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K-1 with book tax difference

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    K-1 with book tax difference

    Partnership 2 gets a K-1 from another partnership 1 it owns. The k-1 has book to tax difference. Page 1 of the K-1 has income/loss items and then the supplementary page has the reconciliation of the book to tax difference. How is the income treated at the level of Partnership 2. Does Partnership 2 pick up the taxable income only and track the book to tax difference separately?

    Say the taxable income is 100 and there is a 20 book tax difference. So book income is 120 and taxable income is 100. Through this example please provide thought on how the income is treated at Partnership 2 level.

    #2
    What is the nature of the book/tax-method differences?

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      #3
      Originally posted by ttbtaxes View Post
      What is the nature of the book/tax-method differences?
      Accrual to cash adjustments

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        #4
        K-1

        Entries from the K-1 to your client's 1040 come from page 1 of the K-1, with details by line may be attached. The reconciliation of tax income to book may be helpful for understanding if you have the financials, but MAYBE no required in recording to the 1040.

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          #5
          Accrual to Cash Adjustment

          I have spent the last week or so mulling over this exact same issue! I have come to the following conclusions:

          #1) it depends if company 2 is filing their return on a cash basis or accrual basis. Generally, I would think if Co #1 is filing on a cash basis, the Partner co is also filing on a cash basis. If this is the case, the book/tax difference would not be reported as income on the return.

          #2) Are the books of Co #2 kept on an accrual or cash basis? If they are kept on an accrual basis, the book/tax difference should be recorded to the books. If this has been done correctly in the past, the asset 'Investment in Co #1' on the balance sheet should equal the ending capital account in Part 1, Box L of the K-1 unless...

          #3) They have had different accountants in the past and each booked it differently (this is my issue) - If Co 2 only has K-1's flowing through, it really shouldn't matter if the books are kept on an accrual or cash basis. In my case, I requested the client to make the decision on how they want to keep the underlying books and DOCUMENT, DOCUMENT, DOCUMENT!

          #4) One other issue you may not have run into is how the Partners capital account analysis is reported as being calculated (Box L--Tax basis, GAAP etc). In my case the K-1's came thru as having been calculated on a Tax basis. As the current year increase/decrease correlated to the amount including the book/tax difference, the GAAP basis box should have been checked. Also be sure you report the correct basis of calculating Partner capital account analysis for any K-1's going out of Co #2.

          Hope this helps!
          K

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