A Partnership Capital Account is a distinct account that shows the equity in a partnership that is owned by specific partners. This account typically exists as an item that is shown in a business’s financial and accounting records rather than as an actual bank account, although this depends on business practices. Businesses may choose to create separate partnership capital accounts for each partner or combine all partners into one account, with separate notes on the various assets, contributions, and distributions attributable to each partner. As a tax preparer, there are several things you need to know about submitting a business tax return with a partnership capital account. Choose TaxSlayer Pro to help you enter them quickly and easily.
Types of Transactions Reported and Analyzed in a Partnership Capital Account
Typically, a partnership capital account will record and report on the following transactions:
- Initial contributions by partners to the partnership.
- Subsequent contributions by partners to the partnership.
- Profits and losses generated by the business and assigned to partners depending on their ownership stakes and the partnership agreement.
- Distributions, earnings, and payments made to the partners.
Contributions to a business may be cash or the fair market value of other assets, including property, vehicles, investments, equipment, or other property.
The ending balance in the account at the conclusion of an accounting period represents any money or assets that have not been distributed to the partners.
An Example of a Partnership Capital Account
A partner originally contributed $100,000 to a partnership. She was then allocated $55,000 of profits and has previously received payment of $15,000. The ending balance in her account is $140,000, calculated as:
$100,000 initial contribution + $55,000 profit allocation – $15,000 distribution = $140,000.
One Partnership Capital Account Vs. More Than One
Some partnerships choose to have just one partnership capital account that records transactions for all partners. Other partnerships may have a separate account for each distinct partner. Larger partnerships tend to choose the second option as it is easier to account for special contributions, distributions, allocations, and ownership changes.
Analysis of Partner’s Capital Accounts — Form 1065 Schedule M-2
Form 1065 Schedule M-2 is how a partnership reports changes to the partnership capital account to theIRS. This form is used by the IRS to analyze and verify the accuracy of tax reporting. This is because changes to capital accounts should match income and balance sheet reporting.
When Schedule M-2 Does Not Have to be Completed for Analysis
In some limited circumstances, a partnership will not have to complete Form 1065 Schedule M-2. There is no need to complete this form if all of the following requirements are met:
- The partnership’s total receipts were less than $250,000 for the tax year.
- The partnership’s total assets were less than $1 million at the end of the tax year.
- Schedule K-1s are filed with the return and provided to partners on or before the due date.
- The partnership is not filing or required to file Schedule M-3.
TaxSlayer Pro Desktop makes it easy to enter a partnership capital account. We do all the math for you and provide all the forms you need.