AICPA Representative Tasks (verbatim). 1. Remembering & Understanding, Recall partner elections applicable to a partnership for tax purposes (e.g., partnership tax year, adjustment to basis of property).
Partnerships are flow-through entities, meaning income passes through to partners who report it on their individual returns. The partnership's tax year determines when partners recognize their distributive shares. To prevent excessive deferral, IRC §706 establishes a hierarchy of required years.
- Majority Interest Tax Year: If partners owning more than 50% of profits and capital share the same tax year, the partnership must adopt that year.
- Principal Partners Tax Year: If no majority interest year exists, the partnership uses the tax year of all principal partners (those with 5% or greater interest).
- Least Aggregate Deferral: If neither test produces a result, the partnership calculates weighted deferral for each possible year-end and selects the one producing the least aggregate deferral.
KEY: Most partnerships with individual partners end up on a calendar year because individuals use calendar years.
Common mistakes
- Treating the §754 election as automatic. The election requires an affirmative statement attached to a timely filed return. Failure to elect means §743(b) and §734(b) adjustments do not apply (unless mandatory threshold exceeded).
- Confusing §743(b) and §734(b) triggers. Section 743(b) applies to transfers of partnership interests; §734(b) applies to distributions of property. Trap: "partner sold interest, so §734 applies." Correct: sales trigger §743(b).
- Applying §743(b) adjustments to all partners. The adjustment is personal to the transferee only. Other partners continue using their original shares of inside basis. Trap: "adjust partnership basis for everyone." Correct: only the buying partner's allocations change.
Bottom line
- Partnerships must use a required tax year (majority interest, then principal partners, then least aggregate deferral) unless they elect §444 and make required payments
- The §444 election permits a fiscal year up to three months different from the required year but requires annual payments approximating the deferral benefit
- The §754 election triggers basis adjustments under both §743(b) (transfers) and §734(b) (distributions) and remains in effect until revoked with IRS consent
- §743(b) adjusts inside basis when a partner buys an interest; the adjustment equals purchase price minus the transferee's share of inside basis, and is personal to that transferee only
Exam shortcut
"754 Equals Both": When you see "§754 election," immediately think of both adjustments: 743(b) for transfers, 734(b) for distributions. The single election unlocks both mechanisms. "Purchase Price Minus Share": For §743(b), the formula is always purchase price minus the transferee's share of inside basis. Positive difference = upward adjustment; negative = downward. "Syndication = Capitalize Forever": Any costs related to selling partnership interests (broker fees, offering documents) are syndication costs.
The full lesson (about 2,333 words, 16 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- II.C2
Browse all free CPA TCP lessons or jump into free CPA TCP practice questions.