IRS Rolls Out New Form for Reporting Property Distributions by Partnerships
The IRS is stepping up the details it requires from partners about property distributions starting in 2024. If you're a partner in a partnership, you’ll soon be asked to report your tax basis in any property you receive. This new requirement comes with a form called Form 7217, which will be part of your annual tax filing. Here’s what you need to know.
What’s Changed?
Form 7217 is designed to collect more detailed information about property you receive from a partnership. While the IRS isn’t adding new rules for calculating your basis in distributed property, they’re asking you to provide more specific details. This includes the property’s fair market value (FMV) and the partnership’s basis before the distribution, along with other factors that can affect your basis.
This is part of the IRS’s ongoing push to streamline audits and ensure compliance by requiring clearer reporting from partnerships and their partners. If you’re unsure how these changes might impact your tax filings, consulting with a Small business CPA Houston can help you navigate the updates efficiently.
The Basics of Property Distributions
In most cases, when a partnership distributes property to a partner, there’s no immediate tax hit. But if the partnership distributes cash or marketable securities that exceed your basis in the partnership, you could face tax. Other types of distributions that change your stake in the partnership’s assets, like unrealized receivables or appreciated inventory, may also trigger taxes. But generally, unless you’re getting cash or making specific types of changes, property distributions aren’t taxable events.
Under Section 732 of the IRS code, the basis in property you receive from a partnership is calculated based on the partnership’s predistribution basis. This is a complex calculation, especially if multiple properties are distributed at the same time. The rules make sure that basis is allocated in a way that limits ordinary income tax when you later sell or dispose of the property.
What Is Form 7217?
Starting in 2024, Form 7217 will be required for any property distributions you receive from a partnership. Here’s a quick rundown of what it involves:
When to File: You’ll file Form 7217 with your tax return if you’ve received property distributions. If you received multiple distributions during the year, you’ll need a separate form for each date.
- Part I: This section asks for basic details about the distribution, such as whether it was liquidating or if it resulted in any gain under tax rules. It will also ask for your basis in the partnership before the distribution.
- Part II: This part goes into more detail. You’ll need to break down the basis of each property you received and list its fair market value. It will also ask if any adjustments were made to the partnership’s basis before the distribution.
If this sounds complicated, working with a Houston CPA can ensure that you meet these new filing requirements accurately.
Why This Matters for Small Business Owners
While this might seem like more paperwork, the main goal of this form is to make sure everything’s being reported correctly. If you’ve been following the rules for calculating your basis in property distributions, this new requirement shouldn’t be too much of a hassle. But it’s important to know that you’ll now need to “show your work” and provide the details that the IRS is asking for.
For example, if you’re getting property in a liquidation distribution, and you’re claiming a stepped-up basis, that’ll need to be clearly reported. This extra level of transparency could also help the IRS spot any potential issues with basis-shifting transactions, which they’re increasingly targeting.
How It Helps the IRS
The IRS has been cracking down on what’s known as basis-shifting—a strategy used to manipulate the tax basis of assets, often in ways that reduce tax liability. By requiring more detailed disclosures, the IRS hopes to identify these transactions more easily.
For example, if you receive property with a higher basis than what you should have received, it’ll be easier for the IRS to catch it. The IRS is also focused on making sure that property that is depreciated or has long-term value is treated fairly for tax purposes.
What Should You Do Now?
If you’re a partner in a partnership, it’s a good idea to get familiar with Form 7217, even if you’re not sure it will impact you this year. You should keep track of the property you receive and make sure you have the right information to fill out the form when the time comes. It’s also a good idea to talk to your tax professional about how these new reporting requirements might affect your situation.
A CPA Houston can help you prepare for these changes and ensure your partnership’s tax reporting is compliant.
In the end, the goal of this new form is to make sure partners are reporting property distributions accurately. While it means more paperwork, it shouldn’t be too difficult if you’re already on top of your basis calculations. Stay prepared and keep those records handy!
