While the newly enacted law known as the One Big Beautiful Bill Act (OBBBA) included only one change specific to partnerships, there are numerous provisions relevant to such entities that provide new planning opportunities. Notably, many elements of the tax code were made permanent by the new law, which offers a more predicable landscape than individuals and pass-through businesses have had in recent years.
Additionally, many of the OBBBA’s provisions are effective beginning in 2025, so there may be opportunities to obtain cash tax savings this year. Further, in the case of partnerships, any tax distributions that are dependent on income projections or estimates may need to be recomputed (potentially downward) to the extent that a partnership’s taxable income is reduced by virtue of an OBBBA provision. Modeling the numerical results is key to ascertaining these impacts to cash positions.
Payments from partnership to partner or between partners
The one partnership-specific change in the new law relates to Section 707, recharacterizing certain payments as a disguised sale or compensation payments between a partnership and partners or between partners. The OBBBA change makes the recharacterization provision self-executing and thus not dependent on the presence of implementing regulations.
This change is aimed at disguised sales of partnership interests, an area where, due to the absence of regulations, some taxpayers have asserted that the form of a contribution of money to a partnership by one partner and a distribution to another partner should be respected (potentially with no gain to the distributee) and that there is no disguised sale of a partnership interest (that might result in gain).
While this change was effective immediately upon the July 4, 2025, enactment, the OBBBA provides that no inference is intended with regard to prior transactions, suggesting the rule was always in place.
Grant Thornton insight:
The potential for a challenge by the government regarding prior distribution reporting where there was both a contribution and an associated distribution continues to be a risk. Additionally, for future transactions where distribution treatment is sought, having facts and documentation that evidence partnership distribution treatment, rather than a partnership interest sale transaction between two persons, will be even more critical than before.
Permanency for TCJA’s pass-through deduction
Of significant benefit to all pass-through entities, including partnerships, the qualified business income (QBI) deduction created by 2017’s Tax Cuts and Jobs Act (TCJA) under Section 199A has been made permanent, without significant changes in how the deduction is computed. Beginning in 2026, the OBBBA increases the income limitation phase-in from $50,000 to $75,000 for individuals (from $100,000 to $150,000 for joint filers) and adds a new $400 minimum deduction.
If a taxpayer has aggregated QBI of at least $1,000 with respect to qualified trades or businesses (QTB) in which the taxpayer materially participates, as defined in the Section 469 passive activity rules, the taxpayer can take advantage of the $400 minimum deduction.
Grant Thornton insight:
- Potential opportunities for partnerships looking to maximize a partner’s Section 199A deduction include aggregating eligible QTBs, reviewing whether any trade or business is a specified services trade or business (SSTB), and restructuring to report partner compensation as W-2 wages instead of guaranteed payments.
- Choice of entity comparisons/decisions remain important, given that the indefinite availability of the QBI deduction may make a partnership entity more favorable from a tax perspective in M&A transactions and transactions that include conversions from a C corporation.
State and local tax (SALT) considerations
Wrangling over the cap on the individual SALT deduction ꟷ which was $10,000 under the TCJA but will temporarily increase to $40,000 this year and by 1% annually through 2029, before falling back to $10,000 ꟷ was a major storyline throughout this bill’s evolution. However, a lesser-discussed issue was the treatment of state-enacted pass-through entity tax (PTET) regimes.
While both the original House-passed bill and the initial Senate proposal of the OBBBA would have substantially limited the utility of these regimes by subjecting the SALT cap rules to these regimes in broad and incredibly complicated ways, the final bill dropped all such provisions, including one that would have restricted the SALT deduction for certain SSTBs, and made no changes to the use of state workarounds.
Grant Thornton insight:
- Although the cap on the deduction for state taxes paid by individuals has been raised until 2029, partners in many instances will benefit from partnerships electing into PTET regimes. In doing so, though, partnerships face a variety of federal tax issues, including the timing of the associated federal deduction, making it vital to carefully assess the timing of making the election.
- If a partnership wants to specially allocate the associated federal deduction, it should note that the ability to make special allocations of PTET federal deductions may be limited in situations in which the allocation is not linked to the partners’ distribution entitlements. As such, the partnership should consider specific provisions in its partnership agreement that may impact the allocation of the PTET federal deduction.
