Partnerships: 2025 Year-End Planning Guide for Private Companies
- HFM CPAs + Business Advisors
- 3 days ago
- 16 min read
Over the last several years, the IRS has been ramping up its scrutiny of partnership tax positions. Part of this effort included comprehensive basis shifting guidance issued in the summer of 2024. In 2025, the trend toward increased partnership enforcement eased under the new administration, which has withdrawn the bulk of the basis shifting guidance. And while the enactment of OBBBA was the major tax event of the year, the legislation's direct impact on partnership tax was limited. Nonetheless, there were some important developments for private companies organized as partnerships in 2025.
Key areas partnerships should be looking into as they plan for year-end and the coming year include:
Eased partnership Form 8308 reporting requirements
Limited partner claims of exemption from self-employment tax
Final rules on partners' shares of partnership recourse liabilities
New reporting requirements for distributions of partnership property
Simplified corporate alternative minimum tax (CAMT) guidance relating to partnership interests
EASED PARTNERSHIP FORM 8308 REPORTING REQUIREMENTS
The IRS in August 2025 issued proposed regulations that would modify reporting requirements for partnerships with unrealized receivables or inventory items that are required to furnish Form 8308. The form is generally required to be furnished by January 31 to the transferor and transferee in connection with certain partnership interest transfers that occurred in the previous calendar year.
The IRS expanded Form 8038 reporting in late 2023, but offered temporary relief in Notice 2024-19 and Notice 2025-02. This guidance responded to partnerships' expressed concerns that they do not have the information necessary to complete the new Part IV of Form 8308 by the January 31 deadline.
The proposed regulations would modify the existing rules to remove the requirement to include Part IV in the statements generally required to be furnished by the January 31 deadline. Other Form 8308 requirements would remain.
Expanded Form 8308 Reporting
Partnerships file Form 8308, Report of a Sale or Exchange of Certain Partnership Interests, to report the sale or exchange by a partner of all or part of a partnership interest when any money or other property received in exchange for the interest is attributable to unrealized receivables or inventory items (that is, when there has been a Section 751(a) exchange).
Final regulations published in November 2020 require a partnership to furnish to a transferor partner the information necessary for the transferor to make the transferor partner's required statement related to a Section 751(a) exchange. Under applicable regulations, a transferor partner in a Section 751(a) exchange must submit a statement with the transferor partner's income tax return for the tax year of the transaction separately stating the date of the sale or exchange, the amount of any gain or loss attributable to Section 751 property, and the amount of any gain or loss attributable to capital gain or loss on the sale of the partnership interest.
The IRS significantly expanded the Form 8308 reporting requirements in the revised form released in October 2023. For transfers occurring on or after January 1, 2023, the revised Form 8308 includes expanded Parts I and II and new Parts III and IV. Part IV is used to report specific types of partner gain or loss when there is a Section 751(a) exchange, including the partnership's and the transferor partner's share of Section 751 gain or loss, collectibles gain under Section 1(h)(5), and unrecaptured Section 1250 gain under Section 1(h)(6).
Furnishing Information to Transferors and Transferees
Partnerships with unrealized receivables or inventory items described in Section 751(a) (Section 751 property or "hot assets") are required to provide information to each transferor and transferee that is a party to a Section 751(a) exchange.
Under the existing regulations, each partnership that is required to file a Form 8308 must furnish a statement to the transferor and transferee by the later of (1) January 31 of the year following the calendar year in which the Section 751(a) exchange occurred, or (2) 30 days after the partnership has received notice of the Section 751(a) exchange. A penalty applies under Section 6722 for failure to furnish statements to transferors and transferees on or before the required date, or for failing to include all the required information or including incorrect information.
Proposed Regulations
The proposed regulations would eliminate the current regulatory requirement that partnerships furnish the information required in Part IV of Form 8308 by January 31 of the year following the calendar year in which the Section 751(a) exchange occurred. The IRS plans to update the instructions to Form 8308 in accordance with the proposed regulations.
Under the proposed regulations and modified Form 8308 instructions, partnerships would only be required to furnish the information in Parts I, II, and III of Form 8308 (or a statement with the same information) to the transferor and transferee in a Section 751(a) exchange by the later of (1) January 31 of the year following the calendar year in which the Section 751(a) exchange occurred, or (2) 30 days after the partnership has received notice of the exchange.
