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PARTNERS & PARTNERSHIPS

734 and 743. The proposal would also income from carried interests. In 2021, partnership allocates excess taxable
change the allocation of debt under Sec. Treasury issued regulations that explain income to the partner (Sec. 163(j)(4)
752. Going forward, all debt, other than these provisions. (B)(ii)).
debt personally guaranteed by a partner, ■ Rules are provided for the adjusted
would be allocated based on the part- Limitation on business interest basis in a partnership of a partner
ners’ share of partnership profits. The deductions that is allocated excess business
proposal does give some relief for gains The TCJA added Sec. 163(j), which interest expense (Sec. 163(j)(4)(B)
that would occur if liabilities are reallo- limits the amount of business interest (iii)).
cated among partners. In this case, any an entity can deduct each year. Sec. Final regulations3 under Sec. 163(j)
gain that results from the reallocation of 163(j)(4) provides special rules for ap- issued in 2020 provided special rules for
debt would be taxed to the partners over plying the interest deduction limitation how partnerships apply the Sec. 163(j)
an eight-year period. to partnerships, which include: limitation. Treasury also issued proposed
Further, Wyden’s proposal would ■ The limitation on the deduction for regulations4 to accompany the final
change the tax treatment for many pub- business interest expense must be regulations to provide additional guid-
licly traded partnerships (PTPs). The applied at the partnership level, and ance on several other aspects of the de-
proposal would repeal the exceptions for a partner’s adjusted taxable income duction limitation including issues with
the treatment of PTPs used by many must be increased by the partner’s tiered partnerships and dispositions of a
oil and gas and real estate partnerships. share of excess taxable income, as partnership interest. Final regulations5
The impact would be that all PTPs defined in Sec. 163(j)(4)(C), but not were issued in 2021, which adopted the
would be treated as corporations for by the partner’s distributive share of proposed regulation related to partner-
tax purposes. income, gain, deduction, or loss (Sec. ships. The final regulations adopt an
163(j)(4)(A)). entity approach where if excess business
Tax Cuts and Jobs Act ■ The amount of partnership business interest expense (EBIE) is allocated to
On Dec. 22, 2017, President Donald interest expense limited by Sec. an upper-tier partnership (UTP), the
Trump signed the TCJA, the first major 163(j)(1) is carried forward at the UTP’s basis in a lower-tier partnership
tax reform in over 30 years. The law partner level (Sec. 163(j)(4)(B)). (LTP) is reduced; however, the UTP
contained several provisions that affect ■ Excess business interest expense partners’ bases in the UTP are not re-
partners and partnerships. These in- allocated to a partner and carried duced until the UTP EBIE is treated as
clude a new limitation on the deduction forward is available to be deducted paid or accrued by the UTP. In order to
for business interest and new rules for in a subsequent year only if the reflect the reduction in value associated

3. T.D. 9905. 5. T.D. 9943.
4. REG-107911-18.

EXECUTIVE SUMMARY one or more applicable partner- • The IRS issued new international-
ship interests (carried interests) as related Schedule K-2, Partner’s
• Several bills in Congress as of short-term capital gains. Distributive Share Items — Inter-
this writing would affect partners national, and K-3, Partner’s Share
and partnerships. Sen. Ron • Final regulations provided special of Income, Deductions, Credits,
Wyden, D-Ore., the chair of the rules for how partnerships apply etc. — International, along with
Senate Finance Committee, has the Sec. 163(j) business interest instructions.
proposed changes to partnership limitation. Concurrently issued
allocations. proposed regulations provided • Court rulings addressed sham
additional guidance on the partnerships, cancellation-of-
• Final regulations were issued deduction limitation, including on indebtedness income, theft loss
under Sec. 1061 that provide issues with tiered partnerships deductions, and disguised sales,
guidance on the recharacteriza- and dispositions of a partnership among other topics.
tion of certain net long-term capi- interest.
tal gains of a partner that holds

38 February 2022 The Tax Adviser