Feature image for article on populating partners' capital accounts on a Form 1065 tax return in ProConnect Tax Online

Beginning Partners’ Capital Accounts Empty for New Returns

When you create a new Form 1065 Partnership tax return in ProConnect Tax Online (“PTO”) that does not have any data imported or carried over from a prior year (i.e. as with a new client’s tax return), the beginning balance in the partner’s capital accounts box — Form 1065, Schedule L, Line 21, Column B — will almost certainly be blank. If you are required to complete Schedule L when you prepare and file the tax return (or you opt to do so anyway), then this will cause your Schedule L to be out of balance, and a critical diagnostic will result on the “Check Return” screen of the PTO software:

Screenshot of ProConnect Tax Online showing a new Form 1065 tax return with an empty beginning partners' capital accounts balance.

By default, new Form 1065 tax returns will have empty beginning balances on the partners’ capital accounts line …

Screenshot of critical diagnostics in ProConnect Tax Online caused by the balance sheet being out of balance.

… This usually results in critical diagnostics being generated due to the balance sheet being out of balance.

Best Solution: Populate Schedule M-2

PTO by default populates the Partners’ Capital Accounts balances on Schedule L using amounts from Form 1065, Schedule M-2. The amounts that will populate Schedule L, Line 21 are mapped as follows:

  • Schedule M-2, Line 1 Schedule L, Line 21, Column B
  • Schedule M-2, Line 9  Schedule L, Line 21, Column D

Therefore, the best way to ensure that the Partners’ Capital Accounts in Schedule L are correctly populated is to make sure that Schedule M-2 is correct, and then Schedule L should fall in place. You can populate Schedule M-2, Line 1 (Beginning Partners’ Capital Accounts) by going to the following screen:

Balance Sheet, M-1, M-2 Sch M-2 (Capital Account) Analysis of Partners’ Capital Accounts (M-2)

On that screen, the very first input box is for “Beginning capital”. After entering the correct amount of total beginning partners’ capital, the rest of Schedule M-2 should calculate and, if all related amounts are in place, the ending partners’ capital accounts balance should also be correct and flow-through properly to Schedule L, Line 21, Column D:

Screenshot of ProConnect Tax Online showing the flow of amounts from Form 1065 Schedule M-2 to Schedule L.

Once Schedule M-2 is populated and calculating properly, the amounts will flow therefrom to Schedule L automatically.

Backup Solution: Override Schedule L

PTO also has an input available for entering a beginning balance directly onto Schedule L, Line 21, Column B. The input box is located at:

Balance Sheet, M-1, M-2 Federal Liabilities

The input is the very last one on this screen. Any amount you enter in the beginning or ending boxes will override PTO’s calculations and populate on Schedule L. Because this is an override input, however, you should avoid using it where possible.

Screenshot of ProConnect Tax Online showing how to navigate to override Form 1065, Schedule L, Line 21 -- Partners' Capital Accounts.

As a last resort, PTO allows you to override the amount that populates Schedule L, Line 21, Columns B and D.

Blake is a CPA and a law school graduate specializing in taxology, tax and finance process automation and optimization, and cloud accounting systems.

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