2018 Tax Law: What It Means For Partnerships & LLCs
Changes in the tax law and audit regulations that took effect on January 1, 2018 for the 2018 tax year and forward have resulted in necessary changes to all partnerships agreements and multi-member limited liability company’s operating agreements. For the purposes of this article, limited liability companies (Companies) will be used as the example; but be sure to note that limited partnerships and any entity taxed as a partnership are also implicated by these changes. The changes in the law and regulations affect how Companies are dealt with when under audit by the IRS. Companies now need to select a person to be named as the “Partnership Representative” who will then be in sole charge of all contact and decisions with the IRS. Under the new laws and regulations, a Company’s failure to select a Partnership Representative allows the IRS the ability to select and appoint anyone they decide to become the Partnership Representative for the Company.
Permitting the IRS to select the Partnership Representative, or not carefully considering who to choose yourself could ultimately result in adverse tax treatment for many members of the Company and would potentially remove all members from the conversation with the IRS during an audit. This is one of the key changes with the new audit regime: one individual is in control of the audit on the partnership side, and this individual has significant authority to make all decisions regarding the audit process – without even informing the other members of the audit in the first place!
Another important change in the laws and regulations is that whatever change in tax liability that may result from the audit can be the liability of the current year members of the Company, and not the member for which the liability was incurred. This is of extreme importance if the percentages of ownership have changed among the members, or more critically, if any members have come and gone. New members could now be saddled with the tax burden of prior years’ tax decisions that they were neither a part of nor received the benefit from. Even if the members are identical but ownership percentages have shifted, the impact of the audit decision could affect members differently than it would have at the time profits were issued. In the event you find yourself in the position of buying into a limited liability company or partnership, you need to consider how you may be impacted by the changes mentioned above. Actions by prior members could affect your potential liability since the tax burden is borne by the current members, regardless of who was a member in the year under audit.
It is vital to have a plan in place to deal with the immense new powers the Partnership Representative will hold, as stated below. The precursor to the Partnership Representative was the Tax Matters Partner. The Tax Matters Partner was in essence the messenger between the partnership and the IRS, relaying all information between the two parties and was assigned to keep the other members involved. Without the proper safeguards in place from a well drafted operating agreement, the Partnership Representative, who potentially could be an outsider appointed by the IRS, is free to deal with the IRS as they deem fit. The IRS prefers this model since it allows for faster resolutions and fewer individuals to deal with. For your Company, this potentially poses substantial dilemmas:
- What if your Partnership Representative makes some audit decisions that benefit themselves at the expense of the other members?
- How should former members of the Company be dealt with who owned interests in the year under audit, but have since sold their interest to new members?
- What duties of good faith, fair dealing, and open information sharing should be imposed upon the Partnership Representative?
Schwartz Law Firm is committed to servicing the individual needs of our clients and all of their business matters. Please contact our office if you would like to discuss how we can assist you in making these important decisions for your business and implement them into your operating agreement or other governing documents. Our office is located at 37887 West 12 Mile Road, Suite A, Farmington Hills, Michigan 48331, and you can reach our office by telephone at . Call today to get started preparing your business to deal with these new tax changes!
* This article does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. *