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P3: assets' posted and scheduled depreciation, their bases, and the K-1 on the tax basis (defect 13, D-41)
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Book value is cost less what the books posted; the schedule's figure is
apart. An asset's acquired date comes from its entry. Contributed
property keeps its section 723 carryover basis apart from its depreciable
basis (the lower of value and adjusted basis), with its 704(c) built-in
gain and method. The K-1 worksheet reports tax-basis capital (Form 1065
Item L) beside the book figures, leaving open what only the CPA knows.

Co-Authored-By: Claude Opus 5.5 <noreply@anthropic.com>
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docs/spec/sources/irs-partnership-basis.md
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# Tax basis of fixed assets: cost, contributed property, and personal-use conversion
Governs the tax basis the fixed asset register carries beside book value (rules.md B-25). Property the partnership buys has a cost basis (IRC §1012); property a member contributes keeps the member's adjusted basis (IRC §723), and the difference from its fair market value is the built-in gain or loss that §704(c) makes the partnership account for; property a member converts from personal use has a depreciable basis of the lesser of fair market value and adjusted basis (Treas. Reg. §1.168(i)-4(b)(1)). wanderbooks records the basis; tax depreciation (MACRS, conventions, elections) stays with the CPA.
Governs the tax figures the fixed asset register carries beside book value (rules.md B-25): the §723 basis, the depreciable basis, and the §704(c) built-in gain or loss at contribution; and the property contributed at its adjusted basis on the K-1 worksheet's tax-basis capital (rules.md B-36). Property the partnership buys has a cost basis (IRC §1012); property a member contributes keeps the member's adjusted basis (IRC §723), and the difference from its fair market value is the built-in gain or loss that §704(c) makes the partnership account for; property a member converts from personal use has a depreciable basis of the lesser of fair market value and adjusted basis (Treas. Reg. §1.168(i)-4(b)(1)). wanderbooks records the basis; tax depreciation (MACRS, conventions, elections) stays with the CPA.
## 26 U.S.C. §1012(a): basis is cost
Source: <https://www.law.cornell.edu/uscode/text/26/1012>
@@ -38,3 +38,67 @@ Retrieved: 2026-10-15
SHA-256 of the retrieved file (`ecfr168i4.html`): `284efb83eeb11442ab86e050f6d630bd468fd75463e27e3ec81dbc8de455e9be`
> Depreciation deduction allowable. This paragraph (b) applies to property that is converted from personal use to use in a taxpayer's trade or business, or for the production of income, during a taxable year. This conversion includes property that was previously used by the taxpayer for personal purposes, including real property (other than land) that is acquired before 1987 and converted from personal use to business or income-producing use after 1986, and depreciable property that was previously used by a tax-exempt entity before the entity changed to a taxable entity. Except as otherwise provided by the Internal Revenue Code or regulations under the Internal Revenue Code, upon a conversion to business or income-producing use, the depreciation allowance for the year of change and any subsequent taxable year is determined as though the property is placed in service by the taxpayer on the date on which the conversion occurs. Thus, except as otherwise provided by the Internal Revenue Code or regulations under the Internal Revenue Code, the taxpayer must use any applicable depreciation method, recovery period, and convention prescribed under section 168 for the property in the year of change, consistent with any election made under section 168 by the taxpayer for that year (see, for example, section 168(b)(5)). See §§ 1.168(k)-1(f)(6)(iii) or 1.168(k)-2(g)(6)(iii), as applicable, and 1.1400L(b)-1(f)(6) for the additional first year depreciation deduction rules applicable to a conversion to business or income-producing use. The depreciable basis of the property for the year of change is the lesser of its fair market value or its adjusted depreciable basis (as defined in § 1.168(b)-1T(a)(4)), as applicable, at the time of the conversion to business or income-producing use.
