Partnership taxation is uniquely complex.

Unlike S-corps with straightforward salary/distribution splits, or sole proprietors with simple Schedule C reporting, partnerships require continuous basis tracking, allocation monitoring, and coordination among multiple partners—each with different tax situations.

Miss a Section 754 election when a partner leaves, and you’re leaving tens of thousands of dollars on the table. Fail to track basis properly, and you’ll overpay taxes on distributions or lose valuable deductions. Structure guaranteed payments incorrectly, and you’re creating unnecessary self-employment tax liability.

Tax advisory for partnership owners isn’t optional when complexity reaches a certain level—it’s the difference between paying the correct amount of tax and significantly overpaying because critical elections and tracking mechanisms weren’t implemented.

Here’s what partnership tax advisory includes, why it matters more as partnerships grow, and which strategies deliver the most value. (Note: While this guide focuses on partnerships, we also provide tax advisory for S-corps, C-corps, and Schedule C businesses.)

What Does Tax Advisory for Partnership Owners Include?

Tax advisory for partnership owners focuses on five critical areas: (1) basis tracking (inside and outside basis calculations affecting distribution taxability), (2) Section 754 elections (step-up in basis when partners enter/exit), (3) guaranteed payments vs distributive share (self-employment tax implications), (4) special allocations (Section 704(b) compliance for non-pro-rata distributions), and (5) multi-state filing coordination. Partnership advisory costs $4,000-$12,000 annually depending on partner count and complexity. The most common missed opportunity: Section 754 elections when new partners buy in, which can create $20,000-$100,000+ in additional depreciation deductions.

Key Takeaways

Basis tracking is complex and critical – Distributions exceeding outside basis create taxable capital gains; missed inside basis adjustments = lost deductions
Section 754 elections are often missed – New partner buys in? File 754 election for step-up in depreciable basis (saves $20K-$100K+)
Guaranteed payments = SE tax – Unlike distributive share, guaranteed payments subject to 15.3% self-employment tax
Special allocations require 704(b) compliance – Non-pro-rata allocations must follow substantial economic effect rules or IRS will reallocate
Multi-state filing is common – Partners in different states create nexus and filing requirements often missed by generalist CPAs
Partnership advisory saves $10K-$50K+ annually – Through basis optimization, 754 elections, and SE tax planning

Why Partnership Taxation Benefits from Ongoing Advisory

Partnerships have moving parts that require continuous attention—not just annual review.

Basis Tracking Complexity

Every partnership owner has two basis calculations to track:

Outside basis (partner’s basis in partnership interest):

Initial contribution
- Share of partnership income
- Additional contributions
− Distributions received
− Share of partnership losses
± Share of partnership liabilities

Inside basis (partnership’s basis in assets):

Partnership’s tax basis in assets
Adjusted through Section 754 elections
Affects depreciation and gain/loss on asset sales

Get outside basis wrong, and you’ll:

Overpay tax on distributions (taxable when they exceed basis)
Lose deductions (losses limited to your basis)
Miscalculate gain/loss when you sell your partnership interest

For detailed guidance on tracking basis, see: Partner Basis Calculation Guide

Partner Allocations Require Annual Documentation

Partnership agreements typically specify how income, losses, and deductions are allocated among partners. These allocations must comply with Section 704(b) substantial economic effect rules.

Common allocation issues:

Special allocations (allocating specific items differently than ownership percentages)
Guaranteed payments (payments to partners regardless of partnership income)
Preferred returns (certain partners receive priority distributions)
Capital account maintenance (tracking each partner’s economic interest)

Without proper documentation and annual monitoring, allocations can be challenged by the IRS—resulting in reallocation of income and additional taxes.

Self-Employment Tax Planning Opportunities

Partnership income treatment for self-employment tax depends on partner classification:

General partners:

Subject to self-employment tax on distributive share (not just guaranteed payments)
Can’t avoid SE tax through entity structure alone

Limited partners:

Generally NOT subject to SE tax on distributive share
Only guaranteed payments subject to SE tax

The distinction matters significantly—15.3% on $100,000 of income is $15,300 in self-employment tax. Proper structuring (LP vs. GP status, guaranteed payments vs. distributive share) can save substantial amounts annually.

