I have a question regarding preparation of schedule L / Balance Sheet of a 1065 Partnership return.

[napman200]

I have a question regarding preparation of schedule L / Balance Sheet of a 1065 Partnership return.  The partnership invests in stocks and mutual funds.  How is the appreciation of these assets accounted for on the balance sheet?  I assume it is a type of unrealized gain?

[TomYoung · Accepted solution]

From a pure "Generally Accepted Accounting Practices" (GAPP) standpoint, if you mark to market your investment portfolio, (a balance sheet asset), then the offset would typically be an accounting entry to the P&L titled "unrealized gain/(loss)" and that amount would settle out on the balance sheet in the entity's "equity" section.  Assuming the partnership would not recognize unrealized gains and losses for tax purpose, i.e., the partnership is not a "trader' in the eyes of the IRS, then that unrealized gain or loss would show up as an adjustment in Schedule M-1 "Reconciliation of Income (Loss) per Books With Income (Loss) per Return"

Tom Young

[rtaylorcpa]

I respectfully disagree, I don't think this should run through M-1 or P&L.  This approach, in affect, would erroneously increase (unrealized gain) or decrease (unrealized loss) the partners' M-2 capital accounts by the unrealized and untaxed income.

I believe it is more accurate to net the unrealized amount to the investment on Sch L to bring the asset back to cost.  You might also use the "unrealized" like a contra asset account and net to the same results.  I believe these approaches would result in accurately presented capital account.

Note, there will be exceptions for returns with M-3's, etc. but for a simple cash basis return this should work.       

[mtbdog6666]

I have an investment partnership client that is on accrual for books, cash for tax.  They record unrealized gains and losses for books, including disallowed wash sale losses.  M-1 has book to tax differences to include those items. 

What I'm wondering about is how to show a final distribution on the tax return.  A withdrawing partner received a distribution of his ending capital account per books, which includes net unrealized losses.  So, the distribution is lower than tax basis capital account, leaving an ending balance in the tax basis capital account.

Should I make an adjustment on the K-1 for this book-to-tax difference?

[RobertB4444]

Yes, your final balance should match.  So his basis should be reduced to zero.

[jc152]

@TomYoung how would you enter unrealized lost in Schedule M-1 as an adjustment? thanks!

[jc152]

Hi @rtaylorcpa , If I'm understanding you correctly, what you're saying is that in Schedule L, Line 8, the end of tax year should include the unrealized gain/loss? I guess this will makes balancing the book alot easier. 

What exceptions are you referring to for M3? I'm filing a partnership llc and using cash basis. Thanks!

[BrittanyS]

Unrealized gains and losses are referred to as paper gains or losses.  The accounting treatment of the unrealized gains depends on the amount you own.  

Under the fair value method, record in your earnings unrealized gains and losses for tradeable debt and equity – securities you plan to sell within 12 months. For securities available for sale, report unrealized gains and losses as other comprehensive income, which appears below net income on the income statement. You accumulate other comprehensive income as a separate line on your balance sheet's owners’ equity section.

A Schedule M-3 is required in place of a Schedule M-1 when Schedule L assets are the end of the year equal to or exceed $10 million.  You are not required to file the M-3 unless your assets meet the requirements to file.  

For more information on unrealized gains and losses, see the link below:

Unrealized Gains & Losses

@jc152

[jc152]

hi @BrittanyS 

where is this net income on the income statement? What forms/schedule is this and what line?

"For securities available for sale, report unrealized gains and losses as other comprehensive income, which appears below net income on the income statement. You accumulate other comprehensive income as a separate line on your balance sheet's owners’ equity section."