## 26 U.S.C. §1016(a)(1)-(2): adjusted basis
Source: <https://www.law.cornell.edu/uscode/text/26/1016>
Retrieved: 2026-10-20
SHA-256 of the retrieved file (`usc1016.html`): `fe4bb279ed8d661b06d997eab76ed699cbdc51ce87eb72ccf2d0174a5d08188e`
What "the contributing member's adjusted basis" adds and takes away: improvements up, depreciation down (allowed, but never less than allowable).
> Proper adjustment in respect of the property shall in all cases be made— (1) for expenditures, receipts, losses, or other items, properly chargeable to capital account, [...] (2) in respect of any period since February 28, 1913, for exhaustion, wear and tear, obsolescence, amortization, and depletion, to the extent of the amount— (A) allowed as deductions in computing taxable income under this subtitle or prior income tax laws, and (B) resulting (by reason of the deductions so allowed) in a reduction for any taxable year of the taxpayer’s taxes under this subtitle [...], but not less than the amount allowable under this subtitle or prior income tax laws.
## Treas. Reg. §1.704-3: contributed property (§704(c))
Source: <https://www.ecfr.gov/api/renderer/v1/content/enhanced/current/title-26?part=1&section=1.704-3>
Retrieved: 2026-10-20
SHA-256 of the retrieved file (`ecfr704-3.html`): `b927010356e8673c1d31ac56255c942f77a32818e9f85761e86eb4f7ee12eda7`
**§1.704-3(a)(1) General principles** (sentences three, five and six)
> Notwithstanding any other provision of this section, the allocations must be made using a reasonable method that is consistent with the purpose of section 704(c). [...] An allocation method is not necessarily unreasonable merely because another allocation method would result in a higher aggregate tax liability. Paragraphs (b), (c), and (d) of this section describe allocation methods that are generally reasonable.
**§1.704-3(a)(2) Operating rules** (first two sentences)
> Except as provided in paragraphs (e)(2) and (e)(3) of this section, section 704(c) and this section apply on a property-by-property basis. Therefore, in determining whether there is a disparity between adjusted tax basis and fair market value, the built-in gains and built-in losses on items of contributed property cannot be aggregated.
**§1.704-3(a)(3)(i) Section 704(c) property** (first three sentences)
> Property contributed to a partnership is section 704(c) property if at the time of contribution its book value differs from the contributing partner's adjusted tax basis. For purposes of this section, book value is determined as contemplated by § 1.704-1(b). Therefore, book value is equal to fair market value at the time of contribution and is subsequently adjusted for cost recovery and other events that affect the basis of the property.
**§1.704-3(a)(3)(ii) Built-in gain and built-in loss** (the first four sentences)
> The built-in gain on section 704(c) property is the excess of the property's book value over the contributing partner's adjusted tax basis upon contribution. The built-in gain is thereafter reduced by decreases in the difference between the property's book value and adjusted tax basis. The built-in loss on section 704(c) property is the excess of the contributing partner's adjusted tax basis over the property's book value upon contribution. The built-in loss is thereafter reduced by decreases in the difference between the property's adjusted tax basis and book value.
**§1.704-3(b)(1) Traditional method** (sentences one, two, five to seven)
> This paragraph (b) describes the traditional method of making section 704(c) allocations. In general, the traditional method requires that when the partnership has income, gain, loss, or deduction attributable to section 704(c) property, it must make appropriate allocations to the partners to avoid shifting the tax consequences of the built-in gain or loss. [...] For section 704(c) property subject to amortization, depletion, depreciation, or other cost recovery, the allocation of deductions attributable to these items takes into account built-in gain or loss on the property. For example, tax allocations to the noncontributing partners of cost recovery deductions with respect to section 704(c) property generally must, to the extent possible, equal book allocations to those partners. However, the total income, gain, loss, or deduction allocated to the partners for a taxable year with respect to a property cannot exceed the total partnership income, gain, loss, or deduction with respect to that property for the taxable year (the ceiling rule).
