Publicly Traded Partnerships: Qualified Income Rules and 2025 Updates

(UNITED STATES) The U.S. Treasury and IRS moved quickly in 2025 to tighten reporting around complex partnership deals while also widening the path for clean‑energy companies to raise money through publicly traded partnerships. For taxpayers who hold units in these partnerships, and for funds that structure deals in the space, the year’s changes reshape how income is reported, what must be disclosed, and where penalties can apply. The most urgent item is a new disclosure deadline tied to certain related‑party basis shifts, while the broader story is a policy push that could let more energy businesses tap the public markets through PTPs as soon as next year.

These shifts matter to individual investors, private funds, and operating companies because they affect how cash returns are taxed and how partners report qualified PTP income separate from other qualified business income.

What is a PTP and what changed in 2025?

At the center of these changes is how the law treats publicly traded partnerships (PTPs)—partnerships whose interests trade on a public market like stocks or can be easily traded on a secondary market.

• Under Internal Revenue Code Section 7704, a publicly traded partnership is usually taxed like a corporation unless at least 90% of its gross income is from qualifying sources.
• Historically, qualifying income covered certain real estate and commodities activities.

In a notable policy expansion, Public Law No: 119‑21, signed on July 4, 2025, adds low‑carbon energy areas to the pool of qualifying income for tax years starting after December 31, 2025. Those areas include:

• Hydrogen
• Carbon capture
• Advanced nuclear
• Hydropower
• Geothermal

The goal: help companies in those sectors raise capital through PTPs without paying corporate‑level tax—potentially changing how projects are financed across the United States.

This adjustment opens a clearer route to PTP status for certain low‑carbon projects, but each revenue stream must still be tested against the statute and the 90% gross income test.

Qualified PTP income vs. QBI — what taxpayers need to know

For individual taxpayers, a key point is how qualified PTP income is reported on returns:

• If you hold units in a PTP that is not taxed as a corporation, you must treat that income on its own line, separate from partnerships that feed into the qualified business income (QBI) deduction.
• Qualified PTP income generally means your net share of income, gain, deduction, and loss from a PTP that keeps partnership tax status, plus gain or loss tied to assets that would create ordinary income under Section 751(a) or (b).

Section 751 targets “hot assets” such as unrealized receivables and inventory, where part of a gain is treated as ordinary income instead of capital gain. This matters because:

• Ordinary income is taxed at different (often higher) rates than capital gain.
• Section 751 prevents partners from converting what is essentially business income into lower‑taxed capital gain by selling units.

Practical takeaway: PTP income is not pooled with your other QBI for the 20% deduction rules—it’s handled separately. That line‑by‑line approach helps the IRS track the flow and character of gains that may arise when Section 751 applies.

Basis‑shift disclosure rules (final regs TD 10028)

On January 14, 2025, the IRS and Treasury released final regulations (TD 10028) aimed at certain “basis shifting” transactions between related parties. These rules:

• Label such arrangements “transactions of interest” (TOIs) and require disclosure.
• Create a six‑year lookback for reporting.
• Raise reporting thresholds and narrow the scope for certain Section 743(b) adjustments.
• Focus on situations that shift tax basis among partners or entities to cut taxable income without real economic change.

Key deadlines, thresholds, and penalties:

• Disclosure statements must be filed by July 14, 2025 for any relevant transactions in any open year within the six‑year window.
• Material advisors (firms or individuals who helped design/implement the transactions) get an extra 90 days to file.
• Penalties can be as high as $50,000 per transaction per participant for failing to report.
• Reporting dollar triggers:
  • $25 million for tax years before 2025
  • $10 million for tax years after 2024

There is an important carveout for many owners of PTPs, recognizing that PTPs can have thousands of small, dispersed investors who don’t control partnership-level decisions.

Section 743(b) and the narrowed scope

The final rules pared back which transfers count under Section 743(b):

• The focus is now on nonrecognition transfers between related parties—moves where gain is not immediately recognized.
• Exceptions are allowed for substituted basis adjustments.

Implications:

• Private equity funds, family partnerships, and closely held groups must scrutinize reorganizations and internal shifts that touch partnership interests.
• If a basis step‑up or shift occurs in a related‑party chain and exceeds thresholds, it may need disclosure.
• Funds should be prepared to document how and why basis changes occurred, who benefited, and which partnerships were involved.

