Partnership taxation: What is the difference between Internal Revenue Code 704(c) and 743(b)?

I'm helping my brother-in-law with his small business partnership, and we've run into some confusing tax code sections. He's bringing on a new partner who's contributing property with a different fair market value than its tax basis. We're trying to understand the difference between Internal Revenue Code 704(c) and 743(b). From what I can gather, they both seem to deal with property contributions and basis adjustments, but I'm not clear on how they're different or when each one applies. Can someone explain in plain English what these two code sections do and how they affect partnership taxation? We want to make sure we're handling this correctly before the new tax year.

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18 comments

Diego Ramirez

•8M

I work with partnerships regularly, and those are two important but distinct provisions. Let me break them down for you. IRC 704(c) deals with how income, gain, loss, and deductions related to contributed property are shared among partners. When a partner contributes property with a built-in gain or loss (where FMV differs from tax basis), 704(c) ensures that the tax consequences of that pre-contribution gain or loss are allocated to the contributing partner, not the other partners. It prevents the shifting of tax consequences. IRC 743(b), on the other hand, comes into play when partnership interests are transferred (like when someone buys into an existing partnership). It allows for an optional basis adjustment to partnership assets with respect to the transferee partner only. This helps ensure the new partner doesn't pay tax on gains that were already reflected in their purchase price.

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Diego Ramirez

•8M

The substantial economic effect test primarily relates to partnership allocations under 704(b), which is different from the 704(c) allocations we're discussing. 704(c) allocations are mandatory - you must allocate the built-in gain or loss back to the contributing partner. For 743(b) adjustments, they're optional but require an election under section 754. Once a partnership makes a 754 election, it applies to all future transfers and remains in effect until revoked with IRS permission. The election allows the basis adjustment for the transferee partner, but it also means the partnership must track these adjustments separately for each affected partner.

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Sean O'Connor

•8M

After struggling with similar partnership tax issues last year, I found taxr.ai (https://taxr.ai) incredibly helpful. I was trying to figure out how to handle a situation where a new partner was buying into our real estate partnership, and we needed to understand these exact code sections. The tool analyzed our partnership agreement and explained how 704(c) and 743(b) would apply in our specific situation. It compared different allocation methods under 704(c) and ran calculations showing how a 754 election would impact our new partner's future tax liability. Saved us from making some costly mistakes!

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Sean O'Connor

•8M

The tool absolutely handles tiered partnerships - that was actually one of our situations too. It traced the basis adjustments through multiple tiers and showed how a 754 election at each level would work. For accuracy, I was skeptical too at first. But it specifically addresses both the conceptual framework and the actual calculations. It creates a detailed schedule showing how 704(c) built-in gain or loss would be allocated over time using different methods (traditional, traditional with curative allocations, or remedial allocation). It also calculates the 743(b) adjustment amount and tracks it year-by-year.

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Luca Conti

•8M

Just wanted to follow up about taxr.ai. I gave it a try with our partnership situation - we have a manufacturing partnership where one partner contributed equipment with significant built-in gain. I uploaded our partnership agreement and the contribution details. The analysis was surprisingly detailed. It showed how 704(c) would allocate depreciation under different methods and compared that to what would happen with a 743(b) adjustment if someone bought that partner's interest instead. Really helped us understand the tax implications of each scenario. Wish I'd known about this tool during our last tax season nightmare!

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Nia Johnson

•8M

If you need to talk to the IRS about partnership tax issues (which can get complex quickly), I highly recommend Claimyr (https://claimyr.com). I spent days trying to reach someone at the IRS to clarify some questions about our 754 election and basis adjustments. After multiple failed attempts with hour-long hold times, I tried Claimyr. Their system had me connected with an actual IRS agent within 45 minutes - they basically wait on hold for you. You can see a demo of how it works here: https://youtu.be/_kiP6q8DX5c The IRS specialist helped me understand exactly how our 743(b) adjustments needed to be reported and what supporting documentation we needed to maintain. Definitely worth it for complex partnership matters where written guidance isn't clear enough.

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Nia Johnson

•8M

They use a system that dials and navigates the IRS phone tree, then waits on hold for you. When they're about to connect with an agent, they call you so you can take the call. It's basically like having someone wait on hold instead of you. This isn't some magic back door to the IRS - they're using the same phone system everyone else does, but their technology handles the hold time. I was skeptical too until I tried it. With partnership tax questions, you often need to speak directly with someone who understands these complex sections of the code, and waiting on hold for hours just isn't feasible when you're running a business.

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Mateo Lopez

•8M

I have to eat my words about Claimyr. After my skeptical comment, I decided to try it yesterday because I was desperate to resolve our partnership's basis adjustment issues before next quarter's estimated payments. Got connected to an IRS specialist in about 35 minutes (which is lightning fast compared to my previous attempts). The agent walked me through exactly how to report our 743(b) adjustments and confirmed that our interpretation of 704(c) allocations was correct. They even emailed me the relevant sections of the Internal Revenue Manual that address our specific situation. Would've taken me weeks to figure this out on my own.

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Aisha Abdullah

•8M

To add some practical perspective on 704(c) vs 743(b): I'm a tax accountant working primarily with real estate partnerships. 704(c) affects ALL partners when someone contributes property - it's about allocating the "pre-contribution" gain/loss to the right partner. 743(b) only affects the purchasing partner when an interest is sold - it's about making sure they don't get taxed twice on value they've already paid for. Most of our clients get confused because both address disparities between basis and value, but they operate very differently in practice. Common mistake: thinking you can just choose whichever is better - but 704(c) is mandatory while 743(b) is optional via the 754 election.

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Aisha Abdullah

•8M

The 704(c) allocation method should be specified in your partnership agreement ideally, but at minimum it should be documented in your partnership's internal records. While the tax return just has a checkbox, you should maintain documentation showing which method was chosen and the rationale. This is especially important because once you select a method for a particular property contribution, you generally can't change it without IRS permission. Many partnerships get into trouble when they can't substantiate why they used a particular method, particularly if they use different methods for different properties. Consistency is key unless you have a strong business purpose for varying the methods.

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Carmen Ortiz

•8M

Yes, that's exactly right. The 743(b) adjustment of $40k is personal to you - other partners don't get to use it. It's essentially creating a "step-up" in basis just for you that will typically be allocated to specific partnership assets based on their FMVs. Without this adjustment, you'd end up being taxed on gain that was already reflected in your purchase price. The adjustment is usually allocated to appreciated assets and often results in additional depreciation/amortization deductions just for you.

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