Schedule K-1 (Form 1065) includes a capital account section that tracks a partner’s investment in the partnership over time.
This page explains what the capital account on Schedule K-1 represents, why it may increase or decrease, and how partners should interpret the information, based on official IRS instructions.
For a general explanation of the form, see Schedule K-1 (Form 1065): Overview.
What the Capital Account on Schedule K-1 Represents
The capital account reflects a partner’s equity interest in the partnership.
According to IRS instructions, the capital account shows how a partner’s investment changes from the beginning of the tax year to the end of the tax year.
It is used to track ownership interests and allocations, not cash balances.
Where to Find the Capital Account on Schedule K-1
The capital account information is reported in Part II of Schedule K-1 under Capital Account Analysis.
This section typically includes:
- Beginning capital account
- Capital contributed during the year
- Current year net income or loss
- Other increases or decreases
- Withdrawals and distributions
- Ending capital account
Why a Capital Account May Increase
A partner’s capital account may increase due to:
- Additional capital contributions
- Allocations of partnership income
- Other increases reported by the partnership
An increase does not necessarily mean that cash was distributed.
Why a Capital Account May Decrease
A capital account may decrease for several reasons, including:
- Allocations of partnership losses
- Cash or property distributions
- Withdrawals by the partner
- Other decreases reported by the partnership
A decrease in the capital account does not automatically indicate a problem.
Negative Capital Account on Schedule K-1
In some cases, a partner’s capital account may become negative.
This can occur when losses or distributions exceed the partner’s contributed capital.
A negative capital account does not always result in immediate tax consequences, but it may affect future allocations or distributions.
Capital Account vs Cash Distributions
The capital account is not the same as cash received.
A partner may receive distributions without reducing taxable income, or may be allocated income without receiving cash.
Schedule K-1 reports tax allocations, not payment history.
Why Capital Account Information Matters
The capital account is used to:
- Track ownership interests
- Determine allocation of income and losses
- Support partnership agreement terms
- Reflect changes in a partner’s investment over time
Partners should review capital account information to ensure it aligns with partnership records.
Related Situations and Guides
- Do You Need to File If Schedule K-1 Shows No Income?
- Amended vs Corrected Schedule K-1
- Schedule K-1 for LLC Members
Official Form
The official Schedule K-1 (Form 1065) template issued by the IRS is available here: