IRS Makes Electing Step-up Easier

Partnership taxation has some unique tax calculations. There is both a cost basis inside and outside for each partner in a partnership. Many times, these “cost basis” are the same, however, whenever someone purchases a partnership interest or someone passes away and the partnership interest is transferred to someone else, there usually is a difference and it can affect the tax reporting. Let’s look at an example:

The ABC partnership has three equal partners and the only asset is a combine that was originally purchased for $500,000 and is now fully depreciated and is worth $300,000. Partner A sells her interest to new partner D for $100,000. D’s cost basis in the partnership interest is $100,000, however, without making a special election, the cost of her share of combine stays at zero. The Tax Code allows the partnership to make a special election to “step-up” her basis inside the partnership to $100,000 which can then be depreciated using a seven-year life.

In the past, the partnership had to make the election on the partnership tax return AND be sure to sign the election. With the advent of E Filing of tax returns, many of these elections were not getting signed and the IRS was wasting a lot of time letting taxpayers update the election with a late signature, etc.

Last week, the IRS issued a new Proposed Regulation to allow for the election to be made with a properly filed return and not require a signed election statement. This will make life much easier for the IRS and for taxpayers.

Update on Social Security Wage Base

The social security wage base in 2017 jumped about $9,000 from 2016. The new wage base for 2018 is now projected to only go up by $1,500 from $127,200 to $128,700. Although this is not a bad increase, we continue to hear a lot of chatter regarding tax reform making more of farmer’s income (including self-rental) subject to self-employment tax. Although your income tax rate may go down, be ready to see more income subject to self-employment tax if reform goes through.

  • Principal
  • CliftonLarsonAllen
  • Yakima, Washington
  • 509-823-2920

Paul Neiffer is a certified public accountant and business advisor specializing in income taxation, accounting services, and succession planning for farmers and agribusiness processors. Paul is a partner with CliftonLarsonAllen in Yakima, Washington, as well as a regular speaker at national conferences and contributor at agweb.com. Raised on a farm in central Washington, he has been immersed in the ag industry his entire life, including the last 30 years professionally. In fact, Paul drives combine each summer for his cousins and that is what he considers a vacation.

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