In the United States, general and limited partnerships (except certain “master limited partnerships” discussed below) are not subject to tax because their earnings and losses are passed directly to their owners and taxed at that level. ASC 740 does not apply to such partnerships. Although many tax regimes around the world have a similar approach for partnerships, this is not always the case. In certain jurisdictions, partnerships represent taxable entities. In those cases, the provisions of ASC 740 would apply to a tax based on income for that jurisdiction even if other jurisdictions do not subject such entities to tax.

Question TX 1-1 addresses whether the Bipartisan Budget Act of 2015 impacts the application of ASC 740 to US partnerships.

No. While the Bipartisan Budget Act of 2015 resulted in significant changes to the IRS’ audits of partnerships and related adjustment procedures, ASC 740 provides that the determination of whether income taxes are attributable to the entity or its owners should be based on the laws and regulations of the taxing authority rather than on who pays the income taxes. For US federal purposes, partnerships are respected as flow-through entities that are not subject to income taxes. The partners of the partnership remain responsible for the tax consequences of the partnership and payment of any income tax obligations by the partnership is attributable to, and for the benefit of, the partners. This view is consistent with AICPA Technical Questions & Answers Section 7200.

While we believe that ASC 740 does not apply to the partnership itself, corporate partners of the partnership should continue to assess the impact of potential uncertain tax positions related to the outside basis of their partnership interests. See TX 11.7 for accounting for outside basis differences in a partnership.

While partnerships, S-Corporations, and similar "pass through" entities may not be subject to tax in their home jurisdiction, this tax status is not always respected by the tax laws of overseas territories. Income generated in foreign jurisdictions may be subject to foreign withholding taxes. It is unclear how an entity that is otherwise a "pass through" entity for tax purposes should account for these withholding taxes. We believe, depending on the facts, there may be more than one acceptable presentation.

Because the taxes have been withheld on income, it would be acceptable to view these taxes as being within the scope of ASC 740 and record an income tax expense. Effectively the foreign jurisdiction has levied taxes on the entity despite its nontaxable status in its home territory.

Alternatively, the reporting entity could account for the taxes as a deduction from equity because the taxes have in substance been paid on behalf of the members. As a nontaxable “pass through” entity, any foreign taxes withheld are effectively being levied on the members.

Another alternative for entities operating as investment vehicles and reporting as an investment company might be to consider the withholding tax to be an “above-the-line” expense in accordance with the accounting for investment companies in ASC 946-225-45-3(h).

Some states impose a tax on a pass-through entity’s taxable income allocable to the state. ASC 740-10-55-226 through ASC 740-10-55-228 discuss factors that could indicate whether such a tax is a tax attributable to the pass-through entity or a tax attributable to the owners. In some instances, the facts of a particular law may clearly align with the factors discussed in the guidance. In those cases, the reporting entity must account for the tax in accordance with the guidance. However, in many situations, the tax may have factors that are both indicative of a tax attributable to the pass-through entity and a tax attributable to the owners. In these situations, we believe that the reporting entity should assess the economic substance of the tax to determine whether the tax is attributable to the pass-through entity and therefore accounted for by the entity (and any other entities that consolidated it) under ASC 740, or a tax attributable to the owners and therefore, excluded from the entity’s net income. If the entity continues to administer the tax or otherwise make payments to the taxing authority even when the tax is not considered to be attributable to the entity, those transactions with the taxing authority would be deemed to be transactions with the entity’s owners and accounted for within equity.

In the US, publicly traded limited partnerships (master limited partnerships) are generally taxable as corporations. Certain limited partnerships, however, to the extent they generate substantially all (greater than 90%) of their income from “qualifying activities,” are exempt from tax (e.g., partnerships engaged in real estate activities or the transportation and distribution of natural resources). Assuming an entity is established to operate in an effectively tax-exempt manner and continues to meet the requirements to be exempt from federal income tax, the provisions of ASC 740 would generally not apply.