Section: 70602 | Code Affected: IRC §707(a)(2)
Summary:
A subtle but important change has been made to how payments from partnerships to partners will be treated under the tax code. While this update doesn’t change existing tax liability in most cases, it signals the IRS is preparing to finalize more formal guidance on what counts as a guaranteed payment versus a true distributive share or outside transaction.
What Changed:
Section 70602 of the bill revises the language in IRC §707(a)(2) by replacing:
“Under regulations prescribed by the Secretary…”
with:
“Except as provided…”
This wording change removes the IRS’s exclusive reliance on future regulations and opens the door for direct statutory interpretation, potentially leading to more case-by-case IRS scrutiny without waiting for formal regulations to be finalized.
Why It Matters:
More scrutiny on partner compensation: If you’re paying a partner for services or property contributed to the partnership, the IRS may now apply existing law more aggressively to determine whether that’s a guaranteed payment (deductible) or a disguised sale (capital treatment).
Implications for tax planning: Some partnerships that have been taking flexible approaches to compensating partners may now want to revisit their agreements and clarify intent, timing, and treatment of those payments.
Bookkeeping implications: Any payments to partners not tied to ownership percentages should be documented clearly, including service descriptions and payment dates.
Who Should Pay Attention:
Partnerships where partners are contributing significant services or property
Firms using "preferred payments" or special allocations to compensate partners
Professional service firms with hybrid comp structures (law, architecture, etc.)
Effective Date:
Applies to services performed and property transferred after the date of enactment of the bill (2025 enactment date).