One of the defining features of partnerships is that the entity, not the individual partners, is responsible for making most tax elections. These elections can significantly affect how income, deductions, and credits are reported, so understanding who controls them is crucial. For example, if a partnership purchases equipment costing $100,000, it must decide whether to claim immediate expensing under §179 or depreciate the equipment over several years under MACRS. That election is made at the partnership level, and whichever method is chosen determines how each partner reports their share of income or loss. An individual partner cannot unilaterally decide to depreciate while others expense — the decision binds everyone.

Example: Suppose the partnership has $200,000 of ordinary business income before depreciation, with two partners: A owns 50% and B owns 50%.

• If the partnership elects §179 expensing, the entire $100,000 deduction is taken in Year 1. Taxable income is reduced to $100,000, and each partner is allocated $50,000 of income.
• If the partnership uses MACRS 5-year straight-line depreciation, only $20,000 is deducted in Year 1. Taxable income is reduced to $180,000, and each partner is allocated $90,000 of income. The remaining $80,000 deduction is spread evenly across future years, continuing to reduce each partner’s share of income by $10,000 annually.

This comparison shows how a single partnership-level election can dramatically affect the timing of income recognized by each partner, even though the total deduction over time is the same.

Who Makes Tax Elections in a Partnership?

Under IRC §703(b), the partnership as an entity makes all elections affecting the calculation of taxable income, except for a few elections reserved to the individual partners. This means decisions about depreciation methods, accounting conventions, and the treatment of organizational expenses are made collectively at the partnership level and bind all partners.

In other words, if you are a partner, you cannot simply choose your own depreciation schedule or accounting method for partnership items. Those decisions are made once, for the entire partnership, and apply uniformly to every partner’s distributive share.

Example: Depreciation Election in a Partnership

The Setup

• Partnership has $200,000 of ordinary income before depreciation in years 1 and 2.
• It buys $100,000 of 5-year equipment.
• Two partners: A owns 60%, B owns 40%.
• Partner A would prefer §179 expensing (immediate deduction).
• Partner B would prefer MACRS 5-year straight-line depreciation (~$20,000 per year).

Scenario 1: Partnership Elects §179 Expensing

• Year 1 Deduction: $100,000
• Taxable income: $200,000 – $100,000 = $100,000

Allocations:

• Partner A (60%): $60,000 income
• Partner B (40%): $40,000 income
• Year 2 Deduction: $0 (no depreciation left)
• Taxable income: $200,000 – $0 = $200,000

Allocations:

• Partner A (60%): $120,000 income
• Partner B (40%): $80,000 income

Scenario 2: Partnership Uses MACRS Depreciation

• Year 1 Deduction: $20,000
• Taxable income: $200,000 – $20,000 = $180,000

Allocations:

• Partner A (60%): $108,000 income
• Partner B (40%): $72,000 income
• Year 2 Deduction: $20,000
• Taxable income: $200,000 – $20,000 = $180,000

Allocations:

• Partner A (60%): $108,000 income
• Partner B (40%): $72,000 income

Why Partners Cannot “Split” Elections
If Partner A expensed and Partner B depreciated, Year 1 would look like this:

• A’s share of income: $60,000 – (A’s “share” of $60,000 deduction) = $0
• B’s share of income: $80,000 – (B’s “share” of $20,000 deduction) = $60,000

By Year 2, A would have no deduction while B would still get $8,000 of depreciation. That kind of mismatch is exactly why IRC §703(b) requires the partnership to make one election for all partners.

Are There Exceptions Where Partners Make Their Own Elections?

Yes. While the partnership controls most elections, certain ones are made at the partner level. These include elections under:

• §108(b)(5): Reduction of basis of depreciable property when income from cancellation of debt is excluded.
• §108(c)(3): Elections relating to qualified real property business indebtedness.
• §617: Deduction and recapture rules for mining exploration expenditures.
• §901: The foreign tax credit.

Each of these elections reflects an area where Congress determined that the consequences are highly personal to the individual taxpayer’s circumstances.

Example: Suppose a partnership incurs foreign income taxes. The election to claim a foreign tax credit under §901 is made individually by each partner. One partner might claim the credit, while another might deduct the taxes instead, depending on which treatment yields the greater benefit given their overall tax situation.

What Happens With Contributed Property?

Special rules apply when a partner contributes property with built-in accounting attributes. Under IRC §168(i)(7), if a partner contributes depreciable property to the partnership, the partnership must continue to use the contributor’s method and recovery period for that property. This prevents a “reset” of depreciation schedules simply by shifting the asset into partnership form.

Example: If a partner has a machine that has been depreciated for three years under MACRS and contributes it to the partnership, the partnership cannot restart depreciation as if it were newly acquired. Instead, it must continue using the same depreciation method and remaining recovery period the partner was already using.

Why Does This Matter for Partners?

Because elections can shape the timing and character of income, they influence not only when tax is paid but also how it interacts with other parts of the Code. Uniformity at the partnership level promotes consistency and prevents manipulation, but it also means individual partners must live with decisions they did not personally make.

For new partners, this highlights the importance of due diligence before buying into a partnership. The entity may already have made elections that bind every partner going forward. For existing partnerships, these rules underscore the need for careful planning, because the wrong election could have ripple effects for years.