New Tax Laws May Require You to Make Changes to the Way in Which Your Multi-Member LLC or Partnership Functions and Interacts with the Internal Revenue Service
Natalya Belonozhko, Cindy Horenstein and Stephen Horenstein
March 20, 2019
Tax Matters Partner is Being Re-designated as the Partnership Representative for Certain Business Entities
Prior to the enactment of the Bipartisan Budget Act of 2015 (“Act”), a member in a multimember LLC or a partner in a partnership was designated by the managers or partners as the “Tax Matters Partner” (TMP). The TMP was responsible for representing the company or partnership in dealings with the Internal Revenue Service (IRS) and making elections on behalf of the company. For tax years beginning January 1, 2018, the Act replaces the TMP with the “Partnership Representative” (PR) — required to be designated on the company’s annual tax filing as having the authority to act on behalf of the partnership and the partners in connection with all examinations of the company’s affairs by the IRS.
Bipartisan Budget Act of 2015 Creates the Possibility for Imposition of Underpaid Tax at the Multi-Member LLC or Partnership Level
Under the Act, beginning on or after January 1, 2018, the IRS will assess and collect underpaid taxes at the partnership level rather than at the individual partner level. This means, all income, gains, losses, deductions and credits of the company, as well as the partners’ distributive shares and any adjustments for such items, are assessed and collected at the partnership level.
Amendments to Operating Agreements and Partnership Agreements
Because this new centralized partnership audit regime which focuses on multi-member LLCs and partnerships places the sole responsibility for tax matters on the PR, operating agreements of multi-member limited liability companies and partnership agreements of partnerships must be amended to designate a PR for tax years on or after January 1, 2018. Operating agreements should include:
- Provisions on decision-making procedures for the PR
- Limitations on the authority of the PR, and the PR’s duty to inform all members and partners of audits, disputes and proceedings in connection with the company’s affairs by tax authorities
- The members’ and partners’ consent or voting requirements with regard to settlements with the IRS
- The PR’s duty of care and indemnification of the PR
Electing To “Opt Out” of the New Centralized Partnership Audit Regime
Partnerships may opt out of the new centralized audit regime on an annual basis (on the partnership’s tax return) if:
(a) the partnership has less than 100 partners (as determined by the number of Schedule K-1s)
(b) all partners are “eligible” — all partners must be either an individual, C corporation, an S corporation, or an “eligible foreign entity
(c) the partnership makes a timely election to opt out.
Members’ and Partners’ Liability for Tax Adjustments
Under the Act, if a company does not or cannot elect to opt out of the new regime, and it becomes liable for any tax adjustments for any taxable year in the form of imputed underpayments, several issues may arise that involve amending tax returns and former partner tax liability at the individual level. These are nuances that can be dealt with in amendments to partnership and operating agreements.
Contact Steve Horenstein ( Steve@horensteinlawgroup.com), Cindy Horenstein (firstname.lastname@example.org) or Natalya Belonozhko Natalya@horensteinlawgroup.com) at Horenstein Law Group for more details on whether and how the Act affects your business and, if necessary, for a review and revision of your operating agreement or partnership agreement in light of the new centralized audit regime.