Notwithstanding, the Losses allocated to any Member pursuant to this Article shall not exceed the maximum amount of Losses that can be allocated to that Member without causing or increasing an Adjusted Capital Account Deficit for such Member at the end of any Fiscal Year. After giving effect to the special allocations provisions and allocations equal to the distribution of cash flow, the Profits and Losses for each Fiscal Year (or portion thereof) shall be allocated to the Members in proportion to their capital accounts. Typical language in a partnership agreement may include the following:Īllocations of Profits and Losses. Furthermore, the Regulations measure substantive economic effect in great part by reference to the partners’ capital accounts. A partner’s interest in the partnership is measured by his capital account. If the partnership agreement fails to meet either of these two, a partner’s “interest in the partnership” determines his share of partnership items. The partnership agreement determines each partner’s share of partnership items, provided it meets two requirements- the agreement must provide for allocation, and the allocation must have substantive economic effect. Surkin, JD, LLM addresses the prior rule, why the IRS wasn’t happy, the change they wanted, how to process the transition, and the need to maintain both the former capital account and the IRS-prescribed method. The IRS directed partnerships to report capital accounts on the tax basis starting in 2020.
This article originally appeared in the April 2022 TaxStringer, a publication of the New York State Society of Certified Public Accountants. Tax Basis Reporting Calculations and Analysis
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