Learn more about partnership self-employment tax: Partnership Self-Employment Tax Guide

K-1 Complexity

Schedule K-1 (Form 1065) reports each partner’s share of partnership income, deductions, and credits. Unlike S-corp K-1s (which are relatively straightforward), partnership K-1s can include:

Ordinary business income/loss
Rental income
Interest and dividends
Capital gains/losses
Section 179 deductions
Section 1231 gains/losses
Self-employment earnings
At-risk limitations
Passive activity limitations
Unrecaptured Section 1250 gain
Alternative minimum tax items

Partners need accurate K-1s to file their personal returns correctly. Errors cascade—fix one partner’s K-1, and you may need to amend multiple tax returns.

Core Partnership Strategies in Advisory Engagements

These are foundational strategies included in most partnership tax advisory relationships—ongoing optimization that happens throughout the year.

1. Basis Tracking and Documentation

What’s involved:

Annual reconciliation of each partner’s outside basis
Tracking contributions, distributions, income/loss allocation, and liability changes
Maintaining Section 704(b) capital accounts
Documentation supporting basis calculations

Typical annual value: $5,000-$15,000 in avoided tax through proper loss utilization and distribution treatment

How advisory helps: We maintain basis schedules year-round, updating them as distributions occur or income is allocated. When you take distributions or claim losses, you know exactly where your basis stands—no surprises at year-end.

2. Guaranteed Payment vs. Distribution Optimization

The distinction:

Guaranteed payments: Deductible by the partnership, taxable to the partner, subject to SE tax
Distributive share/distributions: Not deductible by the partnership, not separately taxable to partners (already taxed through K-1 income allocation)

Planning opportunity: If you’re a limited partner, receiving guaranteed payments increases your SE tax. If you’re a general partner, SE tax applies to your share of partnership income anyway—so the form of payment matters less.

What advisory includes:

Analyzing whether guaranteed payments or distributions are more tax-efficient
Recommending adjustments to partnership agreement if current structure is suboptimal
Coordinating with your attorney if agreement changes are needed

Typical annual value: $3,000-$8,000 in SE tax savings through proper structuring

Learn more about guaranteed payments: Guaranteed Payments to Partners Guide

3. Section 754 Election Analysis

What it is: Section 754 allows partnerships to step up (or step down) inside basis when:

A partner sells their partnership interest
A partner dies and interest transfers to heirs
Partnership makes disproportionate distributions

Without the election, the purchasing or inheriting partner is stuck with the partnership’s historical basis in assets—even though they paid fair market value for their interest.

Example: Partnership owns real estate with $500,000 basis and $1,000,000 FMV. Partner A sells their 50% interest to new Partner D for $500,000.

Without 754 election:

Partner D’s outside basis: $500,000 (what they paid)
Partner D’s share of inside basis: $250,000 (50% of partnership’s $500,000 basis)
Result: When the property sells, Partner D will be taxed on $250,000 gain they didn’t economically realize

With 754 election:

Partner D gets a $250,000 step-up in their share of inside basis
Result: When the property sells, Partner D is only taxed on actual economic gain from the time they bought in

Typical value: $10,000-$50,000+ in tax savings depending on the asset basis/FMV difference

How advisory helps: We monitor partnership transactions that trigger 754 opportunities and file the election timely. Missing the deadline means losing the step-up permanently.

Learn more about Section 754: Section 754 Election Guide

4. Self-Employment Tax Minimization Strategies

For general partners: Limited options—GP distributive share is generally subject to SE tax. Focus shifts to:

Maximizing retirement contributions (Solo 401(k) or SEP based on SE income)
Timing guaranteed payments to optimize cash flow
Evaluating whether to convert partnership to S-corp (in some cases)

For limited partners: Significant planning opportunities:

Structure compensation as distributive share (not subject to SE tax) rather than guaranteed payments (subject to SE tax)
Maintain proper limited partner status (avoid management activities that could reclassify you as GP)
Document LP status in partnership agreement and actions

Typical value for LPs: $10,000-$20,000 annually in SE tax savings through proper structuring

How advisory helps: We analyze your role in the partnership, recommend optimal payment structure, and coordinate with your attorney to ensure partnership agreement reflects the intended tax treatment.

5. QBI Deduction for Partners

Partners can claim the Section 199A qualified business income deduction on their share of partnership income—but it’s subject to the same limitations as S-corps:

For 2026, limitations begin at:

$383,900 (married filing jointly)
$191,950 (single/head of household)

Above these thresholds, QBI deduction is limited based on:

W-2 wages paid by the partnership
Qualified property held by the partnership

Partnership-specific considerations:

Each partner’s QBI deduction is calculated separately on their personal return
Partnership’s W-2 wages and property are allocated to partners for their calculations
Partners with other businesses can aggregate QBI deductions

How advisory helps: We project your QBI deduction throughout the year, identify whether you’re approaching threshold limits, and recommend strategies to maximize the deduction (increase partnership W-2 wages, defer income, accelerate deductions).

