Advanced Tax Strategies for LLCs and Partnerships

Chapter 6Adjustments to the Basis of Partnership or LLC Assets

Learning objectives

• Determine when an Internal Revenue Code (IRC) Section 754 election will allow a partnership or LLC to adjust its basis in its assets.
• Assess when a partnership or LLC should make a Section 754 election in order to allow it to adjust the basis of its assets.
• Recognize when a Section 754 election will require a partnership or LLC to decrease its basis in its assets.
• Assess required basis adjustments among partnership or LLC assets.

Introduction

Partnerships offer more flexibility in tax planning than any other form of business. One area that exemplifies this flexibility is the ability of the partnership to adjust the basis of partnership assets to reflect the economic reality of certain transactions between the partnership and one or more of its partners, and even between two or more partners outside the partnership.

These basis adjustments are made under Section 754, in tandem with either Section 734 or Section 743. Mechanically, Section 754 governs only the method for making the required election to adjust basis in the case of certain distributions¹ or upon certain transfers of partnership interests.² A Section 754 election, once made by the partnership, applies to all subsequent distributions and transfers. This chapter will first describe situations in which a basis adjustment is permissible and the reasons for making a Section 754 election. It will then describe the mechanics of adjusting ...