Camp Offers Option That Would Revamp Tax Laws for Partnerships

Partnerships, including hedge funds, would lose some of their flexibility to allocate income and tax benefits among their members, under a draft proposal released by the top Republican tax writer in Congress.

The proposal by Representative Dave Camp would scrap the separate rules governing partnerships and those overseeing closely held S corporations and create a unified system that adopts features of both.

Camp, chairman of the House Ways and Means Committee, released the proposal as the more aggressive option in a draft plan to overhaul taxation of small businesses. Other parts of the plan would extend expensing rules, allow more businesses to use cash accounting and simplify deductions for startup businesses.

“It’s not meant to be a complete product,” Camp told reporters, adding that he is inviting comments from affected businesses.

Under the U.S. tax code, businesses that aren’t organized as traditional corporations pay their taxes through their owners’ returns, regardless of their size. The draft wouldn’t alter that rule. Many so-called pass-through companies are large, such as global accounting and law firms.

The draft is the third in a series of proposals the Michigan Republican has released over the past 17 months. The other two focused on international taxation and taxation of financial products.

Camp plans to combine them into a full rewrite of the tax code that would broaden the base and lower the individual and corporate tax rates as much as possible. He has said he expects the committee to pass the plan this year.

The more aggressive option on partnership taxation would loosen the rules that now apply to closely held S corporations. Those companies would no longer face limits on the number of shareholders or the prohibition on foreign ownership.

Partnerships, though, would lose the flexibility to allocate tax benefits to partners except for net ordinary income and loss, net capital income and loss and tax credits. Currently, a partnership can distribute each tax break.

Camp’s draft doesn’t affect publicly traded partnerships such as master limited partnerships and real estate investment trusts.