Learn more about QBI optimization: QBI Deduction Planning Strategies

Advanced Partnership Advisory Strategies

These strategies typically require additional analysis or implementation beyond base advisory fees—but when applicable, they deliver significant value.

1. Family Partnership Income Allocation

Family partnerships can be powerful estate planning and income-shifting tools—but they must be structured correctly to withstand IRS scrutiny.

Key requirements:

Capital must be a material income-producing factor (not just services)
Family members must have genuine ownership interests (not nominee arrangements)
Allocations must reflect actual contributions of capital and services
Children must report and pay tax on their allocated income

Common structure:

Parents contribute capital and/or assets to partnership
Children receive partnership interests (often through gifting within annual exclusion limits)
Partnership income is allocated based on ownership percentages
Result: Income is taxed at children’s (often lower) tax rates

How advisory helps: We analyze whether your partnership qualifies, coordinate with your attorney on proper structure, and ensure allocations comply with IRS requirements.

Learn more about family partnerships: Family Partnership Tax Strategies

2. Real Estate Partnership Cost Segregation

Partnerships owning real estate can accelerate depreciation through cost segregation studies—reclassifying building components from 27.5-39 year depreciation to 5-15 year property.

Typical opportunity:

Commercial property purchased for $2,000,000
Traditional depreciation: $51,000 per year (39-year straight-line)
After cost seg: Identify $600,000 in 5-15 year property
Result: Additional ~$90,000 in depreciation in year 1, accelerating ~$40,000-$60,000 in depreciation over 5 years

When it makes sense:

Properties over $500,000 in value
Partnerships with sufficient income to utilize accelerated deductions
Partners who aren’t subject to passive activity limitations (or qualify as Real Estate Professionals)

Implementation cost: $4,000-$8,000 depending on property size and complexity

Typical ROI: 3-8x in first year through accelerated depreciation

How advisory helps: We identify which partnership properties are good candidates, coordinate with cost segregation specialists, and allocate the accelerated depreciation among partners correctly.

Learn more about real estate partnerships: Real Estate Partnership Tax Planning

3. Partnership Liquidation Planning

When partnerships dissolve or partners exit, proper planning prevents unnecessary tax liability.

Common liquidation scenarios:

Full partnership liquidation (all assets distributed to partners)
Partial liquidation (one partner buys out others)
Asset sale followed by partnership termination

Key tax considerations:

Basis tracking must be accurate before liquidation
Section 754 election affects gain/loss on asset disposition
Distributions in excess of basis are taxable
Hot assets (ordinary income property) receive special treatment

How advisory helps: We model different liquidation scenarios tax impact before you execute, identify optimal timing, and ensure elections are filed to minimize tax.

Learn more about partnership liquidation: Partnership Liquidation Tax Guide

4. Section 199A Aggregation Opportunities

Partners who own multiple businesses (through partnerships or other entities) may be able to aggregate them for QBI deduction purposes—potentially allowing them to clear the W-2 wage limitation that would apply if businesses were calculated separately.

Requirements for aggregation:

Same person(s) own 50%+ of each business
Businesses meet 2+ of 3 factors: same products/services, shared facilities/systems, or shared operations
Election to aggregate must be filed

When it matters:

You’re above QBI threshold limits ($383,900+ MFJ)
One business has high W-2 wages, another has low wages
Aggregating allows you to use the high-wage business’s W-2 to support QBI deduction for the low-wage business

How advisory helps: We analyze whether your businesses qualify for aggregation, calculate the benefit, and file the aggregation election.

Partnership Advisory Pricing Considerations

Partnership advisory is typically more expensive than S-corp advisory due to higher complexity—but the strategies available often deliver higher ROI.

