The OBBB's Tax Affects on Partnerships

Partnerships (including LLCs taxed as partnerships) are pass-through entities like S-corps, so many of the impacts for S-corps apply equally here. But there are a few nuances for partnerships and their partners:

• Pass-Through Deduction Permanence: Partners will continue to benefit from the Section 199A qualified business income deduction. Whether you’re a partner in a small LLC or a large private equity fund, the portion of income that qualifies for the QBI deduction remains deductible, reducing your pass-through income taxation. The same phase-out simplification applies – which is good news for high-earning partners, especially in certain service fields, as the deduction will phase out more gradually. So partnerships retain this key tax break indefinitely.

• Business Expensing & Investment: Partnerships can take advantage of 100% bonus depreciation and the higher Section 179 limits too. If the partnership buys assets, it can elect bonus depreciation (passing through losses or larger deductions to partners). Real estate partnerships might be particularly interested in the special 100% deduction for qualified manufacturing or production buildings – while most partnerships won’t be building factories, any that do (or those in construction partnerships involved in such projects) will see tax benefits if they qualify. The Section 179 increase to $2.5M will help medium-sized partnerships fully expense equipment. Expect many partnerships to use these provisions to accelerate deductions to partners – a plus for cash flow and ROI on investments.

• R&D and Interest: Just like S-corps, partnerships get relief with immediate R&D expensing restored. So partners in firms that develop software, drill for new resources, or conduct any experimental activities won’t see those expenses trapped on the books for 5 years – they’ll reduce current income. And the relaxed interest limitation (EBITDA basis) helps capital-intensive partnerships (say, real estate partnerships with lots of depreciation or leveraged investment partnerships) to deduct more interest expense before hitting any limitation. This means fewer partnerships will be constrained by the business interest cap through 2029, simplifying tax prep for those with big loans.

• SALT Cap and PTE Tax: Partnerships in states with pass-through entity (PTE) tax elections need to heed the new SALT rules similar to S-corps. The bill explicitly targets partnerships’ state tax payments to ensure they are not used to circumvent the SALT cap in abusive ways. If your partnership pays state tax on the entity level (with partners then getting a state credit), you must separately state those taxes to partners. And an extra tax can be imposed if the IRS finds that the allocation of the state tax paid vs. the benefit isn’t lining up – in other words, if one partner is effectively getting more than their share of the SALT-cap-free deduction via creative allocation. The vast majority of partnerships doing the PTE tax workaround in good faith (paying tax proportionally for all partners) should be fine – just comply with the new reporting detail. The SALT cap being permanent at federal level (albeit $30k for some) means many partners will want the partnership to continue paying state tax at entity level where possible, to deduct it on the partnership return. That benefit remains, just under tighter scrutiny. Also note: if you itemize, the personal SALT cap for property taxes, etc., is now $30k (couples) unless you’re high-income – a slight improvement for partners who pay high property taxes personally.

• Excess Loss Limitation: Partners (especially in real estate or venture partnerships that often pass through large paper losses via depreciation or other deductions) should note the excess business loss rules are permanent now. If partnership losses allocated to you exceed the threshold (~$500k single / $a bit over $1M joint by 2026), you can’t use that excess to offset other non-business income in the current year. It will carry forward as an NOL. This affects primarily high-net-worth individuals in loss-generating partnerships (like those investing in start-ups or heavy depreciation real estate deals). That safety net against big tax shelters will continue indefinitely, so plan your tax liquidity knowing you might not get immediate use of ultra-large losses.

• Simplified Reporting Thresholds: Partnerships often deal with issuing 1099s to freelancers or vendors – the higher Form 1099 reporting threshold ($2,000) is a minor relief here. Fewer small payments will require issuing tax forms, reducing administrative overhead for the partnership (though again, all income is still reportable by the recipient, just fewer forms to track). If your partnership gets paid via platforms, the 1099-K threshold going back up to $20k/200 transactions means you won’t get flooded with 1099-Ks for trivial amounts, which simplifies bookkeeping.

• Industry-Specific Changes: Certain partnerships might benefit from industry-specific provisions. For example, if you’re in real estate development, the extension of the New Markets Tax Credit and enhancements to the Low-Income Housing Tax Credit (if present in the bill) could provide more opportunities for credits on projects. If you’re in an investment partnership handling college endowments or private foundations, note there were changes to the excise taxes on those (a new tiered tax on large college endowments, and higher taxes on very large private foundations) – not directly partnership taxation, but something to flag if you advise those entities. Most typical partnerships (professional services, small businesses) won’t be impacted by those.

  
  

In sum, partnerships emerge as winners in this bill much like other pass-throughs: their income continues to be taxed at low rates with the QBI deduction intact (and growing), and they have ample new ways to reduce taxable income via expensing and credits. Just be mindful of the ongoing limits on loss usage and the SALT cap compliance. It’s a great time for partnerships to invest in growth, knowing the tax code will reward them for it.