Tax Reform Creates New Challenges for Transactions Involving Partnerships
Acquisitions of partnership interests require careful consideration of tax consequences that may have a long-lasting effect on the firm and value of your investment.
Previously, a technical termination of a partnership occurred whenever 50 percent or more of the partnership’s capital or profit interests were acquired within a 12-month period. This technical termination required the old partnership to file a final income tax return, and the new partnership was provided a fresh start with a new tax year and also had the ability to select new income tax accounting methods as well as make new tax elections.
This change for partnership tax years beginning after December 31, 2017, has eliminated the technical termination provisions. As such, organizations undertaking acquisitions of a partnership interest should consider the following implications:
- If a partnership vehicle is utilized to acquire the interests of another partnership, which entity will be the survivor?
- What are the tax consequences of this decision?
- How do you maximize recoverable tax basis and amortization/depreciation benefits prospectively?
- How do you best position the partners in case the IRS takes an alternative view?
The changes will not necessarily be negative for partnerships. In many cases this will permit the recovery of existing depreciable and amortizable tax basis to be over a shorter period. It may also provide a simpler allocation of amortization and depreciation for any increase in basis of the assets as a result of the acquisition.
Although a short-period tax return will be avoided in many cases, the allocation of income or loss for the pre and post-acquisition periods will need to be addressed in the purchase agreement, including which parties should absorb the impact of any required changes in accounting methods.