K-1 Investment Basis = Capital Acct Bal.

[John of PA]

My challange to you is, now that we are responsible for tracking the basis of our client's K-1 investments (1065 or 1120S) is : Why not use the Ending Capital Account Balance for an estimated of what the clients tax basis is of thier K-1 investment. (ignore debt basis for now). I don't see where that figure would be off from the real tax basis for most of the clients. It includes the original capital investment, and all the allocated income and losses, and all the capital contributions and withdrawls. Many of us find ourselves without the information to compute the real basis (previous accountants did not becasue they not required to).

[OldJack]

I agree that we should track basis for our clients, but where do you see that we are required to do such?

[S T]

Isn't it?

Only required on the partner's form 1040 or the shareholder's form 1040, not required attachment to form 1065 or the form 1120S??? My software will do all if I prepare both 1065/1120S and the individual form 1040.

This is an issue that I am confused on!

Sandy

[JG EA]

Basis Rules

Only required on the partner's form 1040 or the shareholder's form 1040, not required attachment to form 1065 or the form 1120S??? My software will do all if I prepare both 1065/1120S and the individual form 1040.

This is an issue that I am confused on!

Sandy

Sandy,

It is a service to the partner or shareholder not a requirement. It is not an attachment, not a part of the return. In the instructions for

Shareholder's Instructions for Schedule K-1 (Form 1120S) (2005)

Basis Rules - it says to the shareholder:

"You are responsible for maintaining records to show the computation of the basis of your stock in the corporation. Schedule K-1 provides information to help you make the computation at the end of each corporate tax year. The basis of your stock (generally, its cost) is adjusted as follows and, except as noted, in the order listed. In addition, basis may be adjusted under other provisions of the Internal Revenue Code. You can use the Worksheet for Determining a Shareholder's Stock Basis to figure your aggregate stock basis."


Partner's Instructions for Schedule K-1 (Form 1065-B) (2005) says to the partner:

"The partnership is not responsible for keeping the information needed to figure the basis of your partnership interest. You can figure the adjusted basis of your partnership interest by adding items that increase your basis and then subtracting items that decrease your basis.

Use the worksheet on page 3 to figure the basis of your interest in the partnership."

So the programs have this as an extra like they have W-4's or 2848's. It is a value added - not a requirement. Everything a partner or a shareholder needs to figure basis is on the K-1 or should be. The worksheets are in the instructions to the partner or shareholder.

Why wouldn't a preparer of the 1065 or 1120S prepare the basis worksheets? Perhaps if they didn't have previous returns they would not have access to basis and would be hesitant about starting with zero or starting with an arbitrary number based on assets.

Why should a preparer of the 1065 or 1120S prepare the basis worksheets? If they were concerned with the partners and shareholders (perhaps they are spread all about the country) and wanted to make sure the basis was being prepared correctly. Or, there was some gift stock or something that may change the basis and wanted it plainly seen instead of in a letter that may or may not get to the preparer of the personal return.

JG

[S T]

I agree

JG,
I agree that we should track basis if we are preparing the 1065 or the 1120S, but John of PA was saying "we were responsible" and Old Jack said where is the requirement.

Thanks for your great outline, it clears up a lot of questions in my mind. You always have a way of "clearing the fog"

Sandy

[OldJack]

In some cases basis is not just one calculation from tax returns. There is "inside basis" (book records) and "outside basis" (individuals records). Inside basis is usually the same for each shareholder, outside basis is usually different for each. It is usually possible to calculate and/or track inside basis without having information direct from the individual but outside basis is clearly a matter with each shareholder.

A tax preparer is not responsible for tracking this basis just as s/he is not responsible to track the individuals stock investments in the stock market. Basis worksheets in tax software should be viewed as a tool that if calculated and presented to a client we must be concerned with the risk we are assuming for such data. Bear in mind that if you prepared his tax return based upon the inside basis worksheet and the client later finds out the wrong basis cost him taxes, he has cause to claim malpractice.

[sea-tax]

It is our company policy to track basis for those which we prepare both Business and personal returns for.

We actually ask for copies of checks for contributed capital and try to get as much documentation as possible. Like I think old Jack said we could be opening the door to some malpractice but what else are we to do?

I will say that my Partner got an audit where by the auditor questioned basis and he required the shareholders to provide proof of ther paid in capital and capital contributions. he made them go to the bank and track down copies of the checks from 15 years ago . So some shareholders could and some could not due to not keeping records. Auditor disallowed the losses on the shareholders returns who could not prove basis . Scary huh?