Partnerships would still be required to file the completed Form 8308, including Part IV, as an attachment to their Forms 1065, for the tax year of the partnership that includes the last day of the calendar year in which the Section 751(a) exchange took place.
The IRS states that partnerships may rely on the proposed regulations, and the described changes to the Form 8308 instructions, with respect to Section 751(a) exchanges occurring on or after January 1, 2025, and before the date final regulations are published.
Planning Considerations
While the requirement of furnishing Form 8308 statements was not new, the inclusion of numerical "hot asset" (i.e., unrealized receivables or inventory items) information in Form 8308 for transactions in 2023 and later created difficulties, because, in many cases, partnerships do not have all the information required by Part IV of the Form 8308 by January 31 of the year following the calendar year in which the Section 751(a) exchange occurred. The penalty relief related to the new requirements for the previous two years was welcome – but it was temporary, and it was unclear whether such relief would continue to be offered in future years. The new rules ease the most problematic Form 8308 information reporting requirements and give partnerships more certainty regarding compliance going forward.
LIMITED PARTNER CLAIMS OF EXEMPTION FROM SELF-EMPLOYMENT TAX
Partnerships, particularly management fund entities, may need to revisit their tax positions on self-employment tax after a series of IRS court victories on the issue.
In the latest decision in December 2024, the Tax Court held in Denham Capital Management LP v. Commissioner that "active" limited partners in an investment management company formed as a limited partnership were subject to self-employment (SECA) tax and not entitled to the statutory exemption for limited partners.
The Tax Court relied on its earlier decision in Soroban Capital Partners LP v. Commissioner, which held that the determination of limited partner status is a "facts and circumstances inquiry" that requires a "functional analysis." However, the Denham case is the first in which the Tax Court applied the functional analysis of whether a state law limited partner was, in fact, active in the business of the partnership and a "limited partner" in name only. The key issue in the Denham case, as in Soroban, was whether limited partners in state law limited partnerships may claim exemption from SECA taxes – despite being more than passive investors.
Application of Functional Analysis in Denham
Denham Capital Management was organized as a limited partnership under Delaware law and offered investment advisory and management services to private equity funds. As the court addressed the functional analysis, it reaffirmed that determinations of eligibility for the exemption under Section 1402(a)(13) require a factual inquiry into how the partnership generated the income in question and the partners' roles and responsibilities in doing so.
The court noted that, in the years at issue, Denham's income consisted solely of fees received in exchange for services provided to investors, including advising and operating private investment funds. The court found the partners' time, skills, and judgment to be essential to the provision of these services. It found unconvincing claims that Denham's income – largely distributed to the partners as profits – was a return on investments, when only one of the partners had made a capital contribution to obtain their interest.
Moreover, the court stated that all the partners, except for one that had made a capital contribution, were required to "devote substantially all of [their] business time and attention to the affairs of the [p]artnership and its affiliates." The court determined that the partners treated their roles in Denham as their full-time employment, with each participating in management and playing crucial roles in the business.
Other relevant facts cited by the court included:
Fund marketing materials made clear that the partners had a significant role in Denham's operation.
The partners' expertise and judgment were a significant draw for fund investors, who could withdraw their investments if certain partners no longer participated.
Investment decisions for the funds were made by investment and valuation committees, which included the partners.
The partners all exercised significant control over personnel decisions.
A sizable number of Denham employees received total compensation exceeding the partners' guaranteed payments, suggesting such payments were not designed to adequately compensate the partners for their services.
Concluding that "[i]ndividuals that serve roles as integral to their partnerships as those the [p]artners served for Denham cannot be said to be merely passive investors," the court held that the partners were not "limited partners, as such" under Section 1402(a)(13) and the partners' distributive shares were ineligible for the SECA tax exemption for limited partners.
Planning Considerations
Denham Capital was another big win for the government. Similar to the Tax Court's ruling in Soroban Capital, the Tax Court in Denham required a functional analysis centered around the roles and activities of the individual partners. In Denham, the Tax Court detailed the various activities of the partners to show that they were active participants in the business of Denham and not merely passive investors receiving a return on their capital.
The Tax Court again rejected the argument that the partners were eligible for the SECA tax exemption under Section 1402(a)(13) merely because they were limited partners in a state law limited partnership, making it clear that federal law and not state law prescribes the classification of individuals and organizations for federal tax purposes.
