New to Us: Does TurboTax Help with Partners' Capital Accounts (Form 1065 Scheds L/M1-2)?

[beanorama1]

We have a two-member LLC (husband and wife) taxed as a partnership and filing Form 1065 for several years. Finally this year we have the fortunate problem of having generated revenue sufficient that we are now required to complete Schedules L, M-1and M-2. Yet what a problem!

I got most of the way through simply using the equity balances from our balance sheet. Schedule M-1 reconciles, after making needed adjustments for specific cash-basis expenses. And Schedule L would reconcile, except on line 21, Partner's capital accounts ending balance, it presumes to take the amount generated from Schedule M-2, line 9. The problem is that there is something in Schedule M-2 that makes the capital accounts ending balance disagree with the equity amounts in our books by $7k. (Though the IRS instructions are clear that beginning capital account balances on Schedule M-2 do not need to reconcile with Schedule L if it isn't reported on a tax basis, I'm loathe to overwrite TurboTax except as a last resort.) 

Previously, we've not had any tax or business need to track our capital accounts. We've never made any capital contributions (neither cash nor property), we've generated revenue each year, the partnership has no property, and distributions are made only in cash. Now that we need to report them, I'm not finding any resources in TurboTax to help.

Is there anything in TurboTax to help calculate and track partners' capital accounts? 

[Mike9241]

Nothing in Turbotax

however, it seems that the only asset the partnership would have is cash and therefore the total of the capital accounts should be the same as the cash balance

since no contributions and no property it would seem that the cash balance at year end would be the sum of the net profit less net losses from each year less the distributions made each year.

[beanorama1]

Thanks, @Mike. I was afraid of that.

I would hope Intuit/TTB would see their way to providing a tool to track capital accounts. It would certainly be helpful for small, growing cash-basis companies like us that have no use at all for a balance sheet or capital accounts other than that the IRS wants to see them if we earn enough. Yet maybe accrual basis partnerships could use some help, too, now that the IRS has its own unique way of accounting for capital accounts.

Our situation is only slightly more involved than you describe. We do have some liabilities (Covid relief debt and credit cards we use) and there are cash-basis timing differences with our deductions, so there are a few adjustments we need to report in Schedules M-1 and 2. Yet the capital accounts on M-2 don't reconcile, so the amounts I thought might be right for beginning/ending balances apparently aren't. Time to pull out the old returns and calculate them by hand, I guess.

[RobertB4444]

Since this is your first time having to do the schedules and these numbers will be carried forward from year to year going forward then the key is getting it to match your balance sheet for this year.  I suggest making an adjusting entry of contributions from members (or distributions) in order to get your accounts to balance.  

@beanorama1 

[beanorama1]

Thanks, @RobertB4444 . I figured as much. Yet we've only had this partnership for five years, so I'm thinking of running the numbers manually from the beginning to get the right opening balance right. Studying the IRS's p541 Partnership and Partner's Instructions for Schedule K-1 to get the specifics.

[beanorama1]

@Mike9241I found the tool in TTB I was looking for.

It's called the Partner's Basis Statement. I saw a reference to it buried in the help screens for the fields in the Sch K-1 Wks. To activate it "go to the Partnership Information Worksheet, Part IV, Partner Printing Options. Click 'Yes' on Calculate and print the Partner Basis Statement. The Partner Basis Statement is listed as 'Partners Basis' on the menu (speed key: BASIS)."

This Partner's Basis Statement seems to track the Worksheet for Adjusting the Basis of a Partner's Interest in the Partnership found in the IRS's Partner’s Instructions for Schedule K-1 (Form 1065).

It's currently still in the process of being updated (just like the matching Schedule K-1 forms in TTH&B we use for our personal returns) and can't be used yet. We're less than a month from when these returns are due -- I hope Intuit gets this done pronto.

[PatriciaV]

Remember that TurboTax tracks the INSIDE Partner Basis from the partnership's perspective and may not be the same as the partner's actual investment (OUTSIDE) basis due to transactions and income/expense allocations that may be specific to that partner's investment in the partnership. 

Here is the link to the IRS Partner Basis worksheet: Form 1065 Schedule K-1 Instructions (page 7).

[NCCG]

I'm the original poster, @beanorama1 , using a different account. (I can't access that account since posting it, because Intuit now denies that the user ID we all can see exists.)

