IRS Finalizes Rules on Partnership Basis-Shifting Maneuver: What Partnerships Need to Know

On Friday, the IRS finalized regulations requiring partnerships to report specific basis adjustment transactions—a move aimed at curbing the misuse of tax deductions in complex partnership structures. This significant update impacts partnerships engaged in related-party transactions and underscores the need for compliance with enhanced reporting requirements.

What Are the New Rules?

The finalized rules (TD 10028; RIN 1545-BR07) identify certain basis-adjustment transactions as “transactions of interest.” This designation means that partnerships and their advisers must disclose these transactions to the IRS or face potential penalties. The regulations are part of the Biden administration’s broader initiative to prevent abuse in tax strategies by large, complex partnerships.

Under these rules, partnerships must self-report transactions involving basis shifts between related parties when the adjustment exceeds specific thresholds. These basis shifts often occur when one partner transfers their ownership basis to another partner, potentially generating tax deductions.

Key Thresholds and Deadlines

• Reporting Thresholds: The final rule raises the reporting threshold for basis increases in transactions of interest:
  • $25 million for tax years starting in 2025.
  • $10 million for tax years beyond 2025.

This adjustment limits the scope of transactions subject to the reporting requirement, focusing on larger-scale basis shifts.

• Extended Reporting Timeframe: Taxpayers now have an additional 90 calendar days to report these transactions of interest, giving partnerships more time to meet compliance obligations.

Why This Matters for Partnerships

The IRS’s intent is clear: to crack down on partnerships using basis-shifting strategies to unfairly reduce their tax liabilities. For partnerships, this means heightened scrutiny, increased reporting responsibilities, and a greater likelihood of IRS audits for non-compliance.

Partnerships should expect additional rules and clarifications in the future, making it critical to stay ahead of these regulatory changes.

How Tonneson + Co Can Help

At Tonneson + Co, we specialize in guiding Partners in partnerships through complex tax regulations to ensure compliance and minimize risk. With decades of experience serving Private Equity and other Partnerships across various industries, our team can help you:

• Assess Your Transactions: We’ll review your partnership’s financial activities to identify any basis adjustments that may require disclosure under the new rules.
• Ensure Compliance: Our experts can assist with preparing and filing the required disclosures to avoid penalties.
• Plan Strategically: We’ll work with your partnership to develop tax strategies that align with IRS guidelines while optimizing your financial outcomes.

The IRS estimates these rules could raise over $50 billion in revenue over the next decade, highlighting the scale of enforcement efforts. With the number of large pass-through businesses growing by 70% over the past decade and audit rates for these entities plummeting, it’s more important than ever to ensure your partnership is in compliance.

Stay Ahead with Tonneson + Co

If your partnership engages in related-party transactions or complex basis adjustments, the new rules are a clear signal to take action. At Tonneson + Co, we’re here to help you navigate these changes with confidence. Contact us today to learn how we can assist your partnership in complying with the latest IRS regulations while achieving your financial goals.

Optimize your tax strategies with Tonneson + Co—your partner in proactive tax planning.