Factors That Affect Partnership Advisory Pricing

Higher complexity (higher fees):

Multiple partners (3+)
Complex allocation formulas or special allocations
Real estate holdings requiring cost segregation or 754 elections
Multi-state operations
Partners entering/exiting during the year

Moderate complexity:

2-partner partnerships with straightforward allocations
Service businesses with simple income/expense patterns
Single-state operations

Lower complexity (but still more than sole props):

Two-partner service partnerships
Equal profit/loss sharing
No guaranteed payments
Minimal distributions during the year

Typical Partnership Advisory Pricing

Base advisory services (basis tracking, K-1 projections, allocation monitoring, SE tax planning):

Annual advisory: $4,000-$6,500 per year (more partners = higher fees)
Quarterly advisory: $6,000-$10,000 per year

Return preparation (often discounted for advisory clients):

Partnership return (Form 1065): $2,000-$3,500 (depends on partner count and allocation complexity)
Partner personal returns (Form 1040): $800-$1,500 each
Combined discount for advisory clients: 15-25% off standalone pricing

Advanced strategies (priced separately):

Cost segregation studies: $4,000-$8,000 per property
Section 754 election analysis and filing: $1,000-$2,000
Partnership restructuring: $2,500-$5,000
Multi-state filing coordination: $500-$1,500 per additional state

For a detailed ROI analysis, see: Is Tax Advisory Worth the Cost?

Partnership Advisory Case Study

Here’s a realistic example of what partnership advisory delivers.

Client situation:

Real estate partnership
3 partners (2 general partners, 1 limited partner)
5 rental properties (purchased over 8 years)
No cost segregation previously performed
Basis tracking was incomplete from prior CPA

Year 1 advisory work:

Q1: Prior return analysis and basis cleanup

Analyzed 5 years of prior returns
Identified basis tracking errors (missed loss carryforwards)
Reconstructed each partner’s outside basis
Result: Recovered $47,000 in previously unclaimed losses

Q2: Cost segregation analysis

Evaluated all 5 properties for cost seg opportunities
Identified 2 properties where cost seg would deliver strong ROI
Coordinated with cost seg specialist

Q3: Year-end planning + Section 754 election

One partner planned to exit; identified 754 election opportunity
Filed 754 election before partner buyout
Result: Incoming partner received $85,000 step-up in basis

Q4: Implementation

Cost segregation studies completed on 2 properties
Accelerated $180,000 in depreciation
K-1s prepared with updated allocations and basis tracking

Results:

First-year tax savings: ~$67,000 (combined all partners)
- $47,000 from basis cleanup (recovered prior losses)
- $20,000 from cost segregation (accelerated depreciation)
Advisory cost: $6,500 annually + $14,000 for cost seg studies (one-time)
First-year net benefit: $46,500 (2.3x ROI including implementation costs)
Ongoing annual benefit: $12,000+ from proper basis tracking, SE tax planning, and continued cost seg benefits

How Partnership Advisory Works at SDO CPA

Our partnership advisory approach focuses on the tracking and elections that partnerships can’t afford to miss.

What’s included in partnership advisory:

Annual basis reconciliation for all partners
Partnership K-1 projections updated throughout the year
Section 754 election monitoring (we alert you when opportunities arise)
Self-employment tax optimization
Guaranteed payment vs. distribution analysis
Year-end planning sessions
Direct CPA access for questions throughout the year
Tax return preparation (Form 1065 + personal returns) with advisory client discount

Service frequency options:

Annual advisory: One comprehensive planning session (typically Q3) + return preparation
Quarterly advisory: Four touchpoints per year (recommended for partnerships with 3+ partners or complex allocations)

Typical engagement:

Initial consultation to understand partnership structure and partner situations
Proposal outlining service tier and estimated annual cost
Quarterly or annual meetings as agreed
Proactive outreach when elections or planning opportunities arise

Ready to explore partnership advisory? Schedule a consultation to discuss your partnership’s situation.

For more on partnership taxation and advisory:

Tax Advisory Services – Overview of what tax advisory includes
The Complete Guide to Partnership Taxation – Comprehensive guide to partnership tax rules
Partnership Tax Planning Strategies – Strategic approaches for partnership tax optimization
Partner Basis Calculation Guide – How to track outside basis correctly
Section 754 Election Guide – When and how to file Section 754 elections
Schedule K-1 Form 1065 Guide – Understanding partnership K-1s
S-Corp Tax Advisory – Advisory for S-corporation owners

About SDO CPA: We specialize in tax advisory for partnership owners, with expertise in complex allocations, basis tracking, and Section 754 elections. Our approach combines Big Four technical depth (EY, KPMG) with the accessibility of a specialized practice.

Schedule a consultation to discuss tax advisory for your partnership.