Category: Individual and Business Tax Consulting
Did you know the new partnership rules may impact your share of partnership taxes and penalties upon an IRS audit? They may also impact you if you are no longer a partner in future years or have not been a partner in the year of the audit adjustment. The new rules are effective for 2018 and future years (tax years that begin after Dec 31, 2017).
There are at least two important items to consider:
Do you qualify to elect out of the new rules?
To qualify for electing out of the rules you must have 100 or less K-1 partners AND the partners can only be individuals, C corporations, S corporations, eligible foreign entities, or an estate of a deceased partner. Note the 100 limit includes S corporations and each one of its shareholders. (In other words, all of the shareholders of the S corporation that is a partner in a partnership will need to be included in the count to 100 limit). You cannot elect out if any of the partners are ineligible tax entities, such as partnerships, trusts or disregarded entities. This means that even some partnerships with just a few partners will be subject to the new audit rules, because one or more of the partners is an ineligible entity.
Have you reviewed your partnership agreement with your attorney to align with the new rules?
We recommend you review the following with your attorney as you may need to amend your operating or partnership agreement. Areas to review include but are not limited to:
Who will be responsible to pay the tax and penalties?
The new default will be for the adjustments to be made at the partnership level:
Election will push-out the adjustments to partners of the year examined:
An alternative to the election is to add language that requires prior partners to make contributions to the partnership for their share of the adjustments. Either option is intended to relieve the impact on new partners.
Who will be designated partnership representative and how this position will be administered.
Have you replaced the ‘tax matters partner’ phrase with partnership representative?
In summary, although the new rules impact audits that may occur after 2018, you should review and possibly amend your operating or partnership agreements. Please let us know if we can assist in any way. We continue to monitor if the IRS will change these new regulations.