Partnership tax basis capital account reporting (12-15-2022)

Partnership tax basis capital account reporting (12-15-2022)

We would like to provide a point of clarification regarding the Spidell’s California Taxletter® article titled “California tax basis capital account reporting” that appeared in our November 2022 issue.

In that article, we discussed that starting with the 2022 tax year, partnerships and LLCs taxed as partnerships must begin reporting their partner capital accounts on the California tax basis method. In our article, we provided a list of common items that are treated differently for federal and California income tax reporting purposes.

Our list included many items we identified as key differences between federal and California law, and those differences could create a discrepancy between federal and California capital accounts.

A number of our readers pointed out that our list contained items that do not, in fact, create a difference in federal and California capital accounts. Those readers who pointed out this fact are correct that some of the items on our list do not ultimately create a federal-to-California capital account difference because nondeductible expenses still reduce a partner’s tax basis capital account, and tax-exempt income still increases a partner’s tax basis capital account.

However, the calculation of the partner capital accounts is different for federal and California purposes when these items are present. Our article last month merely sought to point out the calculation difference to aid in your review of your partner’s capital account calculations. Consider the example above.

Example of federal versus California capital account calculation: C&A, LP has two 50/50 partners: Cal and Andrea. C&A’s 2022 net income for federal purposes is $100,000, which includes a deduction for California’s annual limited partnership tax of $800 and a $10,000 state grant that is taxable on the federal return, but tax-exempt on the California return.

Assume Cal’s beginning tax basis capital account on January 1, 2022, is $24,000 for federal and $21,000 for California, and Cal received partner cash distributions of $57,000. Cal’s federal and California ending capital accounts for 2022 are calculated as follows:

Federal California
Beginning capital account $24,000 $21,000
Add: Cal’s 50% share of net income (Schedule K-1, line 1) 50,000 45,400
Less: Nondeductible expenses (         0) (    400)
Add: Tax-exempt income 0 5,000
Less: Distributions (57,000) (57,000)
Equals: Ending tax basis capital account $17,000 $14,000

Cal’s tax basis capital account decreased by $7,000 for both federal and California purposes, but the calculation to arrive at the result is different.

Reporting for multistate partnerships

When calculating tax basis capital account reporting for multistate partnerships, the partnership should adjust total income and deductions to account for differences in California law. However, the FTB has confirmed that these adjustments are not limited to California-sourced income and deductions.

For more information, go to:

cat_1222e-snak.pdf (