The Tax Cuts and Jobs Act has eliminated certain aspects of when partnership terminations occur.

Prior Law

Through December 31, 2017

Under “technical termination” rules, a partnership is considered terminated if, within any 12-month period, there is a sale or exchange of 50% or more of the total interest in partnership capital and profits.

New Law

Effective for tax years beginning after December 31, 2017 and before January 1, 2026

The rule providing for the technical termination of a partnership is repealed. The new rules will allow partnerships more flexibility to make ownership changes.

The repeal doesn’t change the pre-Act law rule that a partnership is considered as terminated if no part of any business, financial operation, or venture of the partnership continues to be carried on by any of its partners in a partnership.

Commentary

Prior law meant that a technical termination would give rise to a deemed contribution of all the partnership’s assets and liabilities to a new partnership in exchange for an interest in the new partnership, followed by a deemed distribution of interests in the new partnership to the purchasing partners and the other remaining partners. As a result of a technical termination: some of the tax attributes of the old partnership terminated; the partnership’s tax year closed; partnership-level elections generally ceased to apply; and the partnership depreciation recovery periods restarted.

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Jeff Dvorachek
Jeff Dvorachek
I joined Hawkins Ash CPAs in 1998. I am the partner-in-charge of the Manitowoc, WI, office and tax director for the firm. I have thorough experience providing tax services to individuals, commercial businesses, nonprofit entities and estates and trusts. I also provide compilation and review services. I lead the Tax Committee and am a member of the Information Technology Advisory Committee.

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