Four Statistics Illuminate Trends in Partnerships

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By Laura Davison

Dec. 2 — A number of changes are occurring in the partnership world, as revealed in data compiled by the Internal Revenue Service from all 2014 partnership returns.

Four figures from the quarterly Statistics of Income Bulletin, released Dec. 1, provide a look at the trends.

1. Faster-Than-Average Growth

The number of partnerships grew 4.4 percent between 2013 and 2014, according to the IRS. That’s faster than average—the annual year-over-year growth rate has been 2.6 percent—in the past decade. Much of that growth is attributable to the formation of limited liability companies, which pair the liability protection of a corporation with the flexibility of a partnership. This is the 13th consecutive year that LLCs have made up the majority of passthrough entity types.

Passthroughs are likely to be seen as even more attractive entities if Congress lowers tax rates for partnerships, which are currently taxed through the individual side of the code, Kurt Lawson, a partner at Hogan Lovells US LLP, told Bloomberg BNA. House Republicans have proposed a 25 percent tax rate.

2. What a Difference a Year Makes

Seventeen industrial sectors out of 20 reported an increase in profits in 2014, compared to a year prior when 12 sectors reported losses.

The finance and insurance sector reported the largest overall increase in profits for the second consecutive year with a 9.6 percent increase to $346 billion. Within the sector, securities, commodity contracts, and other financial investments accounted for about 94 percent of the increase.

3. 99 Percenters

Up to 99.7 percent of partnerships could be eligible to opt out of the new process for auditing passthrough entities, according to 2014 numbers for partnerships with fewer than 100 partners. However, this number doesn’t apply if those partnerships have a passthrough entity as a partner, a disqualifying factor to opt out of the rules.

The new audit procedures, set to take effect in 2018, are really designed for less than 1 percent of partnerships, as most have hundreds or thousands of partners. Those entities aren’t eligible to opt out at all of the rules that seek to streamline the audit regime, a process that has been historically challenging for the IRS.

4. Partnerships Get Tech Savvier

About 81.7 percent of partnerships electronically filed their tax returns in 2014, an 11.9 percent increase from the prior year. Small partnerships with fewer than 100 partners can still file on paper.

Fun fact: The IRS first offered partnerships to file electronically during a year often associated with other big changes in the tax world—1986—the year of the tax overhaul.

To contact the reporter on this story: Laura Davison in Washington at lDavison@bna.com

To contact the editor responsible for this story: Meg Shreve at mshreve@bna.com

For More Information

The IRS compilation of data for 2014 partnership tax returns is at https://www.irs.gov/pub/irs-soi/soi-a-copa-id1612.pdf.

An IRS news release (IR-2016-157) on release of the fall 2016 SOI Bulletin is in TaxCore.

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