Given these decisions, partnerships should reevaluate whether a partner, including a limited partner in a state law limited partnership, is subject to SECA tax by assessing the activities of the partner using a functional analysis similar to the Tax Court's analysis in Denham. Partnerships should also consider the guidance provided for in 1997 Proposed Reg. §1.1402(a)-2(h), which is instructive despite never being finalized.
Pursuant to this guidance, an individual is considered a limited partner unless the individual:
Has personal liability for the debts of or claims against the partnership by reason of being a partner;
Has authority (under the law of the jurisdiction in which the partnership is formed) to contract on behalf of the partnership; or
Participates in the partnership's trade or business for more than 500 hours during the partnership's tax year.
FINAL RULES ON PARTNER SHARE OF PARTNERSHIP RECOURSE LIABILITIES
The IRS in December 2024 published final regulations (TD 10014) adopting rules – initially proposed more than 10 years earlier – to amend the rules under Section 752 regarding a partner's share of partnership recourse liabilities and associated special rules for related persons. The rules are critical for determining a partner's basis in the partnership interest.
Partners' Liability Shares Under Section 752
Under Section 752, an increase in a partner's share of partnership liabilities is generally considered a contribution of money by the partner to the partnership, and a decrease in a partner's share of liabilities is considered a distribution of money to the partner by the partnership. In determining a partner's share of liabilities, the regulations distinguish between recourse and nonrecourse liabilities.
A partnership liability is generally considered recourse to the extent that a partner or related person bears the economic risk of loss under Reg. §1.752-2. A partner's share of a recourse liability is equal to the portion of that liability, if any, for which the partner or a related person bears the economic risk of loss. A partner bears the economic risk of loss for a partnership liability if the partner or related person has a payment obligation under Reg. §1.752-2(b), is a lender as provided in Reg. §1.752-2(c), guarantees payment of interest on a partnership nonrecourse liability as described in Reg. §1.752-2(e), or pledges property as a security as provided in Reg. §1.752-2(h).
Final Regulations
The new regulations finalize rules proposed in 2013 covering when and to what extent a partner would be treated as bearing the economic risk of loss for a partnership liability when multiple partners bear economic risk of loss for the same liability, as well as rules addressing tiered partnerships and related parties. They also add an ordering rule. The final regulations apply to any liability incurred or assumed by a partnership on or after December 2, 2024.
Overlapping Economic Risk of Loss
With respect to overlapping economic risk of loss, the final regulations include a proportionality rule that applies when multiple parties bear the economic risk of loss for the same liability. Under this rule, the economic risk of loss borne by a partner equals the amount of the partnership liability (or portion thereof) multiplied by a fraction equal to the amount of economic risk of loss borne by the partner divided by the sum of the economic risk of loss borne by all partners with respect to that liability. The proportionality rule is intended to address uncertainty regarding how partners should share a partnership liability when multiple partners bear economic risk of loss with respect to the same liability.
Tiered Partnerships
For tiered partnerships, the final regulations address how a lower-tier partnership must allocate a liability in cases in which a partner of an upper-tier partnership is also a partner of the lower-tier partnership and that partner bears economic risk of loss with respect to the lower-tier partnership's liability. The regulations in effect before the final regulations did not address this situation. Under the final regulations, the lower-tier partnership must allocate the liability directly to the partner.
The final rule is broadly consistent with the proposed rule. The final rules add a clarification regarding how the tiered partnership rule applies in a case in which there is overlapping economic risk of loss among unrelated partners and add an example to illustrate the application of the proportionality rule when there are tiered partnerships.
Related-Party Rules
The final regulations also include changes to the related-party rules, including constructive ownership rules, the related-party exception to the related-party rules, and a multiple partner rule.
Ordering Rule
The final regulations add an ordering rule to clarify how the proportionality rule interacts with the multiple partner rule and how the multiple partner rule interacts with the related partner exception. The ordering rule includes three steps to be followed in order, and the final regulations include an illustrative example.
Planning Considerations
The final regulations adopt the regulations that were proposed more than 10 years earlier with only a few minor changes and additions. Among other changes, the final regulations largely resolve uncertainty in several areas, such as when there is an overlapping of economic risk of loss and how to allocate liabilities in a tiered partnership where a partner in an upper-tier partnership is also a partner in a lower-tier partnership. They also adopt the result reached by the Tax Court in IPO II v. Commissioner, 122 T.C. 295 (2004), and change the multiple related partners rule.
