While big changes will be coming after January 1, 2018 as pointed out in last month’s blog, there are a great number of details that have to be worked out. Expect to see the IRS put procedures in place as that effective date approaches. And it is not yet clear if there will be treasury regulations issued to deal with the subject matter. Here are several additional points for consideration.
The “small entity” exception to the new partnership tax audit rules permits entities taxed as partnerships to opt out of these entity-level audit rules under certain circumstances where there are 100 or fewer partners (each shareholder of an S corporation counts against the 100-person total). Opting-out is permitted only if the partners or members of the flow-through entity are individuals, C corporations, S corporations, estates of deceased individuals or foreign entities that would be treated as C Corporations if they were taxed domestically. That means that no small-entity exemption is available if any of the partners or members are trusts, limited liability companies or partnerships. As there are many types of trusts, will this exclusion apply to all trusts or only irrevocable trusts?
Since the new rules make it possible for current partners to be liable for paying the imputed assessment for prior year adjustments, the law offers two elections available to opt out of the partnership level assessment and payment of tax. There are limited time frames that may make these two elections difficult to utilize, including potential problems in having the partners of the assessment year fully comply.
While a number of factors will have to be dealt with in revising partnership agreements and limited liability company operating agreements to accommodate these new rules, one provision that I think will be important to include will be the need for some sort of escrow and indemnification provisions when partners or members sell their entity ownership interests.
From time to time as more details are learned, additional blogs will be offered dealing with this subject.
Michael W. Margrave
Disclaimer: This blog is for information purposes only. Legal advice is provided only through a formal, written attorney/client agreement.