PARTNERSHIPS Act

The PARTNERSHIPS Act (S. 2095) seeks a broad overhaul of U.S. partnership tax rules. It introduces a new framework to determine each partner’s share of partnership items, expands the use of a “consistent percentage method” for certain partnerships and partners, and adds new rules to address misalignments between distributions and distributive shares. It also retools the treatment of contributed and revalued property, tightens rules around liquidating distributions, and changes how partnership debt is allocated. In addition, the bill tightens anti-abuse rules, expands the net investment income tax (NIIT) to some high-income individuals, and offers a new installment method to pay any resulting net tax liability. Many provisions are phased in for years after enactment, with several targeting “covered partnerships” and “covered partners” (defined by ownership in relation to a controlled group). Overall, the bill is designed to curb perceived abuses, improve consistency in allocations, and extend tax reach to some high-income scenarios within partnerships. Key themes include: (1) a redesigned method for allocating items among certain partnerships and partners, (2) rules to prevent and tax mismatches when rights or distributions don’t reflect each partner’s true share, (3) a framework for revaluing contributed or held property and addressing tiered partnership structures, (4) elimination or revision of several long-standing partnership provisions (preformation expenditures, certain liquidating distributions, and timing rules on precontribution gains), and (5) expanded tax authority and administration tools, including a potential six-year installment option for certain gains and broadened NIIT application.