The 2017 Tax Cuts and Jobs Act passed by Congress and signed by President Trump on December 22, 2017 has repealed the “technical termination” of partnerships. When there is a sale or exchange of 50% or more of a partnership interest, such event will no longer cause the partnership to be treated as terminated. Hence, such event will no longer trigger stub period returns. This new rule is effective for partnerships whose tax years begin after 12/31/17.
For technical terminations that occur in 2017, stub period returns for those technical terminations are still needed as long as the event did not occur on the last day of the year. And, for the tax period after the technical termination, the depreciation periods for fixed asset assets are still required to be restarted.
For sale or exchange of 50% or more of a partnership interest occurring in 2018 and thereafter, where the partnership tax year begins after 12/31/17, stub period returns are not needed and depreciation periods will not be restarted. After a sale or exchange of 50% or more of a partnership interest, the tax year will continue as normal. A portion of the profit/loss for the tax year will need to be allocated between the exiting partner and the new in-coming partner. The allocation can be based on either a number of days proration or an actual cut-off.
States conform to changes in the federal Internal Revenue Code in one of several ways. States can conform (1) by automatically tying to the federal tax law as it changes, or (2) by tying to the federal law as of a specific date, or (3) by picking and choosing dates to which certain (i.e., not necessarily all) changes to the federal law will become effective.
California adopts the selective approach in #3 above. California has not yet conformed to the federal 2017 Tax Cuts and Jobs Act. Therefore, repeal of partnership technical termination described above is applicable only for federal purposes at this time for partnerships with California filing requirements.
If you have any questions as to how this may affect you, please contact your LvHJ team.