Thank you, @PatriciaV , for noting the difference between inside and outside basis. Inside basis is the partnership's to track; outside is for each partner individually. The tool I found, the Partner's Basis Statement, found in TTB to produce the partnership's Form 1065 return, tracks the worksheet found in the *Partner's* Instructions for Schedule K-1, for calculating the *outside* basis. Technically, that's not the partnership's concern. As the IRS Instructions for Form 1065 state, p34, they are not the same: "The partner's ending capital account as reported using the tax-basis method in item L might not equal the partner's adjusted tax basis in its partnership interest."

The adjusted basis of our partnership interests is not my concern right now. My immediate concern is getting TTB to correctly report our ending capital accounts in Schedule M-2, so Schedule L will reconcile and our Schedule K-1s will be correct.

I'm still looking for resources in understanding the *inside* basis, as it may help me see why the Schedule M-2 is not calculating our ending capital accounts correctly per our balance sheet. It's seemingly missing a (net) decrease of about $7k.

Since our accounting is very simple -- cash basis, no property -- our corrected balance sheet is also very simple. I'm just not finding anything in it that should be in M-2  line 7  to decrease our capital account.

[PatriciaV]

Your best option is to recreate Schedule M-2 for each year since inception, especially the Smart Worksheet for computing tax-basis net income. Without capital contributions/distributions, the likely source of your outage would be net income or timing differences. 

Did your beginning balance carry over correctly from last year? In other words, is Schedule L Line 21 column (b) this year the same as column (d) last year? If your beginning balance doesn't tie, you won't be able to reconcile the current balance sheet.

@NCCG

[NCCG]

@PatriciaVthanks.  The capital account beginning balance for M02 came from last year's balance sheet. There was no ending balance to carry over as a beginning balance this year because we didn't complete Schedules L/M last year.

Again, we're a cash basis Mom&Pop, the business has no property, and have no business use for tracking equity or even for a balance sheet. We did not have a tax obligation to track our capital accounts until this year.

I'm heading the way you suggest, because I'm left with the only thing I can try is to recreate both the Schedule M-2 and the balance sheets needed to complete them for each year.

I'm hoping it works, though I don't see any reason why it would. 

If I had known that these Schedules L/M would not balance without having tracked every prior year, I would have done it from the start.

[NCCG]

@PatriciaVI did create an historical worksheet for Schedules M-1 and M-2 from the partnership's inception in 2019 through to this tax year 2023, creating ending/beginning Capital Accounts balances. So now Schedules M-1 and M-2 have no errors.

But now Schedule L, Balance Sheets per Books, doesn't balance. It's way off.

Schedule M-2 passes through the ending balance for the Partners' Capital Accounts to Schedule L. Schedule L gets its beginning balance from the Sch K-1 Wks in which I've entered the beginning balance from the historical worksheet.

Frankly, I'm not surprised that Schedule L is out of balance. It's trying to balance the accounting equation using the Partners' Capital Accounts (tax basis) created in Schedule M-2. But those Capital Account (tax basis) amounts bear no relationship to the equity amounts on our corrected Balance Sheets.

Again, we're a simple cash basis company. No capital other than revenues. No property. Our only Assets are cash. Our only Liabilities are nonrecourse credit card balances and Covid loans. The accounting equation is simple: the Equity is simply our cash minus loans. But that simple accounting equation doesn't look anything like the Schedule L because it's trying to balance our Assets and Liabilities using this calculated tax basis Capital Account instead of using Equity.

What am I missing?

[beanorama1]

(Original poster here again, under original profile again.)

After an update, going through step-by-step  I now saw that it had a tab regarding Balance Sheet. (Was it there before and I missed it, or is it new?).

So I went through the Balance Sheet process hoping to learn something. Going back to the forms view, the Schedules M now have errors all over them. The errors chastise me that I shouldn't enter data directly on both the form 1065 p5-6 Schedules M and  the Sch M Wks. (That worksheet is new, and no, I didn't enter data to it directly; TurboTax did.) The directions to resolve the errors make no sense, telling me to remove some Reconciliation Adjustment somewhere (without telling me where it is or how to do it). And for all the error codes on the Form 1065 p5-6 Schedules M, there is exactly only one amount on the whole Sch M Wks worksheet.

This is going to take several hours of quality time on the phone with TurboTax to sort out.

What I was looking for with the original post is what TurboTax finally provided in the Balance Sheet tab.

[PatriciaV]

You may find it's worth the cost to sign up for TurboTax Assisted Business, which provides unlimited expert help as you work on your return. This online service provides step-by-step guidance from a business tax expert whenever you need assistance, either over the phone or by screensharing.

@beanorama1