The idea behind the broader shift would be to consolidate the rules governing S corporations and partnerships, both types of pass-through entities.
The S corporation rules are relatively inflexible, compared with partnership tax law. The law limits the number of shareholders, requires a single class of stock and restricts non-U.S. ownership.
The proposal would effectively remove some of those restrictions on S corporations and impose some new limits on partnerships.
Simplification would be welcome, though the proposal leans too far toward pushing people into an S corporation structure that growing businesses don’t often use, said James Brown, a partner at Willkie, Farr & Gallagher LLP in New York.
“The proposal would make partnerships look too much like S corps, with their disadvantages,” he said.
The changes could alter longstanding economic arrangements that were created to mesh with the current partnership rules. The transition to a new system, which isn’t addressed in Camp’s draft, will be important, particularly if the new rules affect existing partnerships, DeBoer said.
Transition Rules
“I think the transition rules are going to be absolutely impossible,” said Andrea Whiteway, chair of the partnership tax practice at McDermott Will & Emery. “It will be absolutely crazy, and I also think it will be crazy for S corps.”
Among the dozens of changes outlined in the draft, tax practitioners are focusing on two areas in which the proposal would limit partnerships’ flexibility: special allocation and distribution of appreciated property.
Under current tax law, partnerships can split tax benefits and income among partners in myriad ways. For example, in many real estate partnerships, depreciation deductions can be given only to some partners who want to use those breaks to offset other income.