Partner capital is the part of a 1065 that ends up in three places on the return, and new UltraTax CS users tend to go looking for three separate places to enter it.
There's really only one, plus a screen that tells UltraTax what basis you're reporting on, plus a field for the case where the balance sheet and the capital accounts legitimately disagree. Once you've seen how those fit together the rest of it stops being confusing.
The one screen that matters
M1M2 screen, Balance Sheet folder, in the section called Analysis of Partners' Capital Accounts.
What you enter there feeds both Schedule M-2 and item L on every partner's Schedule K-1. Not one and then the other. The same figures produce both.
That's deliberate. The IRS has said the amounts on a partnership's Schedule M-2 should equal the totals of the item L amounts across all partners, and UltraTax enforces it by refusing to give you two places to disagree with yourself. If you've ever spent an afternoon chasing a difference between M-2 and the sum of the K-1s in another package, you'll appreciate why.
Practical consequence: if M-2 is wrong, item L is wrong in the same way, and there's exactly one place to fix it.
Telling UltraTax which basis you're on
Partner Info, Basis folder, K1Misc screen, in the capital account accounting method field. There's an "other, specify" option if you need it.
Set it before you enter capital, not after, because it's the label on everything downstream. Item L reporting is on tax basis, and the method you pick has to describe what you actually entered. Entering book figures and labeling them tax basis produces a return that says something untrue about numbers that are already wrong.
When Schedule L and M-2 do not agree, and shouldn't
This is where people force numbers, so it's worth being clear about.
Schedule L is the partnership's balance sheet, and it's typically book. Item L and M-2 report partner capital on tax basis. Those are two different measurements of the same thing, and they can differ for perfectly good reasons: depreciation methods, section 754 adjustments, nondeductible expenses, anything that makes book income and taxable income diverge.
So a difference isn't automatically an error. It's often the correct state of affairs.
UltraTax has two fields on the L screen in the Balance Sheet folder for exactly this. One is "Partners' capital accounts (Force)", which sets what appears on Schedule L. The other is "Partners' capital account reconciliation", a statement window where you explain the difference between the capital reported on Schedule L and the capital reported on M-2.
The second field is the one people miss, and it's the one that exists because the difference is expected. Use it. It's a reconciliation, which is what a reviewer wants to see, and it's better in every way than the alternative, which is forcing the Schedule L capital figure to equal M-2 so the two tie and the balance sheet quietly stops representing the books.
Force the number and you've made the disagreement invisible without resolving it. Next year, someone inherits a balance sheet that doesn't match the client's financial statements and no record of why.
When item L will not calculate at all
Two usual causes.
Check the diagnostics first, because if something is missing they'll normally say so.
Then check Schedule B question 4. If it's answered yes, meaning the partnership met the small-partnership conditions, UltraTax suppresses item L along with Schedules L, M-1 and M-2. The field is on the OthInfo screen in the General folder, and the better fix is usually the separate "print schedules when not required" option rather than forcing question 4 to no. There's more on that in the article on why Schedules L, M-1 and M-2 will not print.
The reporting obligation for tax basis capital in item L doesn't go away just because the partnership qualifies as a small one. That's why the print option exists separately.
What actually moves capital
If a partner's ending capital is wrong, the fix is upstream. Capital moves for four reasons: contributions in, the partner's share of income or loss, distributions out, and any special allocation the agreement provides for.
Two things are worth checking before you go hunting anywhere else. Whether distributions were coded to distributions in the client's books rather than to an expense account, which is a constant with partner draws. And whether guaranteed payments are being treated as guaranteed payments, since they're deducted in arriving at ordinary income and they don't reduce capital the way a distribution does.
Negative tax basis capital is not automatically an error either. It's a flag worth understanding, since it usually means distributions or losses in excess of basis, and both have consequences for the partner.
Tracking capital where it's easier to prove
Capital accounts are the clearest case for doing the work on the trial balance side rather than in the return.
In Ledger IQ, contributions, distributions and each partner's share of income are tracked per partner, so the capital rollforward is built rather than reconstructed at the point of data entry. Book to tax differences post as tax journal entries with their own M-1 and M-2 offset rows, which is what keeps the book column matching the client's financial statements while tax basis capital is tracked separately. That's the same difference the reconciliation field on the L screen is asking you to explain, except you have the detail behind it rather than a summary you assembled by hand.
The Working Trial Balance proves each column foots, and the income proof walks net income per books through the differences to ordinary business income, which is the figure driving every partner's share. When that ties before you open UltraTax, item L and M-2 are right the first time, and the reconciliation to Schedule L is something you can hand a reviewer instead of something you'd rather not be asked about.
Building the capital rollforward instead of reconstructing it
- Upload the trial balance and map the accounts to real 1065 lines.
- Confirm distributions were coded as distributions in the client books, and reclass them with an adjusting entry if partner draws went to an expense account.
- Keep guaranteed payments on their own line, since they are deducted in arriving at ordinary income and do not reduce capital the way a distribution does.
- Record book to tax differences as tax journal entries with M-1 and M-2 offsets. This is the detail behind the difference the L screen reconciliation statement asks you to explain, itemized rather than summarised from memory.
- Check the income proof, because each partner share of ordinary business income is what moves their capital.
- Download the workpaper so the capital rollforward is documented for the file and for whoever picks the client up next year.
- Export to UltraTax CS and enter the M1M2 screen once, with figures you can support.
Supports Forms 1065, 1120S and 1120, with exports for Drake, Lacerte and UltraTax CS. The walkthrough is in the UltraTax CS resource guide, and it is free during early access, so you can start at portal.ledgeriq.ai and run this on a live client without a credit card.