A Section 754 election is difficult to revoke, tends to increase the partnership’s administrative burdens, and applies on a mandatory basis to both distributions of partnership assets and transfers of partnership interests, the partnership (and partners) should thoroughly analyze the situation before making the election.
How Does Section 754 Work? Tax advisers routinely turn to the statutory language of Section 754 in hopes of finding guidance as to the intent and mechanics of the election, only to be let down.
This is accomplished by making either an IRC § 734(b) or 743(b) basis adjustment, in line with the Section 754 regulations. IRC § 734(b) is used when there are distributions to partners in excess of basis; IRC § 743(b) is used when there is a transfer of interest in the partnership for an amount over basis
The election adjusts the basis of remaining or distributed assets to reflect the partnership’s economic reality. For example, when a partner receives appreciated property, a 754 adjustment ensures equity among remaining partners by realigning basis values. Key Filing Steps. Making a 754 election requires strict adherence to tax regulations.
Section 754 elections are available only to partnerships and LLCs taxed as partnerships for which the entity’s income and losses pass through to each partner. A valid election requires strict adherence to procedural guidelines, including the filing of a written statement with the partnership’s tax return in the year that the distribution or ...
Code Section 734. The trigger event for a Section 734 adjustment is a distribution of property. In addition to a trigger event, one of two prerequisites must be in place before taking the adjustment: either the partnership has made a Section 754 election or there is a substantial basis reduction with respect to the distribution.
Here's an in-depth look at how basis adjustments under Section 754 work: 1. Triggering Events: A Section 754 election is made by the partnership, and it's generally triggered by either the sale or exchange of a partnership interest or the death of a partner. 2.
Making the 754 Election Making the 754 election will bring the inside and the outside basis into balance, therefore preventing underserved gains when appreciated property is sold. The critical thing to understand about the 754 election is it is a tax concept only. It does not appear on the balance sheet, no money is changing hands.
by the §754 Election Example 1. (i) A is a member of partnership PRS in which the partners have equal interests in capital and profits. The partnership has made an election under §754, relating to the optional adjustment to the basis of partnership property. A sells its interest to T for $22,000. The balance sheet of the
Section 754 of the Internal Revenue Code (IRC) deals with complex issues that often arise in connection with assets owned by a partnership. Under Section 754, a partnership may adjust the basis of partnership property when the property is distributed or when a partnership interest is transferred. Section 754 also allows new partners to ...
These adjustments can only be made if the partnership has made an election under IRC Section 754. When a Sec. 754 election is made, the partnership steps up the inside cost basis – but only for the new partner. This balances the inside cost basis and outside cost basis and reduces the capital gains tax when a property that has appreciated is ...
To make a Section 754 election, a partnership must notify the IRS by attaching a written statement to its timely filed tax return for the year in which the election is to take effect. This statement must indicate that the partnership is electing under Section 754 to adjust the basis of its property under Sections 734(b) and 743(b).
Section 754 of the Internal Revenue Code allows partnerships to adjust the basis of partnership property when there is a transfer of a partnership interest or a distribution of partnership property.
If the partnership has elected § 754 and has not properly revoked that election there is no reason to elect again. (§ 1.754-1.) In order to make a valid election the return must be timely filed. (§ 1.754-1(b).) For partnerships this is on or before the fifteenth day of the fourth month following the close of the partnership's taxable year.
In addition to receiving an allocation of a pro-rata percentage of the depreciation on the existing tax basis of the partnership’s assets, a Section 754 election and corresponding 743(b) basis adjustment would allow Partnership A to take a total of $82 additional depreciation in the first year of the election, comprised of $7 for depreciation relating to the building ($180 over 27.5 years ...
By making informed decisions and leveraging the flexibility provided by Section 754, partnerships can enhance tax planning strategies and support long-term financial goals. For expert assistance in navigating Section 754 elections and optimizing partnership tax planning, consider partnering with AJB & Associates CPAs.
Section 754 Election – An Overview. A good starting point would be to gain an understanding of what a section 754 election is and what it is designed to do. Section 754 of the Internal Revenue Code is a tax provision that allows partnerships to adjust the basis of their partnership property. This election is often considered crucial when ...
Through a Section 754 election, the partnership has an opportunity to avoid these consequences. Like anything worthwhile, this election takes work. It is perhaps especially laborious if the partner or partnership have not been actively tracking the inside and outside basis disparity. The partners’ Schedule K-1s could offer a lifeline.