## IRS Publication 541 (12/2025), Partnerships: basis of contributed property
Source: <https://www.irs.gov/publications/p541>
Retrieved: 2026-10-20
SHA-256 of the retrieved file (`p541.html`): `d19b1ede5efb1e7e9f25584ee2034912ed4a499833d15854545761953c5eab39`
**Basis of contributed property.**
> If a partner contributes property to a partnership, the partnership’s basis for determining depreciation, depletion, gain, or loss for the property is the same as the partner’s adjusted basis for the property when it was contributed, increased by any gain recognized by the partner at the time of contribution.
**Allocations to account for built-in gain or loss.** (first two sentences)
> The FMV of property at the time it is contributed may be different from the partner’s adjusted basis. The partnership must allocate among the partners any income, deduction, gain, or loss on the property in a manner that will account for the difference.
## IRS Publication 946 (2025), How To Depreciate Property: personal-use property and the placed-in-service date
Source: <https://www.irs.gov/publications/p946>
Retrieved: 2026-10-20
SHA-256 of the retrieved file (`p946.html`): `bcc1d04f59bbfc4e74181831c112745e629e671445dab78e39f17051a4a74eb1`
**Property changed from personal use.**
> If you held property for personal use and later use it in your business or income-producing activity, your depreciable basis is the lesser of the following.
> - The FMV of the property on the date of the change in use.
> - Your original cost or other basis adjusted as follows.
> - Increased by the cost of any permanent improvements or additions and other costs that must be added to basis.
> - Decreased by any deductions you claimed for casualty and theft losses and other items that reduced your basis.
**Placed in Service** (for tax depreciation, the CPA's; the book in-service date rests on ASC 360-10-35-4, rules.md B-15)
> You place property in service when it is ready and available for a specific use, whether in a business activity, an income-producing activity, a tax-exempt activity, or a personal activity. Even if you are not using the property, it is in service when it is ready and available for its specific use.
docs/spec/sources/irs-partnerships.md
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# Partnerships: shares of income and capital accounts
Governs `CloseTo::Members` and the members' equity statement. Partners' shares come from the partnership agreement (IRC §704(a)); a partner's capital account is one running balance of what they contributed, their allocations of income and loss, and what was distributed to them (Treas. Reg. §1.704-1(b)(2)(iv)(b)); when a partner's interest changes during the year, the distributive shares take the varying interests into account, period by period (IRC §706(d)(1), Treas. Reg. §1.706-4(a)); Form 1065 reports each partner's capital account on the tax basis (Schedule K-1 item L) and the changes in them (Schedule M-2). No authority prescribes how to round a share to the cent: that rule is the owner's decision (largest remainder, 2026-10-13), counted from the company's first close (D-10, 2026-10-16).
Governs `CloseTo::Members`, the members' equity statement, and the K-1 worksheet's capital accounts on the tax basis (`ledger_core::tax_capital`, rules.md B-36). Partners' shares come from the partnership agreement (IRC §704(a)); a partner's capital account is one running balance of what they contributed, their allocations of income and loss, and what was distributed to them (Treas. Reg. §1.704-1(b)(2)(iv)(b)); when a partner's interest changes during the year, the distributive shares take the varying interests into account, period by period (IRC §706(d)(1), Treas. Reg. §1.706-4(a)); Form 1065 reports each partner's capital account on the tax basis (Schedule K-1 item L) and the changes in them (Schedule M-2). No authority prescribes how to round a share to the cent: that rule is the owner's decision (largest remainder, 2026-10-13), counted from the company's first close (D-10, 2026-10-16).
## 26 U.S.C. §704(a)-(b)
Source: <https://www.law.cornell.edu/uscode/text/26/704>
@@ -68,3 +68,55 @@ SHA-256 of the retrieved file (`i1065sk1.html`): `d7d6298286601fd95ab8e445c10fd6
**Basis Limitations, its third paragraph of five** (where "based on the partnership's books and records" comes from: not Item L)
> Although the partnership provides an analysis of the partner’s capital account in item L of Schedule K-1, that information is based on the partnership’s books and records and can’t be used to figure the partner’s adjusted basis.