Expanded QSBS benefits
The OBBBA modified Section 1202 for qualified small business stock (QSBS) to provide further benefits to owners of small businesses and may allow more shareholders to take advantage of the gain exclusion on the sale of QSBS. Certain gains from the sale of QSBS issued after July 4, 2025, may be eligible for at least a 50% exclusion up to the greater of $15 million, or 10 times a taxpayer’s adjusted basis in the stock.
This is an increase from the historical limit of $10 million under the previous law. Additionally, shareholders historically had to hold QSBS for at least five years to be eligible for gain exclusion under Section 1202.
The changes under OBBBA provide that a shareholder is eligible for a 50% exclusion of gain after QSBS is held for three years, a 75% gain exclusion after four years, and a 100% gain exclusion if the QSBS is held for five years or longer. The new law also raised the gross asset ceiling for a corporation to be classified as a qualified small business from $50 million to $75 million.
Grant Thornton insight:
- Partnerships can acquire QSBS, and the partners in place at the time of the acquisition may be eligible to benefit from a Section 1202 gain exclusion when the partnership disposes of it. Careful consideration (including modeling) should be given to the eventual allocations of gains when QSBS is sold (e.g., will the gain be allocated to the potentially eligible partners?), but this could be a significant tax-savings benefit for partnership investors and funds that are formed to acquire QSBS.
- A contribution of QSBS to a partnership under Section 721 eliminates the benefits of Section 1202, but a distribution of QSBS to partners of a partnership generally retains the Section 1202 benefit for a transferee partner that held its partnership interest at the time of the acquisition.
- Certain planning and structuring strategies may be available for profits-interest partners to benefit from a Section 1202 exclusion.
Permanency and modifications for broader business provisions
The qualified opportunity zones (OZ) program ꟷ and the associated capital gains benefits for investments in designated OZs ꟷ was made permanent in the OBBBA, with some modifications. While it is still possible to make investments into existing zones (with invested gain deferred until Dec. 31, 2026), an updated set of qualified OZs will be designated for investment beginning in 2027. (States can begin to designate new OZs beginning July 1, 2026.)
In addition to the previous benefits provided under the TCJA, starting Jan. 1, 2027, investors in OZ projects will have a 10% step-up in basis for investments held in an OZ fund for at least five years, with a 30% step-up in basis for investments in rural OZs.
Grant Thornton insight:
In addition to deferring or reducing taxable gains invested into funds for five years, the ability to permanently exclude gain from qualified investments may also provide benefits to individuals holding carried interests.
The so-called “big three” business provisions from the TCJA that have been the focus of advocacy efforts for several years were all included in some form in the OBBBA and made permanent.
The calculation of adjusted taxable income (ATI) used for the Section 163(j) business interest expense limitation purposes has been modified to revert to the more favorable approach using earnings before interest, taxes, depreciation and amortization (EBITDA) for tax years beginning after Dec. 31, 2024, instead of earnings before interest and taxes (EBIT) only. While the partnership provisions within Section 163(j) remain unchanged and continue to apply an entity approach, some opportunities exist for partnerships and their partners now that the use of EBITDA may result in higher deductible amounts of business interest expense.
Grant Thornton insight:
- Consider party or in complete redemption from the partnership) increases its outside basis by the amount of remaining EBIE, which reduces gain recognized from the disposition of the partnership interest or higher outside basis if the disposition was structured as a non-taxable transfer to another partnership.
- Partnership EBIE also raises the potential for restructuring. This should be considered at the partnership and/or partner level where partners have large amounts of EBIE and it is not expected that the partnership will create sufficient ETI in future years to “free up” the EBIE. A partner that disposes of a partnership interest (via sale or exchange to another party or in complete redemption from the partnership) increases its outside basis by the amount of remaining EBIE, which reduces gain recognized from the disposition of the partnership interest or higher outside basis if the disposition was structured as a non-taxable transfer to another partnership.
- Restructuring should also be a consideration for electing real property trade or business (RPTOB) partnerships that have partners with EBIE from a pre-RPTOB period when the partnership has no other activity other than the RPTOB (e.g., transfer of assets or merger into another partnership that has non-RPTOBs that can create ETI and EBII).
Also made permanent in the bill was 100% bonus depreciation under Section 168(k) for property acquired and placed in service after Jan. 19, 2025. In addition, a new provision makes immediate expensing temporarily available for qualified production property (QPP) under Section 168(n). QPP is defined as the portion of nonresidential real property used in the manufacturing, production, or refining of a qualified product. The property’s original use must commence with the taxpayer, and construction must begin between Jan. 19, 2025, and Jan. 1, 2029, with the property placed in service in the U.S. before Jan. 1, 2031.
