Article on Tax Changes for Partnerships

Michael Hirschfeld recently published an Article entitled, New Challenges that Require Consideration, 30 Prob. & Prop., no. 5, 9 (2016). Provided below is a summary of the Article:

In the past, IRS efforts to audit partnerships have been thwarted by the need to chase every partner on audit or for collection of taxes due. The result has been IRS inaction in many situations. The Bipartisan Budget Act of 2015, Pub. L. No. 114–74, § 1101, 129 Stat. 584 (Nov. 2, 2015), enacted by Congress late last year (“Budget Act”), changes that situation by totally revamping how partnership tax audits will be conducted. These changes start with taxable years beginning on or after January 1, 2018, unless a partnership makes an election to apply these new rules earlier. The most dramatic change is that the IRS will be able to collect any unpaid tax directly from the partnership rather than having to pursue each partner.

These tax changes are important because real estate is commonly owned by a limited partnership or an LLC that is treated like a partnership for tax purposes. Partnerships are not taxable entities; their taxable income and loss flow through to their partners, who then report their share of the income or loss on their own tax returns and pay any resulting tax liability. Reduction of taxes flowing form partnership activity is of great importance. Planning to maximize taxes permeates nearly every real estate partnership, but such planning may be in gray areas in which the IRS and the partnership may disagree. One situation that routinely occurs is the decision on how much of the purchase price of a building is allocable to the land, the building itself, and its personal property components. This fact-dependent decision affects the depreciation deductions that can be claimed by the partnership and the tax liability of all partners, a determination with which the IRS may disagree.