Criticisms, politics, and potential changes

Critics have challenged both the timing and scope of the rules:

• Some tax practitioners argue the rules arrived late in an administration and created confusion as other proposals were still in flux.
• Others say the reporting net is still too broad for smaller and family‑run businesses.
• There is talk on Capitol Hill about refining or delaying parts of the rules, but as of early 2025 there were no official changes—deadlines stand.

Until an official change, businesses and investors should assume the rules apply and document transactions accordingly.

What this means for investors, funds, and companies

Investors:
– Attractiveness of PTPs: steady cash distributions tied to real assets, but with complex K‑1 reporting and character rules.
– Watch for Section 751 ordinary‑income allocations on the sale of units—part of a sale could be ordinary income, not capital gain.
– Keep all PTP tax statements and footnotes; ask partnerships or brokers for estimates of ordinary income tied to hot assets on sales.

Funds and family offices:
– Two‑front checklist in 2025:
1. Gather facts for any related‑party transfers that could trigger basis shifts within the six‑year lookback and measure against $25M/$10M thresholds.
2. Map portfolio companies’ revenue sources to the revised qualifying income categories effective for post‑2025 tax years.

Companies in low‑carbon energy:
– Model each revenue stream (e.g., hydrogen sales, carbon capture fees, power sales) against the law’s language.
– The 90% gross income test under Section 7704 must be met to keep partnership tax treatment.
– Consider contract structuring, ring‑fencing projects, or separate entities for non‑qualifying activities.

Compliance and material advisors

Material advisors—law firms, accounting firms, consultancies—should:

• Identify covered clients, compile records, and consider the 90‑day supplemental filing window.
• Keep engagement letters, internal memos, and model spreadsheets to support positions.
• Understand that penalties place real dollars at stake for both taxpayers and advisors who fail to report.

The additional 90‑day window beyond July 14, 2025 offers breathing room, but only if advisors act now to identify covered transactions and clients.

Practical filing and recordkeeping steps

Partnerships and funds should:

1. Assemble a cross‑functional team: tax, legal, accounting, investor relations.
2. Review the six‑year period for any basis shifts between related parties.
3. Build a calendar counting back from July 14, 2025, and set internal cutoffs two to four weeks earlier to finalize disclosures.
4. Draft plain summaries for each transaction answering:
   • What moved?
   • Between which related parties?
   • What basis changes resulted?
5. Keep backup schedules that show the math behind any Section 743(b) adjustments and the rationale for any substituted basis exceptions.

Investors should:

• Keep an organized folder with each PTP’s annual package: K‑1s, state schedules, and any Section 751 disclosures.
• When selling units, ask for an estimate of ordinary income tied to hot assets.
• Ensure your tax preparer knows the difference between qualified PTP income and QBI.

Market outlook and practical considerations

Will the expanded qualifying income list spark a revival of energy PTPs?

• Potential upside: If sponsors package stable, contracted cash flows (e.g., carbon capture services or long‑term hydrogen offtake), PTPs could return as a funding tool. Passing income through avoids corporate tax, which may keep yields higher for unit‑holders.
• Risks/limits: Commodity cycles, uncertain contract structures, and ambiguous revenue classifications could keep sponsors using corporate or private structures instead.

For families and smaller partnerships, politics matter. Lawmakers and trade groups argue both sides:

• Some want to stop aggressive basis shifts that erode the tax base.
• Others worry the rules chill routine estate and business succession moves.

For now, small and mid‑sized partnerships should document why each internal transfer happened, who is related, and whether any step‑ups crossed the dollar triggers.

Human impact and communication

The rules have practical effects on everyday decisions:

• Retirees relying on PTP distributions could face a surprise tax bill from a Section 751 ordinary‑income hit when selling.
• Small business families may face paperwork burdens when reorganizing ownership among relatives.
• Brokers and tax preparers should give plain‑English explanations to clients about qualified PTP income and Section 751 consequences.

Final reminders and resources

• Many PTP investors will not be directly affected by the basis‑shift rules if they are passive, small holders on public exchanges—the final regs exclude many such owners.
• The IRS is the source of record for deadlines and definitions. Monitor the IRS Partnerships page for updates:

  https://www.irs.gov/businesses/partnerships

• Good planning, clear records, and steady communication with partners and investors reduce the risk of surprises when returns are filed.

Bottom line: Partnerships and advisors must account for the new disclosure regime and be ready to defend positions taken in the last six years. Investors should prepare for separate tracking of qualified PTP income and potential Section 751 outcomes on sales. Companies in low‑carbon energy should weigh the benefits of PTP structures under Public Law No: 119‑21 for tax years starting after December 31, 2025.