Final Partnership Regulations Issued

 

On January 2, 2018 the IRS issued final regulations on how Partnerships can elect out of the Centralized Partnership Audit Regime.  The final regulations are effective for tax years beginning after December 31, 2017.

An eligible partnership may elect out of the new audit regime on its timely filed income tax return including extensions for the year in which the partnership wants to elect out.  Once the election is made it cannot be revoked without consent from the IRS.

As noted above, to elect out, the partnership must be an “eligible partnership”.  The regulations define an “eligible partnership” as one that has 100 or fewer partners and that each partner is an “eligible partner”.  An “eligible partner” is an individual, C corporation, S corporation, eligible foreign entity, or the estate of a deceased partner.  An S corporation, regardless of whether or not its shareholders are defined as eligible, is still considered an eligible partner for this purpose.  The number of shareholders in an S Corporation must be considered in determining if a partnership has 100 or fewer partners.  The following are not considered eligible partners: partnerships, trusts, a foreign entity that is not otherwise an eligible foreign entity, a disregarded entity, an estate of an individual other than of a deceased partner, or any person that holds an interest in the partnership on behalf of another person.

A partnership that makes an election must notify each of its partners of the election within 30 days of making the election in the form and manner determined by the partnership. Also, a partnership that elects out of the new regime and has an eligible partner that is an S corporation must disclose all of the required information to the IRS about each person who was a shareholder in the S corporation at any time during the tax year of that S corporation.  Finally, the final regulations, just like the proposed, require each partnership to provide a correct U.S. taxpayer id for all partners.

The new audit guidelines for partnerships are very complex.  Reach out to one of our experts at HLB Gross Collins to find out how the new rules effect your partnership interests.

-by Abigail Hampton, CPA