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Posted by Drew Edmundson on March 30, 2007, 11:25 pm
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> I have a partnership that meets the new requirement to file
> schedule M-3 this year. We are running into a problem
> determining how we will track tax basis going forward if we
> are forced to convert partner capital to book basis to
> reconcile to the M-3. It's my understanding that schedule
> M-2 line 3 should equal the audited book income, whereas in
> the past we used a tax basis balance sheet and book income
> (simply taxable income less nondeductibles). Is it
> permissible to continue to do this for the M-2 and reconcile
> the difference to schedule L with a statement? The
> instructions for the M-2 say that a partnership "may, but is
> not required to, use the rules in Regulations section
> 1.704-1(b) (2)(iv) to determine the partners'' capital
> accounts... If the beginning and ending capital accounts
> reported under these rules differ from the amounts reported
> on Schedule L, attach a statement reconciling any
> differences." Does anyone have a summary of this
> regulation? I looked it up but I don't completely follow
> what it says.
>
> Put another way, do we have to report the audited balance
> sheet or can we continue to use a tax basis balance sheet
> and still reconcile audited income on the M-3? Is it
> permissible for M-2 line 3 net income to differ from M-3,
> Part I, Line 11? The reconciliation statement of schedule L
> partners' capital to M-2 should explain the difference.
Wow, your partners' capital accounts match their basis? I
don't have any partnerships where that is the case. I track
the tax basis separately. The same way you do for clients'
who own partnership interest where you don't prepare the
partnership's return.
--
Drew Edmundson, CPA
Cary, NC
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