As taxpayers may choose to apply the final regulations to liabilities incurred or assumed before the effective date with respect to all returns, including amended returns, filed after the date the regulations were published, taxpayers should evaluate whether the final regulations provide a more favorable result for the partners in the partnership. Note that if a partnership chooses to apply the final regulations to liabilities incurred or assumed prior to the effective date (December 2, 2024), the partnership must apply the final rules consistently to all its partnership liabilities.
NEW REPORTING FOR DISTRIBUTIONS OF PARTNERSHIP PROPERTY
The IRS in December 2024 released the final version of new Form 7217, Partner's Report of Property Distributed by a Partnership, as well as the accompanying instructions, reflecting a new reporting requirement for partners in tax years beginning in 2024 or later.
This new reporting requirement applies to any partner in any partnership that receives from the partnership distributions of property other than cash and marketable securities treated as cash.
Investment partnerships that meet certain requirements can distribute marketable securities to partners on a tax-free basis, and the recipient partner can defer income recognition until the securities are later sold. Other partnerships are generally required to treat marketable securities as cash, resulting in more immediate tax consequences.
Each partner receiving a tax-free distribution of property, including marketable securities from an investment partnership, is required to file the new Form 7217. A separate Form 7217 is required to be filed for each date during the tax year in which a distribution was received and will be attached to the recipient's tax return. The information reported must include the basis of the distributed property and any required basis adjustments to such property.
Planning Considerations
This new filing requirement reflects a continuation of the IRS's recent efforts to expand required disclosures from partnerships. Private companies organized as partnerships should be prepared to receive additional requests from limited partners as they comply with the Form 7217 reporting requirement.
SIMPLIFIED CAMT GUIDANCE RELATING TO PARTNERSHIP INTERESTS
The IRS announced in Notice 2025-28 that it intends to partially withdraw proposed regulations on the application of the corporate alternative minimum tax (CAMT) to partnerships and CAMT entity partners and to issue revised proposed regulations. Pending publication of the revised proposed regulations, the notice provides interim guidance.
The modified guidance is intended "to reduce burdens and costs" in applying the CAMT to applicable corporations with financial statement income (FSI) attributable to investments in partnerships. The notice includes interim guidance on simplified methods to determine an applicable corporation's adjusted financial statement income (AFSI) with respect to an investment in a partnership, reporting by partnerships of information needed to compute ASFI, and rules for partnership contributions and distributions.
Key changes in the revised guidance include:
Adding two alternative methods for calculating a CAMT entity partner's distributive share of modified FSI (e.g., the top-down election and the limited taxable-income election);
Loosening requirements for requesting information; and
Introducing modifications to the AFSI adjustments that apply certain partnership principles in current proposed regulations (i.e., Prop. Reg. §1.56A-20).
CAMT Background and Previous IRS Guidance on Partnership Interests
For tax years beginning after December 31, 2022, the CAMT imposes a 15% minimum tax on the AFSI of applicable corporations (generally, those with average annual AFSI exceeding $1 billion). AFSI is generally defined as the net income or loss of the taxpayer set forth on the taxpayer's applicable financial statement for that tax year, adjusted as further provided in Section 56A.
In September 2024, the IRS issued proposed regulations on the CAMT that included significant new provisions for partnerships. The proposed regulations set out rules for determining and identifying AFSI, including applicable rules for partnerships with CAMT entity partners.
The 2024 proposed regulations set out rules regarding a partner's distributive share of partnership AFSI. The IRS explained in the preamble to the proposed rules that it was proposing adopting a "bottom-up" method, which it believed was consistent with the statute and more conducive to taking into account Section 56A adjustments. Under the proposed bottom-up method, a partnership would calculate its AFSI and provide this information to its partners. Each partner would then need to determine its "distributive share" of the partnership's AFSI. Under the proposed rules, the CAMT entity partner would undertake a four-step calculation to arrive at its distributive share amount.
The 2024 proposed regulations also included rules to provide for adjustments to carry out the principles of Subchapter K regarding partnership contributions, distributions, and interest transfers. For both contributions and distributions of property, the IRS proposed a deferred sale method.
New Interim Guidance and Planned Proposed Regulations
Notice 2025-28 describes interim guidance intended to simplify the rules set out in the 2024 proposed regulations, and the IRS said it anticipates releasing proposed regulations consistent with the guidance to be effective for tax years beginning after the publication of final regulations. For tax years beginning before the forthcoming proposed regulations are issued, taxpayers may choose to apply the guidance described in the notice.