Grant Thornton insight:
Generally, partnerships should be aware that immediate expensing could be subject to limitations at the partner level to the extent the allocation of losses (including these immediate expensing deductions) exceed a partner’s outside basis. Additionally, partners may be subject to ordinary gain recapture under the Section 751 hot asset rules upon a disposition of his or her interest, to the extent there is remaining value in the assets.
Finally, the OBBBA made permanent immediate expensing for domestic research and experimental (R&E) expenditures under new Section 174A for tax years beginning after Dec. 31, 2024. However, the optional 10-year write-off for R&E expenditures remains under Section 59(e)(2)(B). Foreign R&E expenditures are still required to be capitalized and amortized over a 15-year period under Section 174. The OBBBA’s modification of the treatment of domestic R&E expenditures is retroactive to Dec. 31, 2021, for certain small business taxpayers that meet the gross receipts test of Section 448(c) for the first taxable year beginning after Dec. 31, 2024, and make an election.
Transition rules are available for all taxpayers under Section 174A(f)(2) that will allow taxpayers to deduct the remaining unamortized costs that were capitalized in taxable years beginning after Dec. 31, 2021, and before Jan. 1, 2025. Taxpayers may elect to deduct the unamortized costs in the first taxable year beginning after Dec. 31, 2024, or ratably over the two-taxable-year period beginning with the first taxable year beginning after Dec. 31, 2024.
Grant Thornton insight:
Partnerships should consider modelling the impact of new Section 174A as they determine when to deduct unamortized costs. The partnership and its partners need to also consider how deductions arising from the recovery of prior unamortized Section 174 expenditures will be allocated among the partners, including new and exiting partners during the 2025 tax year (and the 2026 tax year, if applicable).
Additionally, when considering the impact of allocations, partnerships (and partners as relevant) should take into account the loss limitations at the partner level to the extent the amount of the loss allocation (including these deductions) exceeds a partner’s outside basis.
Contacts:
Content disclaimer
This content provides information and comments on current issues and developments from Grant Thornton Advisors LLC and Grant Thornton LLP. It is not a comprehensive analysis of the subject matter covered. It is not, and should not be construed as, accounting, legal, tax, or professional advice provided by Grant Thornton Advisors LLC and Grant Thornton LLP. All relevant facts and circumstances, including the pertinent authoritative literature, need to be considered to arrive at conclusions that comply with matters addressed in this content.
For additional information on topics covered in this content, contact a Grant Thornton professional.
Grant Thornton LLP and Grant Thornton Advisors LLC (and their respective subsidiary entities) practice as an alternative practice structure in accordance with the AICPA Code of Professional Conduct and applicable law, regulations and professional standards. Grant Thornton LLP is a licensed independent CPA firm that provides attest services to its clients, and Grant Thornton Advisors LLC and its subsidiary entities provide tax and business consulting services to their clients. Grant Thornton Advisors LLC and its subsidiary entities are not licensed CPA firms.
Tax professional standards statement
This content supports Grant Thornton Advisors LLC’s marketing of professional services and is not written tax advice directed at the particular facts and circumstances of any person. It is not, and should not be construed as, accounting, legal, tax, or professional advice provided by Grant Thornton Advisors LLC. If you are interested in the topics presented herein, we encourage you to contact a Grant Thornton Advisors LLC tax professional. Nothing herein shall be construed as imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter addressed herein.
The information contained herein is general in nature and is based on authorities that are subject to change. It is not, and should not be construed as, accounting, legal, tax, or professional advice provided by Grant Thornton Advisors LLC. This material may not be applicable to, or suitable for, the reader’s specific circumstances or needs and may require consideration of tax and nontax factors not described herein. Contact a Grant Thornton Advisors LLC tax professional prior to taking any action based upon this information.
Changes in tax laws or other factors could affect, on a prospective or retroactive basis, the information contained herein; Grant Thornton Advisors LLC assumes no obligation to inform the reader of any such changes. All references to “Section,” “Sec.,” or “§” refer to the Internal Revenue Code of 1986, as amended.
Grant Thornton Advisors LLC and its subsidiary entities are not licensed CPA firms.
Trending topics
Share with your network
Share