New Guidelines for Partnership Distributions

New IRS Form 7217 changes how partners report property distributions—learn what it means for your taxes and how to stay compliant.

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 IRS Form 7217, which will be part of your annual tax filing.

Here’s what you need to know.

Reporting Property Distributions by Partnerships: 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 move is part of the IRS’s ongoing push to streamline audits and ensure compliance in partnership tax reporting.

If you’re unsure how these changes might impact your tax filings, consulting with a trusted Houston CPA can help you navigate the updates efficiently. Whether you're looking for a CPA near me or need a small business CPA in Houston, local expertise is especially valuable with these evolving IRS rules. ✅

The Basics of Property Distributions

In most cases, when a partnership distributes property to a partner, there’s no immediate tax hit. However, 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. Generally, unless you’re receiving cash or making specific changes, property distributions aren’t taxable events.

Under Section 732 of the IRS code, the basis in property you receive is calculated based on the partnership’s predistribution basis. This complex calculation ensures that basis is allocated to limit 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:
  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 resulted in any gain under tax rules, and it will also ask for your basis in the partnership before the distribution.

• Part II:
  This part requires you 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.

Why This Matters for Small Business Owners

While this might seem like more paperwork, the main goal of this form is to ensure everything is 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.

However, you’ll now need to “show your work” and provide the detailed information that the IRS is asking for. For example, if you’re getting property in a liquidation distribution and claiming a stepped-up basis, that must be clearly reported.

This extra level of transparency can help the IRS spot any potential issues with basis-shifting transactions—a strategy often used to manipulate tax liability.

How It Helps the IRS

The IRS has been cracking down on basis-shifting by requiring more detailed disclosures. If you receive property with a higher basis than what you should, it’ll be easier for the IRS to catch it. This focus on basis calculation also ensures that property that is depreciated or holds long-term value is treated fairly for tax purposes.

What Should Small Business Owners Do Now?

If you’re a partner in a partnership, it’s wise to get familiar with Form 7217 even if you’re not sure it will affect you this year. Keep track of the property you receive and ensure you have all the necessary information ready for when it’s time to file. Discuss these new reporting requirements with your tax professional—a nearby CPA can help you prepare and ensure your partnership tax reporting remains compliant.

Stay prepared, keep those records handy, and make sure your basis calculations are accurate to avoid any issues down the road. Contact a local CPA today to navigate the new IRS Form 7217 requirements with confidence!