In recent months, there have been several laws passed and regulations issued that are now becoming effective. If you are a business owner, take a minute to review how some of these changes might affect you.
Changes in IRS Audit Procedures
For tax years starting after Dec. 31, 2017, all partnerships will be subject to new audit requirements. Currently, if a partnership is audited by the IRS, any adjustments must be passed on to the partners and tax collected from them. This is perceived as inefficient for the IRS. Starting in 2018, the IRS can assess tax at the partnership level instead of passing the tax on to the partners of the partnership. In addition, all existing Tax Matters Partner elections that are in existence cease to exist on Dec. 31, 2017. All partnerships must elect a new “Partnership Representative” to be the sole responsible party during an IRS audit. This election must be made in the operating agreement of the partnership. If you do not designate a Partnership Representative in the operating agreement, the IRS has the authority to pick your Partnership Representative. We recommend all partnerships address this in their operating agreement prior to Dec. 31, 2017.
New IRC Section 385 Regulations
On April 4, 2016, the IRS issued proposed regulations that would re-characterize certain debt instruments, or parts of certain debt instruments as stock. The potential impact could be significant in corporate financing transactions, merger and acquisitions and a variety of other contexts. For example, many S corporations will need to evaluate their debt for continued compliance with the one class of stock requirement. For decades, taxpayers were left with only facts and circumstances in determining whether financial instruments were debt or equity. The proposed regulations address debt between certain broadly defined related parties (“expanded groups” and “modified expanded groups”), required documentation and information that must be prepared and maintained, specific situations in which certain debt instruments will be treated as stock, and special rules for consolidated return groups. The proposed regulations apply to foreign and domestic corporations.
New Regulations Issued on Self-employment Tax Treatment of Partners
The IRS has issued final and temporary regulations that clarify the status of partners employed by a disregarded entity of the partnership. The regulations are effective Aug. 1, 2016. This clarification affects the classification of partners as employees for benefit plan purposes. Partners cannot be employees of a partnership and do not receive wages. Some confusion has ensued because a disregarded entity is treated as a corporation for employment tax purposes. Some partnerships have attempted to create employee status for partners by use of a disregarded entity. The new regulations clarify that corporate status of a disregarded entity is for employment tax purposes only. A partner of a partnership is not considered an employee of the partnership or any disregarded entity of the partnership.
IRS Due Dates Changing for 2016 Filings
Just a reminder that the tax return due dates for 2016 returns will change. Partnerships and S-Corporations will be due March 15, while C Corporations will now be due April 15. The extended due date for partnerships, S-Corporations and C Corporations will remain September 15. The extended due date for trust returns will be Sept. 30. The good news with all of this change is the individual filing deadlines are unchanged.
Some states, like Alabama, have already adopted the new due dates for 2016, but not all states. We will keep you up to date on the filing deadlines in the states your business operates in.
There are many changes happening that might affect your business. If you have any questions on how these might affect you, please contact your Warren Averett advisor.