Partnership / LLC Tax Rules

Lance J. Schuster

Lance J. Schuster

The IRS is in the business of collecting taxes.  Pursuant to new tax rules enacted  under Title XI of the Revenue Provisions Related to Tax Compliance of the Bipartisan Budget Agreement (“BBA”), the IRS will have an easier time auditing and collecting taxes from partnerships and limited liability companies beginning January 1, 2018.

Limited liability companies (“LLCs”) that have elected to be taxed as partnerships have proliferated in recent years because they offer members limited liability, while also avoiding the double taxation of C-Corporations and the the ownership restrictions of S-Corporations.

It is relatively common to find LLCs as members of other LLCs.  These structures make it challenging for the IRS to reach business owners and their assets.  Congress responded by changing the law.  Under the new rules the IRS will deal with one designated “partnership” representative who may bind all the partners in an administrative or judicial proceeding.  This simplifies the audit process for the IRS.

In addition, the new rules will allow the IRS to simply take money from a partnership rather than having to chase separate partners to collect their share of taxes.  The new rules shift the burden of tax collection from the IRS to the separate partners.

However, the BBA allows certain partnerships to opt out of the new rules.  To do so the partnership must simplify their ownership structure and to provide the IRS with the tools it will need to track down partners who owe taxes.

Idaho farmers and ranchers need to review partnership agreements and operating agreements with their attorney.  It is critical that BBA terminology and rules be incorporated into agreements so as to avoid paying taxes that are not otherwise owed.