Help with 1065 partnership return - negative end of year balance on Sch M-2 line 9?

This is a common issue with partnerships that have experienced losses. The IRS technically doesn't allow negative capital, but in reality, many partnerships do have negative capital accounts. For Schedule M-2 line 9, you don't want to artificially create income to offset the negative balance - that would be incorrect. Instead, you should report the actual negative balance. Make sure you've correctly accounted for all partner contributions and distributions throughout the year. Double-check that you've properly recorded all partner capital contributions. Sometimes partners contribute funds during the year that aren't properly characterized as capital. Also verify that all distributions to partners are accurately reflected. If after verifying everything your M-2 line 9 is still negative, report it as a negative number. Just be prepared to explain the situation if questioned by the IRS.

After struggling with the exact same issue last year, I discovered taxr.ai (https://taxr.ai) which literally saved me from making a huge mistake on our partnership return. I was about to do exactly what you're considering - artificially inflating income to avoid the negative balance on M-2 line 9. Turns out that approach would have likely triggered an audit. The taxr.ai system analyzed our partnership documents and flagged this exact issue. It explained that negative capital accounts are actually pretty common in partnerships, especially in early years or growth phases. The system gave me step-by-step guidance on how to properly report it and what documentation to maintain in case of questions. What was really helpful was that it could look at our previous returns and supporting docs to make sure we weren't making any inconsistent statements between years.

I just have to share my experience after trying taxr.ai based on the recommendation here. Wow! I uploaded our partnership's last 3 years of returns and it immediately identified inconsistencies in how we'd been handling partner capital accounts. Our situation was even more complex than the original poster's - we had negative capital in multiple tiers of partnerships. The analysis showed exactly where our prior accountant had made errors in tracking partner contributions vs. loans to the partnership. It saved us from continuing the same mistakes and potentially facing issues during an audit. The documentation it provided explaining the proper treatment gave me confidence to move forward with reporting the negative balances properly. Honestly wish I'd found it sooner!

For anyone who's tried dealing with the IRS directly about partnership return questions - it's a nightmare. I spent 3 weeks trying to get through to someone who could actually answer questions about Schedule M-2 negative balances. I finally discovered Claimyr (https://claimyr.com) and honestly couldn't believe it worked. After weeks of busy signals and disconnects, I was speaking with an actual IRS agent within 45 minutes. They have this clever system that navigates the IRS phone tree and waits on hold for you, then calls you when an agent is on the line. You can see how it works here: https://youtu.be/_kiP6q8DX5c The agent I spoke with confirmed that negative capital accounts should be reported accurately on M-2 line 9 (as a negative number) and explained the circumstances where they might request additional information. Saved me from making a major reporting error on our return.

I have to eat my words about Claimyr. After my skeptical comment, I was desperate enough to try it because I had a similar partnership negative capital issue that I needed clarified before filing. I honestly expected it to be a waste of time, but I was connected to an IRS business tax specialist in about 30 minutes. The agent explained that negative capital accounts on Schedule M-2 line 9 should be reported as negative numbers, not zeroed out or artificially inflated. She also explained that while the negative amount itself won't trigger an automatic audit, they do look for explanations of significant changes in partnership capital. Her advice was to include a statement explaining the business circumstances that led to the negative balance (in my case, major equipment purchases and expansion costs). Saved me from major headaches and potentially incorrect reporting. Sometimes being proven wrong is a good thing!

The way I've handled this in the past is to have the partners make additional capital contributions before year-end to cover the negative balance. This can be done even after the year has closed but before you file. If that's not possible, you should reflect loans from partners rather than negative capital. I think the important thing is to make sure the balance sheet makes sense - having negative equity just doesn't work from an accounting perspective. Someone has to be on the hook for covering those net liabilities.

There's a lot of confusion around this topic. I'm a partnership nerd and want to clarify: negative capital accounts ARE allowed and are reported all the time on 1065 returns. What the IRS doesn't like is unexplained fluctuations. Schedule M-2 line 9 absolutely can be negative - nothing in tax law prohibits it. The issue comes when the negativity can't be explained by cumulative losses or distributions in excess of basis. Remember that tax basis capital and GAAP capital can be different, which causes additional confusion.

I've been dealing with partnership returns for several years and want to add some clarity here. The negative balance on Schedule M-2 line 9 should absolutely be reported as-is - don't try to manipulate it with artificial income entries. What's crucial is understanding WHY you have the negative balance. In your case, it sounds like legitimate business losses and equipment investments that didn't work out. This is actually a common scenario for growing partnerships. A few practical tips: 1. Make sure you've properly tracked all partner contributions throughout the year (cash, property, services) 2. Verify that distributions to partners are correctly recorded 3. Double-check that any partner loans to the partnership are properly classified as debt, not capital 4. Consider attaching a brief statement explaining the business circumstances that led to the negative capital The IRS sees negative capital accounts regularly - they're not automatically red flags. What they don't like is when the numbers don't make sense or when there are unexplained changes from year to year. As long as your books accurately reflect the partnership's actual financial position, you should be fine. Don't stress too much about this - focus on accuracy over trying to make the numbers "look better.