Top-Down Election
The interim guidance allows a CAMT entity partner to make a "top-down election" to determine its amount of AFSI from a partnership investment for each tax year (starting with the first tax year for which the election is in effect) by reference to the amount the CAMT entity partner reflects in its FSI for the tax year with respect to the partnership investment. Under this election, the four-step calculation of a CAMT entity partner's AFSI under the 2024 proposed regulations would be replaced by a simplified calculation. This alternative calculation equals the sum of (i) 80% of the "top-down amount," which is defined as "any amounts reflected in the CAMT entity partner's FSI for the tax year that are attributable to the partnership investment for which the top-down election is in effect," (ii) amounts included in AFSI from sales or exchanges, and (iii) certain adjustments described in section 3.02 of the notice. The numerous adjustments not enumerated in section 3.02 of the notice are excluded from an electing partner's AFSI calculation.
Different CAMT Entity Partners in the Same Partnership Can Take Different Approaches
If a CAMT entity partner makes a top-down election, the partnership is no longer required to report its modified FSI to that partner. But if a CAMT entity partner has not made the election, the partnership is still required to compute and report its FSI to a non-electing partner that gives the partnership notice that it requires the partnership to compute and report its modified FSI. A partnership may have both electing and non-electing partners.
Who Can Elect the Top-Down Approach?
Any CAMT entity partner can make the top-down election, provided it is not a partnership. If a CAMT entity is a partner in multiple partnerships, it can choose where it would like to make the election.
Alternative Approaches for Calculating Partnership AFSI
The IRS is also considering a "limited taxable-income election," pursuant to which some CAMT entity partners may use taxable-income amounts to determine their AFSI from a partnership investment. The notice provides a formula for this, which, broadly speaking, is the sum of taxable income, AFSI attributable to sales/exchanges, and AFSI inclusions attributable to foreign stock.
Calculating a CAMT Entity Partner's Distributive Share Under the Bottom-Up Approach
New rules will provide greater flexibility in determining a CAMT entity partner's distributive share. The 2024 proposed regulations set out a rather formulaic approach that was outside of typical Subchapter K concepts. The new rules would provide for certain "reasonable methods" for determining distributive share by using existing Subchapter K concepts, such as net Section 704(b) income or loss.
Requesting Information from Partnerships
The notice gives a CAMT entity more time to request necessary information from the partnership if the "top-down election" is not made. If a partnership fails to provide the requested information, the partner may use its books and records rather than applying required estimate rules.
Contributions and Distributions
The IRS provides additional rules on how to account for partnership contributions and distributions. Under the notice, CAMT entities may choose from two additional methods to determine AFSI adjustments for partnership contributions and distributions (other than partnership contributions and distributions involving stock of a foreign corporation): the "modified -20 method" and the "full Subchapter K method."
Under the modified -20 method, a CAMT entity partner may apply Prop. Reg. §1.56A-20 with certain modifications provided by the notice. These modifications include (1) applying Sections 752 and 707 in determining whether Sections 721(a) or 731(b) apply to partnership contributions and distributions of property subject to liabilities, and (2) changes to recovery period rules for property to which Section 168 applies as well as property for which there is no applicable recovery period.
Under the full Subchapter K method, a partnership may apply the principles of Sections 721 and 731 to determine its partners' distributive shares of partnership AFSI resulting from contributions or distributions. If a partnership adopts this method, it must also apply the principles of other relevant Subchapter K provisions (e.g., Sections 704(c), 732, 734, and 737).
Planning Considerations
Notice 2025-28 provides CAMT entity partners with new approaches for determining their AFSI from partnership investments. These approaches are intended to streamline the calculation process and reduce administrative complexity, particularly for taxpayers seeking alternatives to the current, more burdensome distributive share rules. Taxpayers should consider the calculations underlying each approach to determine which would best serve their interests.
While taxpayers may apply the notice's interim guidance for tax years before new proposed regulations are issued, the IRS anticipates further modifications to be reflected in the anticipated proposed regulations, particularly regarding partnership distributive share and contribution/distribution rules. Accordingly, partnerships with CAMT partners should watch for new guidance and be prepared to adjust their approaches as the rules evolve.
Additional Year-End Tax Planning Guides for Private Companies:
Questions?
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