Knowledge Base Solution - Why isn't my 1065 return (for 2020), page 5, Schedule M-2, Line 3; and  its Schedule K-1, Item L, calculating the same as in prior years? (2024)

FAQs

Does Schedule M-2 need to be on tax basis? ›

Schedules M-2 and K-1 now use tax basis.

The instructions for Form 1065 Schedule M-2 line 3 state that this is generally the amount entered on line 9 of schedule M-1. They go on to state if net income includes income from guaranteed payments made to partners, remove such income on line 7.

Schedule M-2, Analysis of Partner's Capital Accounts is the section in Form 1065, U.S. Return of Partnership Income where the partnership reports to the IRS what caused the changes to the partners' capital accounts on the partnership's books and records.

If the partnership does NOT meet the four requirements set forth in Schedule B (Form 1065), Line 4, the partnership is required to complete Schedule M-2 and submit the changes during the tax year in the partners' capital accounts as reflected on the partnership's books and records.

Schedule M-3 is required when the partner's total assets or adjusted total assets at the end of the tax year is equal to $10 million or more, or the partnership's total receipts for the tax year is $35 million or more. The calculation for Schedule M-3 is done in reverse from the form itself.

The Schedule M-1 must be prepared by corporations with total receipts or total assets of $250,000 or more. The Schedule M-3 must be prepared by corporations reporting gross assets of $10 million or more in assets on Schedule L of Form 1120.

M2 is a measure of the U.S. money stock that includes M1 (currency and coins held by the non-bank public, checkable deposits, and travelers' checks) plus savings deposits (including money market deposit accounts), small time deposits under $100,000, and shares in retail money market mutual funds.

Schedule M-2 is divided into four columns and is used to reconcile the accounts that affect a shareholder's basis. Column (a) is for the Accumulated Adjustments Account (AAA). Column (b) is for shareholders' undistributed taxable income previously taxed. Column (c) is for accumulated earnings and profits.

Who is required to file Schedule M-2? ›

Generally, any foreign corporation that is required to complete Form 1120-F, Section II, must complete Schedules M-1 and M-2 (Form 1120-F).

The partnership files a copy of Schedule K-1 (Form 1065) with the IRS to report your share of the partnership's income, deductions, credits, etc.

Partnerships file an information return on Form 1065, U.S. Return of Partnership Income. A domestic partnership must file an information return, unless it neither receives gross income nor pays or incurs any amount treated as a deduction or credit for federal income tax purposes.

An IRC Section 754 election allows a partnership to adjust the basis of the property within a partnership under IRC Sections 734(b) and 743(b) when one of two triggering events occur: 1) a distribution of partnership property or 2) certain transfers of a partnership interest.

14115: 1065 - Late Filing Penalty

Per the IRS, "The penalty is $220 for each month or part of a month (for a maximum of 12 months) the failure continues, multiplied by the total number of persons who were partners in the partnership during any part of the partnership's tax year for which the return is due."

Schedule M-2 reports an analysis of the partners' capital accounts. This Schedule explains the difference between the partners' capital accounts as shown in the Balance Sheets (Schedule L) at the beginning of the tax year and at the end of the tax year.

Schedule L - Book Basis

For example, §179, bonus or MACRS depreciation may be allowed for tax reporting purpose but straight-line depreciation is required for book reporting purposes. The accumulated depreciation on the Schedule L is to be reported on the “book” basis.

The Guaranteed Payment income does not increase the recipient partner's tax basis in their partnership interest, and the payment itself does not reduce his or her basis.