Under Section 754, a partnership may elect to adjust the basis of partnership property when property is distributed or when a partnership interest is transferred.
The purpose of a Section 754 election is to reconcile a new partner’s outside and inside basis in the partnership. This election allows the new partner to receive the benefits of depreciation or amortization that he or she may not have received if the election wasn’t made.
The election must be made in a statement filed with the partnership’s return (including any extension) for the tax year during which the distribution or transfer occurs.
The statement must include the name and address of the partnership; a declaration that the partnership elects under Section 754 to apply the provisions of Section 734(b) and Section 743(b); and the signature of a partner authorized to sign the partnership return.
If the basis of the partnership property has been adjusted for a transferee partner under Section 743(b), the partnership must adjust the transferee’s distributive share of items of partnership income, deduction, gain, or loss in accordance with Regulations Section 1.743-1(j)(3) and (4).
Report the adjustments on an attached statement to Schedule K-1 (Form 1065) Partner’s Share of Income, Deductions, Credits, etc. using the codes for Other Income or Other Deductions. Identify the partnership item being adjusted and the amount of the adjustment. If the adjustments are to partnership items from more than one trade or business, report the adjustments separately from each activity.
To enter this information into TaxAct 1065:
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