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Tax Blog

IRS Closing Loopholes for Partnerships

            The IRS has unveiled a comprehensive plan to prevent businesses and wealthy individuals from manipulating asset values to reduce tax liabilities. A significant aspect of this crackdown targets a tactic known as basis shifting, where complex business partnerships transfer assets between entities purely to evade taxes. These maneuvers do not generate any economic activity and aim to minimize tax obligations.

Pass-through entities, such as these partnerships, channel income and losses directly to investors, bypassing corporate-level taxation. When these partnerships sell assets like land or equipment, taxes are typically calculated by subtracting the asset's original cost from the sale proceeds. However, current tax regulations permit partnerships to recalculate these original costs when assets are transferred in or out of the business. This loophole has allowed some partnerships to manipulate the asset basis, thereby reducing their tax burden.

In some cases, businesses might repeatedly depreciate the same asset by "selling" it to a related entity, enabling them to restart the depreciation process and avoid taxes. To combat this, the IRS plans to issue guidance for accountants and lawyers, clarifying that basis shifting with the intent to evade taxes is illegal and will be subject to audits. Additionally, the IRS is expected to propose regulations requiring large partnerships to provide detailed reports of such transactions, facilitating the identification and prevention of these tax avoidance schemes.

While this initiative is currently in the planning stages and there is ongoing debate about the IRS's authority to enforce these measures without congressional approval, it represents a significant step towards curbing tax evasion. Entities and partnerships should monitor these developments closely to ensure compliance and avoid potential repercussions. For more information, please contact the professionals at The Center for Financial, Legal, & Tax Planning, Inc., at (618) 997-3436.


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