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his article reviews and analyzes gross income over defined thresholds.
Trecent law changes as well as rulings Other than for guaranteed payments, Partners also may
limited partners and some members
and decisions involving partnerships. The
of limited liability companies (LLC) now add back a
discussion covers developments in the
are not subject to Self-Employment proportionate basis
determination of partners and partner-
Contributions Act (SECA) taxes or net
ships, gain on disposal of partnership investment income tax. on partial sales of
partnership interests.
interests, partnership audits, and basis The House’s version of the Build
adjustments. Back Better Act would expand the scope
of the net investment income tax to
During the period of this update cover “specified income” derived in the the partner’s interest in the partnership.
(Dec. 1, 2020, through Oct. 31, 2021), ordinary course of a trade or business A partner’s interest in the partnership
the IRS issued guidance on the law for taxpayers with more than $400,000 would take into account the partner’s
known as the Tax Cuts and Jobs Act in taxable income for single filers and contributions to the partnership, the
(TCJA),1 which was enacted at the end $500,000 for married filing jointly partner’s interests in cash flow and
of 2017, and made several changes that returns. The net investment income tax other nonliquidating distributions, the
affect partners and partnerships. The would not be imposed on income on partner’s entitlement to distributions on
IRS also provided guidance for taxpay- which Federal Insurance Contributions liquidation, and the partnership agree-
ers regarding other changes made to Act (FICA) tax is already imposed. This ment. Under a new Sec. 704(b), if two
Subchapter K over the past few years. change would subject all earnings from or more members of a controlled group
Also, the courts and the IRS issued vari- passthrough entities to either the 3.8% are partners, the allocations would need
ous rulings that addressed partnership self-employment Medicare tax or the to be determined using the consistent-
operations and allocations. 3.8% net investment income tax. percentage method. In addition to the
The second provision would change changes to Secs. 704(a) and (b), the
Current proposals the rules related to the amount of losses proposal would require that Sec. 704(c)
There are several new bills in Congress a partner may deduct on a noncorporate allocations be made using the remedial
as of this writing that would impact tax return. The TCJA added Sec. 461(l), method for property contributed after
partners and partnerships. which limited the amount of business Dec. 31, 2021. A new subsection would
losses a noncorporate taxpayer could be added to the Code for revalued prop-
Build Back Better Act deduct each year. Sec. 461(l) is set to erty that would be similar to the current
At the time this is being written, the expire on Dec. 31, 2026. However, the rules contained in Sec. 704(c).
House and Senate are attempting to fi- Build Back Better Act would make this In another section of Wyden’s pro-
nalize President Joe Biden’s social safety section permanent. posal, Sec. 707(c) regarding guaranteed
net proposal known as the Build Back payments would be repealed. Instead,
Better Act.2 The current version of the Wyden proposal partners would have to report income if
proposed act contains two provisions At the time of this writing, Sen. Ron they had an excess share of the partner-
that would have an impact on partners Wyden, D-Ore., the chair of the Senate ship. An excess share of a partnership
and partnerships. Finance Committee, has proposed some would occur if the partner’s share of the
The first provision relates to taxes major changes that would affect how partnership in liquidation exceeds his or
paid on a partner’s share of income. income from a partnership is calculated her interest in the partnership based on
Under current law general partners pay and taxed. Wyden’s proposal, released his or her net contributed capital. Like-
self-employment tax on the full amount on Sept. 10, 2021, would eliminate or wise, Sec. 736, which governs payments
of their net trade or business income, amend a number of sections in Sub- to retiring partners, would be repealed.
subject to certain exceptions such as chapter K. The proposal would also change basis
rents, dividends, capital gains, and cer- The first change would impact Sec. adjustments and allocation of liabilities.
tain retired partner income. Likewise, 704. The current versions of Secs. 704(a) In the proposal, a basis adjustment
the net investment income tax imposes a and 704(b) would be repealed. New Sec. would be mandatory when a partnership
3.8% tax on “net investment income” on 704(a) would require a partnership to interest is transferred or when property
individuals that have a modified adjusted allocate income and loss items based on is distributed to partners under Secs.

1. P.L. 115-97. 2. H.R. 5376.

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