The concept of a "tax basis capital account" is important in determining a partner's gain or loss from the sale of his partnership interest and from certain other partnership transactions. However, for tax years prior to 2020, tax basis capital accounts generally did not need to be disclosed on a partnership's income tax returns; instead, a partnership was permitted to report its partners' capital accounts on some other basis, such as GAAP or so-called "section 704(b)" capital accounts. These other methods were often of limited use to the IRS in identifying potentially taxable situations; thus, for taxable years ending on or after Dec. 31, 2020, partnerships are now required to report each partner's capital account on a tax basis.

A partner's tax basis capital account balance is generally equal to the amount of cash and tax basis of property contributed by the partner to the partnership, increased by allocations of taxable income to the partner, decreased by allocations of taxable loss to the partner, and decreased by the amount of cash or the tax basis of property distributed by the partnership to the partner.