The proposed regulations are expected to be finalized relatively quickly after a public hearing on September 18, 2017 in Washington, D.C. Because the proposed regulations are extensive, we recommend that every LLC and partnership agreement be reviewed and amended prior to January 1, 2018 to ensure compliance.
As background, the BBA repeals the Tax Equity and Fiscal Responsibility Act Audit Rules (TEFRA), which generally applies to partnerships with more than 10 partners. Under the proposed regulations, the rules regarding audits of limited liability companies, or LLCs, and other entities taxed as partnerships for Federal income tax purposes would be revised. The regulations would be effective for partnership tax years beginning after December 31, 2017.
The general rule under BBA is that taxes resulting from audits and tax proceedings would be assessed at the partnership level. The tax would be calculated at the highest marginal tax rate, regardless of the tax rates of any of the partners.
Operating agreements should address how calculated taxes and penalties will be allocated between partners in the adjustment year and partners in the reviewed year, to reflect any differences in ownership.
Under BBA, the partnership/LLC is represented by its “partnership representative.” This role replaces the tax matters partner under TEFRA. The partnership representative must be stipulated in the operating agreement.
In general, all LLC and partnerships required to file a Federal income tax return are subject to these new audit rules for tax years beginning on or after January 1, 2018. However, certain “eligible partnerships” may elect out of the centralized partnership audit regime.
Please contact your WK advisor at (573) 442-6171 or (573) 635-6196 to discuss how the proposed regulations will affect your partnership.