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Now that the hustle and bustle from the recent holidays have ended, tax planning is an important matter that we should keep in mind as we begin the new year. With the start of 2017, here are a couple of changes business owners can expect to see over the course of the year.
New Partnership Audit Rules
Though these new audit rules don't take effect until very end of 2017, the time to start preparing is now. The Bipartisan Budget Act of 2015 was enacted in November 2015, bringing with it significant changes governing federal tax audits of entities that are treated as partnerships for U.S. federal income tax purposes. Under the new rules, which apply to tax returns filed for partnership taxable years beginning after December 31, 2017, audit adjustments to items of partnership income, gain, loss, deduction or credit, and any partner's distributive share thereof, will be determined at the partnership level. No longer will the IRS attempt to collect unpaid income tax liability from individual partners. Instead, the Act now allows the IRS to collect directly from the partnership. Furthermore, under the new rules, any deficiency will not be taxed at the separate partners' tax rates, but at the highest individual tax rate (currently 39.6 percent), with a few exceptions.
There's a Saving Grace for some: The Act will allow certain partnerships to elect out of the new rules. Certain small partnerships may be eligible to elect out of the audit provisions for a given taxable year, with the result that any adjustments made to a partnership's income, gain, loss, deduction or credit be determined at the partner level. This election may be made only by partnerships with 100 or fewer partners, each of which can only be an individual, a C corporation, an S corporation or an estate of a deceased partner. The election must be made annually with a timely filed return and provide the IRS with all the partners' names and tax identification numbers.
What if a partnership doesn’t qualify for the small-partnership election? For partnerships who have more than 100 partners or disqualifying partners the new rules allow the partnership to make a timely "push-out" election and furnish to each partner of the reviewed year a statement of that partner's share of any adjustment to income, gain, loss, deduction or credit. Each affected partner will then be required to take the adjustment into account on the partner's individual tax return, and pay the increased tax, in the year in which the partner receives the adjusted information.
The Act further modifies audit procedures by replacing the "tax matters partner" with a "partnership representative". The partnership representative, who is no longer required to be a partner, will have sole authority to act on behalf of the partnership in audit proceedings. Furthermore, the partnership representative will bind both the partnership and the partners in any administrative or judicial proceedings relating to an audit. The IRS will no longer have to notify individual partners of audit proceedings or adjustments.
The take away? These changes will be here before you know it. Know which category your partnership falls in and know which steps to take to lessen the potential tax burden when the IRS comes calling!
Read about additional changes here.
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