Question

what are the most typical deductions allowable for partnerships and how/when is income passed through to the partners?

Answer 1

1) Although not entirely clear, it appears that the three-year holding period described in the bill would be required for sales of assets held (directly or indirectly) by the applicable partnership, or, in the case of the sale of an applicable partnership interest, the applicable partnership interest itself. Rather than treating amounts failing the three-year test as ordinary income (as has been the typical recharacterisation under prior versions of proposed carried interest legislation), section 1061 treats such gain as short-term capital gain.

2) Both the reduction in the corporate tax rate and the exemption from income of dividends received from CFC s are described as increasing the competitiveness of U.S. corporations and levelling the playing field with foreign multinationals. It is worth noting that an immediate tax, which in many cases would be imposed on most of a CFC’s earnings, even at an effective rate of 10.5% for corporate shareholders (after taking into account the 50% deduction described above) would be comparatively unfavourable to the CFC regimes of most of the major trading partners of the United States, which typically tax CFC earnings in much more limited circumstances.

3) Under the new law, any net interest dis allowance applies at the partnership and S corporation level rather than the partner or shareholder level. This affects not only the determination of any interest dis allowance, but also any excess amount (i.e., interest expense capacity) passed through from a partnership or S corporation to its partners or shareholders, respectively. Consideration will need to be given in tiered structures to whether business interest expense is subject to any dis allowance given the limitations are applied at each level. There may also be uncertainties created when applying the rules at the partnership or S corporation level when references are made to the rules of section 469 which apply at the partner or shareholder level.

4) The new law establishes special carryover rules for partnerships (not S corporations) and permits interest disallowed at the partnership level to be passed through to the partners and deducted in succeeding tax years in which, and to the extent that, the partners are allocated excess taxable income from such partnership. The new law also provides for adjustments to the partners’ bases in partnership interests to account for disallowed interest that is passed through.

5) For tax years beginning after December 31, 2017 (subject to a sunset at the end of 2025), section 199 A of the new law generally allows an individual taxpayer (and a trust or estate) a deduction for 20% of the individual’s domestic qualified business income from a partnership, S corporation, or sole proprietorship.

6) Twenty percent (20%) of any dividends from a real estate investment trust (other than any portion that is a capital gain dividend) are qualified items of income, as is 20% of includible dividends from certain cooperatives and qualified publicly traded partnership income. However, qualified business income does not include certain service related income paid by an S corporation or a partnership