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Small Partnership Exception

In a shocking development, tucked away in the Bipartisan Budget Act of 2015, passed by Congress and signed by the President, there is a provision affecting farmers, ranchers and other small businesses in a highly significant way. It signals the end of a 34 year-old tax law that has been depended upon by thousands of taxpayers. It was a model of simplicity when enacted in 1982 and has continued to be the best example of tax simplification to this day. The late 2015 legislation repeals the “small partnership” exception after 2017.

This was spearheaded by Congressman Renacci from Ohio. This was done as part of a big redo of partnerships as part of trying to audit big partnerships. In redoing this the congress deleted a lot of language that included this “small partnership” exception.

The “small partnership” exception was passed in 1982 to create a simpler way for farmers, ranchers and other small businesses to file their tax returns. The brief provision simply stated that if an entity had 10 or fewer members (and a husband and wife were considered one member), and the members were individuals or estates of individuals (C corporations were later added), the entity was not required to file a partnership tax return, Form 1065. The income, losses, credits and other tax items were simply passed through to the members for reporting on each individual’s tax return, Form 1040.

It is thought that the growing number using the simplification provision threatened the bottom line of some tax practitioners and the push was on to repeal it, not in the 2015 tax bill but in the Budget Bill where the repeal would be less likely to be spotted and resisted. There were no hearings and no public discussion that the most significant tax simplification in decades and decades was threatened. That clandestine effort, unfortunately, was successful and it was repealed through the “partnership audit simplification” portion of Budget Bill. The “small partnership” exception was part of the old code that was repealed while they were making way for the “partnership audit simplification.” So in short it wasn’t what was put in it was what was taken out that is the problem. This has caused many people to not even notice, since the focus seems to be audits.

What needs to be done

The repeal is not effective until 2018 so the task now is to contact every House and Senate member to let them know that the best example of tax simplification in decades is under attack with a request to support reinstatement of the provision. The tax simplification did not have an impact on Government revenues. It simply required far less time and effort to file the tax return. The provision is found in Section 6231(a)(1)(B) of the Internal Revenue Code.

The driving force behind this is Dr. Neil E. Harl. He is a lawyer and an economist who was on the Iowa State University faculty from 1964 through 2004. He was designated a "Charles F. Curtiss Distinguished Professor" in 1976, one of the youngest to be so named. He grew up on a farm in Iowa and has published 29 books including a 15-volume treatise for lawyers.

Please see that following links for addtional information 

1 --This explains what the “small partnership” exception does, as it has since 1982.

2—The IRS Code as it was. This shows what was deleted in the budget bill of 2015 with redlines. Highlighting, redlines and commentary added.

3—The IRS Code as it is changed in the budget bill of 2015 Highlighting and commentary added. Please see page 1, 12 and 13 for the areas of interest.

4--Contact was made with Renacci through a constituent. This is what Renacci said about the removal of the “small partnership” exception.

5-Dr. Harl’s and Jane Marshall response to Renaccis email Articles explaining the issue

6- Dr. Harl’s Letter to the Joint Committee on Taxation.

7—Dr. Harl’s Tax Notes article.

8—Dr. Harl’s letter to the chief of staff of the joint committee on Taxation.

 

 

 

 

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