On March 28, 2022, the Biden Administration proposed certain limited changes to the taxation of partnerships. In short, the Administration’s proposals would (i) prevent related partners in a partnership that has made a section 754 election from basis shifting to reduce taxable income;[1] and (ii) make two helpful changes to the partnership audit rules.
I. Prevent Basis Shifting by Related Partners
Under current law, if a partnership with appreciated non-depreciable assets and depreciable or amortizable assets makes a “section 754 election” and distributes the appreciated non-depreciable assets on a tax-free basis to one partner, the other partners are entitled to “step-up”, or increase, their basis in the depreciable or amortizable assets. This allows them to claim increased depreciation or amortization deductions or generate losses from assets to be sold. These transactions are known as “basis bumps”.