Partnership Compliance & Planning

Compliance

Form 1065 due March 15; Schedule K-1 (tax-basis capital); centralized audit regime — partnership representative; small partnerships (≤ 100 eligible partners) may elect out.

Elections

• Section 754: inside basis step-up for buyers (743(b)) and distributions (734(b)); mandatory for substantial built-in losses.
• Section 704(c) methods: traditional, curative, remedial.
• Special allocations need substantial economic effect.

Clocks

• Disguised sale: distribution within 2 years of contribution.
• Mixing bowl: 7 years.
• Carried interest: > 3 years for long-term.

Losses and liabilities

Basis → at-risk → passive → excess business loss. Recourse debt by risk of loss; nonrecourse by profits.

Compensation

General partners: self-employment tax on share. Guaranteed payments: deductible, ordinary, self-employment tax, not qualified business income. Hot assets on sale → ordinary (Section 751).

Exam traps

• A Section 754 election applies to all later transfers and distributions, and can be revoked only with Internal Revenue Service (IRS) consent.
• Nonrecourse debt adds to basis, but counts as at-risk only if it is qualified nonrecourse real estate financing.
• A partner can't be an employee of the partnership — no W-2 wages for partners.