Starting with tax year 2020, the IRS is requiring partnerships to report their capital accounts using the tax basis method. Capital accounts show the equity in a partnership owned by each partner and often include initial contributions made by each partner, business profits and losses assigned to each partner, and distributions made to each partner. The tax basis method calculates these balances using tax basis principles (read more about this method here). Tax advisors are likely aware that … [Read more...]
Tax Basis Method for Partnerships: The Transactional Approach
At the end of 2020, the IRS announced important changes to their compliance rules for partnerships. Starting with tax year 2020, partnerships must report their capital accounts using the tax basis method. Capital accounts show the equity in a partnership owned by each partner, including items like initial contributions made by each partner, business profits and losses assigned to each partner, and distributions made to each partner. The tax basis method is a transactional approach. Since this … [Read more...]
Understanding Partnership Capital Accounts
Beginning in tax year 2020, the IRS has updated its compliance rules for partnerships. Most partnerships will now be required to report their capital accounts. These accounts show the equity owned by each partner and typically include information like the initial contributions made by each partner, business profits and losses assigned to each partner, and distributions made to each partner. More specifically, the new tax code requires partnerships to exclusively use the tax basis method to … [Read more...]
Calculating Adjusted Tax Basis in a Partnership or LLC: Understanding Inside vs. Outside Basis
Calculating adjusted tax basis in a partnership or LLC takes us into a complex area of tax law. Remember that the tax basis is equal to the purchase price of an asset minus any accumulated depreciation. This formula sounds simple enough, but a business’s entity type can introduce unique complications in determining the initial value of an asset and the total depreciation. While some view partnerships as a diminishing business type, LLCs remain as popular as ever. However, many LLCs end up … [Read more...]
Tax Basis for Inherited or Gifted Property: Implications for S Corporations and Partnerships
In a previous blog, we discussed tax basis—the amount that a taxpayer has invested in business assets, which determines the gain or loss when the asset is sold. Remember that a taxpayer must have sufficient basis to deduct a business loss on their tax return. Another set of tax rules that can be overlooked is what happens when a company or shares in a company are passed on to beneficiaries. To understand the implications here, we must ask: how is tax basis calculated if the taxpayer inherits … [Read more...]
Debt Recourse and Tax Deductions for Partnerships and S Corporations
In a previous blog, we discussed how a shareholder in an S corporation or a partner in a partnership needs sufficient tax basis to claim a business loss. Tax basis refers to the amount that a taxpayer has invested in business assets, calculated by taking the purchase price and subtracting any accumulated depreciation. If the taxpayer anticipates that they do not have sufficient basis, they can seek ways to create basis before the end of the tax year in order to maximize their possible … [Read more...]
Overcoming Limits to Tax Deductions for S Corporation or Partnership Losses
Understanding tax basis is key to maximizing tax deductions, especially for shareholders or partners involved in an S corporation or partnership. Tax basis refers to the amount that a taxpayer has invested in business assets, calculated by taking the purchase price and subtracting any accumulated depreciation. This value will determine the gain or loss when the asset is sold. For shareholders in an S corporation, tax basis limits their losses and deductions because taxpayers are not entitled … [Read more...]
Business Losses and PPP Loans: Understanding Tax Implications for S Corp Shareholders
Business losses have become all-too common during COVID-19. Though new tax benefits have been introduced, understanding whether these will benefit a specific business can be a complicated process. One common COVID-era benefit is the Paycheck Protection Program (PPP) loan. Businesses celebrated the news that PPP funds are tax exempt, so they wouldn't have to pay tax or reduce payroll deductions for expenses used to qualify for loan forgiveness. Yet this same benefit can cause tax basis … [Read more...]
The Real Estate Tax Implications of California Prop 19
California Prop 19, also known as “The Home Protection for Seniors, Severely Disabled, Families, and Victims of Wildfire or Natural Disasters Act,” went into effect on February 16, 2021. This blog will review the three classes of people who can benefit from this legislation, as well as the strict limitations it introduces to parent-to-child property transfers. Those who can benefit from Prop 19 are 1) people over age 55, 2) disabled persons, and 3) disaster and wildfire victims. Prop 19 … [Read more...]
Extensions to the Paid Sick Leave and Family Leave Credits in 2021
Employers will continue to see tax benefits for providing paid sick leave and family leave for the second and third quarters of 2021. The Families First Coronavirus Response Act (FFCRA) created an employer tax credit to reimburse employees’ sick and family leave for reasons related to COVID-19. This credit has been extended through the end of September 2021 by the Consolidated Appropriations Act, but the extension only applies to the second and third quarters (April through September) of … [Read more...]
