Reporting Partnership Targeted Tax Allocations

Author: James R. Hamill

Per the IRS Education Provider Standards this course must be COMPLETED by 12/31/2028 to receive credits. NOTE: Go to My Professional Profile in your CCH CPELink account settings to ensure your name, and PTIN number; matches your PTIN card

Partnerships allow partners to reach an agreement with respect to the allocation of items of income, gain, deduction, and loss — provided the agreement has substantial economic effect. Regulations finalized in 1985, at the height of the tax shelter days, provide several “safe harbors” to the structure of allocations that comply with the economic effect test. These regulations require that the partnership liquidate based on capital accounts and have largely driven the form of most partnership agreements.

After the passive loss rules eliminated the classic tax shelter arrangement, many advisors looked for alternative structures that focused on how partners would distribute money and property, and then use the distribution arrangement to determine allocations of partnership items. These arrangements are often called “targeted” allocations as they use allocations to hit a target capital account. The agreement itself does not prescribe a particular allocation scheme, but instead forces the tax return preparer to make allocations that tie capital to the agreed-to distribution scheme.

Partnership tax experts believe one of three things about targeted allocations. They work. They do not work. They may work. This course will discuss the reasoning behind each position. The presenter believes they may work if properly structured.

Join nationally recognized tax practitioner, instructor and commentator James Hamill, CPA, Ph.D., for this two-hour CPE course that provides a practical review of how to make partnership allocations based on a targeted allocation agreement. This course makes liberal use of specific examples to illustrate the “how to” of targeted allocations.

Publication Date: July 2025

Designed For
CPAs, EAs, tax preparers and other tax professionals with responsibility for partnership tax return compliance.

Topics Covered

• "Old" Approach — Rely on the safe harbor approach of the Section 704 regulations
• Required language
• "Layer cake" allocations when final return is filed
• "New" Approach Targeted allocations
• Difference in language
• Do target allocations satisfy economic effect? If not, what then?
• Attorney covers distributions, preparer covers allocations

Learning Objectives

• Recognize and apply essential aspects partnership targeted allocations
• Identify characteristics of the different approaches to partnership tax allocations
• Identify how to properly make partnership allocations based on a targeted allocation agreement
• Recognize how to help clients understand how targeted allocations will affect their tax returns
• Identify the regulatory section the previous method for partnership tax allocations primarily depended on for safe harbor provisions

Level
Intermediate

Instructional Method
Self-Study

NASBA Field of Study
Taxes (2 hours)

Program Prerequisites
Experience with partnership tax returns.

Advance Preparation
None