Published on: 10/22/2018
Changes in Tax Rules for Partnerships and some LLCs
The final regulations were recently published by the Internal Revenue Service that effects businesses taxed as partnerships with less than 100 partners. The classification of partnerships would include General Partnerships, Limited Partnerships, Family Partnerships, and Limited Liability Companies (LLCs) (taxed as a partnership). After talking to several of our legal and tax experts, such as Richard Shanks, JD/CPA, given the significance of the change in the rules, we are providing this notice to you to make you aware of the changes so that you can make the appropriate amendments to your partnership agreements. These rule changes may require you to amend your existing partnership and LLC documents. For those of you that are clients of Richard Shanks, you may have already received notification, for all others, please call us or contact your legal and tax counsel.
The Bipartisan Budget of Act of 2015 replaces existing rules effective January 1, 2018. This new law will dramatically change how tax changes are applied and paid for when these entities are audited by the IRS. We recently heard and reviewed the final regulations were issued by the IRS this year in August. Without making changes to your documents, as discussed below, the entity itself may be subject to tax charges at the highest tax brackets rather than the additional tax being paid by the underlying partners.
What is the change?
Under the old rules, if a partnership was selected for an audit by the IRS, any adjustments resulting from the audit were passed through to each individual partner who would then be responsible for any additional taxes due at their respective tax brackets.
Starting in 2018, the new rules apply. Unlike the prior rules, going forward, all audit adjustments from the IRS are taxed to the PARTNERSHIP, not the partners, at the HIGHEST income tax rate for any partner in the partnership.
Furthermore, the IRS rules have changed the title of the person in charge of dealing with tax issues from the “tax matters partner” to the “taxpayer representative.” This is the person granted authority by the partnership to address the IRS on all tax matters of the partnership on behalf of all partners.
Why are the changes important to me?
The changes inherently create a problem by no longer passing on the IRS adjustments to the individual partners. Instead, the partnership itself bares the obligation to pay the taxes which are likely higher than if the adjustments had been passed on. This could also cause problems with prior tax benefits such as carryforwards or other offsetting deductions.
What can I do to fix the issue?
The good news is that the fix should be relatively simple and not very expensive. We highly recommend that you act now. We recommend visiting with your attorney to update or amend the the partnership or LLC agreement to address the issues created by the new rules. There are certain strategies that can be adopted to minimize the overall tax burden for all current and former partners. If you don’t have an attorney, we’d be happy to help you find one from our recommended attorney’s list.
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