## Instructions for Form 1065 (2025): Item L, the tax-basis method
Source: <https://www.irs.gov/instructions/i1065>
Retrieved: 2026-10-20
SHA-256 of the retrieved file (`i1065.html`): `3485e936c1f6532a3a8efda78d45db38c70892abe9c532704d605a4bc45714fe`
Under "Item L. Partner’s Capital Account Analysis" (Specific Instructions, Schedule K-1 only):
**Tax-basis method.**
> Figure each partner’s capital account for the partnership’s tax year using the transactional approach, discussed below, for the tax-basis method.
**How to report partnership events or transactions.** (first two sentences)
> If you’re uncertain how to report a partnership event or transaction, you should account for the event or transaction in a manner generally consistent with figuring the partner’s adjusted tax basis in its partnership interest (without regard to partnership liabilities), taking into account the rules and principles of sections 705, 722, 733, and 742 and by reporting the amount on the line for other increase (decrease). The partner’s ending capital account as reported using the tax-basis method in item L might not equal the partner’s adjusted tax basis in its partnership interest.
**Beginning capital account.**
> Enter the partner’s ending capital account as determined for last year on the line for beginning capital account. If a partner joined the partnership through a contribution to the partnership this year, enter zero as the partner’s beginning capital account.
**Capital contributed during the year.**
> On the line “Capital contributed during the year,” enter the amount of cash plus the adjusted tax basis of all property contributed by the partner to the partnership during the year. The amount you enter on this line should be reduced by any liabilities assumed by the partnership in connection with, or liabilities to which the property is subject immediately before, the contribution. This amount might be negative.
**Current year net income (loss).**
> On the line “Current year net income (loss),” enter the partner’s distributive share of partnership income and gain (including tax-exempt income) as figured for tax purposes for the year, minus the partner’s distributive share of partnership loss and deductions (including nondeductible, noncapital expenditures) as figured for tax purposes for the year.
**Other increase (decrease).** (first sentence)
> On the line “Other increase (decrease),” enter the sum of all other increases or decreases that affected the partner’s capital account for tax purposes during the year and attach a statement explaining each adjustment.
**Withdrawals and distributions.**
> On the line “Withdrawals and distributions,” enter the amount of cash plus the adjusted tax basis of all property distributed by the partnership to the partner during the year. The amount you enter on this line should be reduced by any liabilities assumed by the partner in connection with, or liabilities to which the property is subject immediately before, the distribution. This amount might be negative.
**Ending capital account.**
> The sum of the amounts shown on the lines in item L above the line “Ending capital account” must equal the amount reported on the line “Ending capital account.” A partner’s ending capital account determined under the tax-basis method may be negative if the sum of a partner’s losses and distributions exceeds the sum of the partner’s contributions and share of income.
Under "Item M. Did the Partner Contribute Property With a Built-in Gain or Loss?":
> A property’s built-in gain is the amount by which the FMV of the property exceeds its adjusted tax basis at the time the property is contributed to the partnership. A property’s built-in loss is the amount by which the FMV of the property is less than its adjusted tax basis at the time the property is contributed to the partnership. Partnerships are required to keep track of this information; see Regulations section 1.704-3.
## Instructions for Form 1065 (2020): the tax-basis method required
Source: <https://www.irs.gov/pub/irs-prior/i1065--2020.pdf>
Retrieved: 2026-10-20
SHA-256 of the retrieved file (`i1065--2020.pdf`): `64a48b6e8a9d713eaf641ffdd9a5a09e9811692d84a4be2c45f458e69eb7491a`
Under "Item L. Partner's Capital Account Analysis", from tax year 2020:
> Tax basis method. Figure each partner's capital account for the partnership's tax year using the transactional approach, discussed below, for the tax basis method. If you reported the partner's capital account last year using any other method (for example, GAAP, section 704(b), or other), you must use the tax basis method this year.