Significant Changes to How the IRS addresses LLCs and Partnerships
In November of 2015, President Obama signed the Bipartisan Budget Act of 2015 ("BBA15") into law. There are numerous provisions of BBA15 that apply to the taxation of partnerships and pass-through entities, such as Limited Liability Companies. However, the vast majority of the changes are aimed at improving the Internal Revenue Service's ability to audit and collect tax from large partnerships. The most significant change allows for the Service to collect for underpayment directly from the entity, something that was not even contemplated under the previous law. However, for the majority of my clients, the changes will be procedural in nature and will not affect the day-to-day (or even year-to-year) running of their businesses.
The immediate issues to bring to your attention are:
The BBA15 only applies to tax years beginning after December 31, 2017.
There is a specific election available to small partnerships, those with less than 100 partners (or members for LLCs), to avoid the more onerous audit procedure. (With some caveats.)
The Tax Matters Partner has been replaced with the "Partnership Representative."
As with all such legislation, the implementation of the BBA15 was left up to the Service. Through the issuance of rules and regulations, the Service has created a few points that do need to be addressed in Operating Agreements.
A Partnership Representative needs to be appointed. This is more than simply a change of title. Unlike the Tax Matters Partner, the PR does not need to be a partner, however, at this time, the Service appears to be taking the position that once an Entity has named a PR, that PR cannot be changed except once an audit has started. This is important because the Service is not required to inform anyone of an audit other than the PR. Meaning that if a PR is named and then leaves the entity or, for example, passes away, as of today, there is no provision for replacing that PR.
The Operating Agreement should be amended to make the election to be treated as a small partnership.
The Operating Agreements should also be amended to restrict the admittance of new members so as not to jeopardize the small partnership election. This includes a limit on the number of members and the nature of those members.
And finally, the Operating Agreement should be amended to allow the members to make certain elections should an audit be conducted.
Please feel free to contact me with any questions or if you would like assistance in preparing the appropriate amendments to your Operating Agreement.