By Lynn Eller, CPA, APCIT, PFS

The 2017 Tax Cuts and Jobs Act (TCJA) spurred transformative change for tax treatment and introduced IRC 1446(f) of the Internal Revenue Code (IRC). This article addresses Section 1446(f) withholding and outlines exceptions to this withholding that are available.

What Is 1446(f) Withholding?

Section 1446(f) of the IRC requires the transferee of partnership interest to withhold a tax equal to 10% of the amount realized on the transfer of partnership interest unless an exception to withholding, or an adjustment to the amount to withhold, applies.

The purpose of 1446(f) withholding is to ensure that taxes owed by the transferring partner are paid in a timely manner, even if the transferring partner is a nonresident alien or foreign corporation.

Exceptions to 1446(f) Withholding

There are certain exceptions to the withholding requirement under Section 1446(f). These exceptions include, but are not limited to, the following:

  • Publicly Traded Partnership (PTP): Withholding is generally not required if the partnership interest being transferred is in a publicly traded partnership. Publicly traded partnerships are subject to different tax rules, and withholding under Section 1446(f) may not be necessary. Such partnerships are often already subject to other reporting and withholding requirements.
  • Sales of Certain Partnership Interests: Withholding may not be required if the partnership interest transfer does not result in a gain or loss to the transferor. This would occur if the transfer is between related parties or not subject to taxation under other provisions of the IRC.
  • Effectively Connected Income (ECI) Less than 10%: Withholding may be waived if the transferor can certify that certain things are true about effectively connected income.
  •  Partnership Certificates of Non-Foreign Status: Withholding may not be required if the transferor provides a valid partnership certificate or Form W-9 of non-foreign status to the transferee.
  • Exemption under a Treaty: Withholding may be reduced or not required if the transferor is eligible for benefits under an income tax treaty between the US and the country in which the transferor resides for tax purposes.
  •  Other Exceptions: Other tax exemptions could apply in circumstances where withholding is deemed unnecessary or impractical.

Application of these exceptions will vary depending on the specific facts and circumstances of the transaction. Consult with a tax professional to determine whether any exceptions to the withholding requirements under Section 1446(f) apply in your particular situation.

Implications of Section 1446(f)

Properly calculating section 1446(f) withholdings requires time and careful attention.

Fund managers are responsible (and funds are liable) for withholding if the investor does not properly satisfy the withholding requirement. Both the transferee and the partnership must ensure section 1446(f) withholding liability is satisfied.

Learn More

The PBMares tax team can help you assess your 1446(f) withholding situation and ultimately provide a recommendation on how to proceed.

Contact us today to learn more.