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IRS Makes Electing Step-up Easier

Published on: 22:48PM Oct 16, 2017

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 $100,000.  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.