Issues

Business Partnerships Under Attack

Overview

Partnerships, the backbone of the U.S. economy, are facing unprecedented challenges from proposed tax changes by politicians and aggressive actions by regulators. These changes, driven by the desire to increase taxes on individuals and businesses, or to impose a political ideology beyond the letter of the law, create a significant threat to the economic landscape and the millions of Americans employed by partnerships.

Recent Developments

In recent years, lawmakers and regulators, spurred by proposals like Senator Ron Wyden's 2021 initiative, have suggested sweeping alterations to how business partnerships are audited and taxed. These proposals not only impose new and costly rules but also undermine investment and productive economic activity. With partnerships representing $36 trillion in assets, nearly half of the U.S. capital stock, the repercussions of these changes would be far-reaching.

With the infusion of tens of billions in additional funding from the 2022 Inflation Reduction Act, the IRS has undertaken an unprecedented ramp-up of audits and enforcement activities, including a high-profile campaign to target American partnerships. In 2023 they announced the hiring of more than 3,700 new agents and to broaden the reach to main street and individuals through the Small Business/Self Employed unit within the Agency. In 2024 the Biden IRS proposed new rules that would unlawfully restrict how partnerships operate, create new, costly and needless reporting requirements, and granted auditors broad and unlawful investigative authority to use to open new audits and force settlements of on-going audits. The Administration also reorganized the agency to dedicate more people and resources to target partnerships and the citizens that participate in them.

In the spring, President Trump withdrew the proposed rules that would restrict partnership operations and expand reporting obligations but has yet to unwind either the unlawful authority Biden granted to IRS agents and auditors, or to unwind the agency restructuring to target business partnerships.

Impact

Disproportionate Burden on Small Partnerships

The proposed changes threaten the vitality of small partnerships, including family farms, local restaurants, and small retailers. With limited assets and resources, these businesses would bear the brunt of the burden. Individuals and businesses engaged in small partnerships lack the means to navigate the added complexity, thereby jeopardizing millions of jobs.

Threat to Family Farms and Businesses

Nearly three-quarters of partnerships have assets under $1 million, making them vulnerable to the proposed changes. Subchapter K modifications directly affect those making under $400,000, contradicting President Biden's pledge not to raise taxes on individuals below this income threshold. The IRS's new AI-driven initiative to audit large partnerships indicates that the proposed changes primarily target smaller entities.