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How to zero out partner capital accounts in a final year

SOLVEDby IntuitProConnect Tax4Updated July 14, 2022

If you need to zero out partner capital accounts in ProConnect Tax, you'll need to follow different steps based on whether the ending capital account equals zero on the Schedule M-2.

Follow these steps if the ending capital account doesn't equal zero on the M-2:

  1. Go into the Input Return tab.
  2. From the left of the screen, select Balance Sheet, M-1, M-2 and choose Sch M-2 (Capital Account).
  3. Scroll down to the Distributions section.
  4. In the field Other decreases (-) (Ctrl+E), enter the appropriate amount.
  5. Or, under the section Distributions, enter the distribution amount in the Cash and marketable securities or Property inputs.

 In some cases, the Schedule M-2 is zero but each partner's ending capital isn't zero. In these cases, you'll need to correct each partner's ending capital.

Follow these steps to correct each partner's ending capital:

  1. Add up the ending capital for all the partners' Schedule K-1s.
    • It should net to zero.
  2. Determine the increase and decrease to enter to zero out the capital. 
    • The increase and decrease should both be the same amount.
  3. Go to the Input Return tab.
  4. From the left of the screen, select Balance Sheet, M-1, M-2 and choose Sch M-2 (Capital Account).
  5. Click in the Other increases (+) (Click on button to expand) field.
  6. Enter a Description and the Amount you determined in step 2.
  7. Under the Distributions section, click in the Other decreases (-) (Click on button to expand) field.
  8. Enter a Description and the same Amount as entered in step 6.
  9. At the top of the screen, select Special Allocations.
    • Under Amounts to Allocate, the entries you just made will appear with the description you entered.
  10. For the partner(s) with negative ending capital account amounts, allocate the Other decreases for that same amount.
  11. For the partner(s) with positive ending capital account amounts, allocate the Other increases for that same amount.
 

The Total Allocated should equal the Total Available after all allocations are completed.  

 

For example, below is the ending capital each partner in ABC Partnership:

Partner 1   $2,000
Partner 2   $1,000
Partner 3 -$3,000
---------------------
Ending $0

For this example, you'd enter 3,000 in the Sch M-2 (Capital Account) input screen for Other increases and Other decreases with a description. Then, in Special Allocations, you'd allocate the increase to Partner 3 (3,000) and the decrease to Partner 1 (2,000) and Partner 2 (1,000). This should zero out each partner's capital account.
 

Related topics

Entering and Specially Allocating Capital Accounts for a 1065 return

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