IRS FAQ addresses TCJA changes to Section 704(d)

Tax Hot Topics newsletter The IRS recently released a frequently asked questions document concerning changes made to Section 704(d) as part of the Tax Cuts and Jobs Act (TCJA). The FAQ is the first guidance released by the IRS dealing with the changes to Section 704(d) and further clarifies the treatment of charitable contributions and foreign taxes allocated to a partner that may be limited by Section 704(d).

Section 704(d) generally prohibits the deduction of partnership losses to the extent they exceed a partner’s outside basis in its partnership interest. For instance, a partner with an outside basis of $30 in her partnership interest who receives an allocation of $100 of partnership losses will only be permitted to deduct the first $30 of those losses. The remaining $70 of losses will be suspended and will not be deductible until the partner’s outside basis in her partnership interest increases.

Prior to the TCJA, Section 704(d) did not limit the deductibility of a partner’s distributive share of a partnership’s foreign taxes paid or accrued during the year or charitable contributions. If a partner with an outside basis of $30 in her partnership interest was allocated $100 of partnership level charitable contributions, the partner’s outside basis would be reduced to $0. However, the partner would be permitted to deduct its full $100 share of charitable contributions unless any other limitations applied at the partner level.

The TCJA eliminated the ability of a partner to take into account its entire share of partnership charitable contributions and foreign taxes without regard to its basis in its partnership interest. However, for partnership level charitable contributions of appreciated property, the modified Section 704(d) limitation only applies to the portion of the charitable contribution that equals the property’s basis.

The FAQ provides an example of how the modified basis limitation applies to charitable contributions of appreciated property. Assume that a partner has a basis of $30 in his 50% interest in a partnership. The partnership makes a charitable contribution of a property with a basis of $100 and a fair market value of $300 and allocates 50% of that charitable contribution to the partner. The amount allocable to this partner is effectively split into two parts, the part equal to the property’s basis ($50) and the part equaling the property’s built-in gain amount ($100). Section 704(d) suspends the charitable contribution to the extent the allocated amount equal to the property’s basis exceeds the partner’s basis in his partnership interest. Accordingly, $20 of the charitable contribution that is allocated to the partner is suspended and must be carried forward, while the $100 portion allocated to the partner that represents the property’s built-in gain is not limited by Section 704(d). The partner’s total charitable contribution from the partnership would equal $130.

After the application of the Section 704(d), partners need to consider other loss limitation provisions including the Section 465 amounts at-risk limitation, Section 469 passive activity loss limitation, and the new Section 461(l) excess business loss limitation.

Grace Kim
Principal, Partnerships
Washington National Tax Office
T +1 202 521 1590

Jose Carrasco
Senior Manager, Partnerships
Washington National Tax Office
T +1 202 521 1552

Whit Cocanower
Senior Associate
Washington National Tax Office
T +1 202 521 1541

Ryan Nodal
Washington National Tax Office
T +1 803 231 3020

Tax professional standards statement
This content supports Grant Thornton LLP’s marketing of professional services and is not written tax advice directed at the particular facts and circumstances of any person. If you are interested in the topics presented herein, we encourage you to contact us or an independent tax professional to discuss their potential application to your particular situation. 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. To the extent this content may be considered to contain written tax advice, any written advice contained in, forwarded with or attached to this content is not intended by Grant Thornton LLP to be used, and cannot be used, by any person for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.

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 or tax advice provided by Grant Thornton LLP to the reader. 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 Grant Thornton LLP or other tax professionals 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 LLP 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.