New Tax Bill Forces Immediate Gain Recognition in Related-Party Partnership Deals, Hitting After June 2025

This bill, officially titled the “Basis Shifting is a Rip-off Act,” is a major overhaul of how the IRS treats property distributions and transfers within partnerships, specifically when related parties are involved. The core idea is to shut down tax strategies that allow partners to shuffle around the tax basis of assets to defer or avoid paying taxes immediately. If you are involved in a family business, own property through a partnership with relatives, or have complex investment structures, this is definitely one to watch. These changes apply to transactions happening after June 11, 2025.

The End of the Basis Shell Game

Right now, when a partner receives property from a partnership, they usually don't have to recognize a taxable gain unless they receive more cash than their initial investment. This bill changes that for what it calls "applicable partnerships"—meaning any partnership where two or more partners are related (using the IRS’s existing, complex definitions of relatedness). Under the new rules, if a distribution to a partner would normally result in a future increase in the tax basis of other partnership assets, the receiving partner must recognize a taxable gain immediately. That gain is equal to the amount of the planned future basis increase. Think of it this way: instead of deferring the tax liability until the assets are eventually sold, the bill forces you to pay tax now on the benefit you were set to receive later. The partnership itself is also forced to recognize gain in certain related-party distributions.

Limiting the Small Business Lifeline

There is a small business exception, but it comes with a major catch. Partnerships that meet a specific gross receipts test (meaning they don't bring in too much revenue) are exempt from these new, strict rules. This is meant to protect smaller operations. However, the bill states that if a partnership fails that gross receipts test even once in a future year, it is permanently disqualified from using the exception forever after. For a mid-sized family business that has a one-off great year due to a big contract or a sale of a major asset, that temporary success could permanently lock them into these highly complex and expensive compliance rules, even if their revenue drops back down the next year. This provision removes a crucial safety net for businesses with fluctuating revenues.

Watch Out for the 40% Penalty

Perhaps the sharpest edge of this bill is the penalty provision. Calculating partnership basis and these new related-party rules is already incredibly complicated, even for seasoned tax professionals. If a taxpayer understates their tax liability because they miscalculated the gain recognized under these new distribution rules, the accuracy-related penalty jumps from the standard 20% to a massive 40%. Doubling the penalty rate for an error in interpreting a brand-new, highly technical section of the tax code is a serious risk. This drastically increases the cost of non-compliance and puts significant pressure on partners and their accountants to get these complex calculations exactly right, or face a severe financial hit.

What It Means for You

If you are a partner in a business with family members or other related entities, you need to review your partnership agreements and distribution strategies before June 2025. The bill aims to accelerate tax collection by preventing the use of these basis-shifting strategies. While the goal is to stop what the government deems a "rip-off," the practical effect for partners is that they might be forced to pay taxes on paper gains without having the corresponding cash flow from a sale. For example, if a distribution triggers a $100,000 recognized gain, the partner must find the cash to pay the tax bill, even if the property they received isn't immediately liquid. This shift could create significant liquidity issues for partners planning property exchanges or restructuring within family-owned enterprises.