Attention Members of LLCs Taxed as Partnerships – a New Tax Rule Could Apply Entity-Level Partnership Tax

August 23, 2016 by

The Effect of a New Tax Rule on LLCs Taxed as Partnerships:

If your LLC has two or more members and is taxed as a partnership, read on. If you do not want to pay tax for a tax year you were not a member of the LLC that is taxed as a partnership, pay attention to this blog post. A new law, called the Bipartisan Budget Act of 2015, includes a big change applicable to LLCs taxed as partnerships. The change imposes liability for an adjustment resulting from an IRS audit of an LLC taxed under the partnership federal tax law.

Why is this a big deal?

The current tax law, if an IRS audit results in increased taxes, imposes the liability for the payment of the additional tax on the persons who were LLC members during the tax year that was the subject of the IRS audit. The new rule requires the additional tax that results from the IRS audit to be collected, including interest and penalties, from the LLC, not from the members of the LLC during the year audited.

There is a “Fix”

Under the new law, an LLC (or partners in a partnership) with no more than one hundred members may opt out of the new rule. If so, the LLC and its members for the year audited will bear the impact of the audit and pay the tax due resulting from the IRS audit. To opt out, each member of the LLC taxed as a partnership must be an individual, a C-corporation, an S-corporation, or the estate of a deceased member. The new rule applies to returns filed after December 31, 2017, so you have time to follow up by opting out from the application of this new tax rule.

LLCs taxed as partnerships may apply the new rule to its tax returns filed for a taxable year that starts after November 2, 2015, and before January 1, 2018. After an election is made, it can only be revoked with the consent of the IRS. An LLC taxed like a partnership cannot obtain an extension of time to make its election. However, the LLC taxed like a partnership can wait to make its election until the LLC is notified of an audit. To do so, the election must be made within thirty days from the date of the notice of the audit. Stay tuned for the IRS to give us guidance about how this new tax rule will be implemented.

Multi-member LLCs require planning that includes an operating agreement that considers the current tax rules and the new rules we know of, even if those rules will not be effective until after the LLC is established.

For more information, check out our latest Client Alert and to arrange an appointment to talk with one of our attorneys about how to plan your LLC, please call Stross Law Firm, P.A. at 813-852-6500 for a free initial consultation.