Partnership Capital Accounts and 754 Basis Changes

Partners in a partnership, have a capital account that track's the cumulative earnings or losses of the partnership interest. On the date the partnership beings, the book value should reflect the FMV of the partnership. One unique feature of partnerships is the fact that special allocations can be made for partnership income/loss. This however, usually increases audit risk of the partnership.

Capital accounts differ from basis. Capital accounts are calculated with the FMV contributions, plus percentage of earnings, minus distributions, minus losses. Basis changes as depreciation of partnership assets occur. A 754 step-up can occur when a partner sells his partnership interest, which is a transaction that increases inside basis in the partnership. This step-up in is depreciated on the partnerships books. A 754 election is made by attaching a written statement to the 1065 filed by the due date. The statement must include information on the partnership. Once the election is made, it cannot be revoked without IRS consent.