Gibson Dunn Partners Eric Sloan and Matt Donnelly in an interview with Checkpoint touched on recently enacted tax provisions favorable to certain partnerships.
Section 199A
Among the least surprising tax provisions of what was referred to as the One Big Beautiful Bill, signed by President Trump July 4, was the extension of the IRC § 199A qualified business income deduction generally available to noncorporate taxpayers.
Originally created under the 2017 Tax Cuts and Jobs Act during Trump’s first term, the 20% deduction served to create parity with the corporate income tax rate, which was lowered from 35% to 21% in the tax reform package. The benefit was set to expire along with other TCJA provisions at the end of calendar year 2025.
Sloan said at the time when TCJA became law, “we all knew … that if the Republicans were in power” when the Section 199A deduction would sunset, “they were going to extend it.” He added that it was a temporary provision to begin with as part of the “budget game” amid negotiations leading up to the final version of the TCJA.
The fiscal year 2025 reconciliation package is a “general extension” of a provision that, “when it functions properly,” serves its purpose and “does get the individual rate on qualifying income earned through a partnership down to something roughly approximating the corporate rate,” said Sloan. The new law also includes taxpayer favorable income phaseouts.
Qualifying Income
An overlap with partnership tax treatment and clean energy provisions, the Act amends IRC § 7704 by expanding the definition of “qualifying income” to include more industries to derive includable income from.
A win for clean energy industries that operate in publicly traded partnerships, the expanded definition includes income derived from qualifying hydrogen storage and transportation; qualifying nuclear, hydropower, and geothermal facilities that produce electricity; carbon capture facilities, and more.
But, as Donnelly noted, “wind and solar don’t qualify.” This is consistent with the Act’s repeals of various tax benefits to the wind and solar industries. Unlike other energy tax provisions, this expanded definition does not carry beginning-of-construction or similar date-specific requirements.
Those new technologies now captured in the expanded qualifying income definition for Section 7704 purposes “just become eligible” for tax years beginning after December 31, 2025, Donnelly explained. “There’s no cutoffs, there’s no sunsetting for that eligibility.”
Sloan said that the creation of Section 7704 stemmed from the concern over “corporate America disincorporating” given how businesses could operate as publicly traded partnerships. Congress responded in saying “if you’re a publicly traded partnership, you’re taxed as a corporation unless what you’re earning is either passive-type income – which is interest, dividends, and the like, or certain types of energy related income,” according to Sloan.
Based on legislative history, he continued, “the theory behind” the qualified income policy is that “those activities were always done through partnerships. They were never done through [a] corporation, and so it was just inappropriate to force them to be done” that way, Sloan observed.
While there are “a lot of different ways to make money from energy and energy-related industries,” Sloan is “somewhat skeptical” of “how attractive” the expanded definition will ultimately end up being. Sloan described a negative perception of publicly traded partnerships “because people hate investors.”
Yet “there’s still a market for them – and that’s certainly a good thing,” he added. “Allowing businesses to access capital markets in lots of different ways without tax getting in the way is a good thing.”
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