A combination of legislative decisions, including the recent PATH Act of 2015 and pronouncements by IRS, have changed the rules that apply to business partnerships and have ushered in new due dates for business returns. If you’re doing business as a C or S corp, take note. The new rules may warrant a current review of partnership agreements.
Partnership Changes
Rules
Remember that the Bipartisan Budget Act of 2015 repeals the TEFRA uniform partnership audit rules and electing partnership rules, replacing them with a new and streamlined set of rules for auditing partnerships and their partners at the partnership level. Under this new approach, any adjustment in terms of income, gain, loss, deduction, or credit of a partnership for a partnership year (and any partner's distributive share of such adjustment) is determined at the partnership level. Similarly, any tax attributable to such an adjustment is assessed and collected, and the applicability of any penalty, addition to tax, or additional amount which relates to an adjustment to any such item or share is determined, at the partnership level.
These new rules apply to partnership tax years that begin after Dec. 31, 2017. However, in most cases, partnerships may also elect for the changes to apply to any return of the partnership filed for partnership tax years beginning after Nov. 2, 2015 and before Jan. 1, 2018. Talk with your tax advisor about that election.
Family Partnership Definition Change
The Bipartisan Budget Act of 2015 removes the rule concerning gifted partnership interests and adds a general definition of “partner”. For partnership tax years beginning on or after January 1, 2016, in the case of capital interest in a partnership in which capital is a material income-producing factor, a person is a partner whether his or her interest was derived by gift from any other person (Code Sec. 761(b)). The pre-Act rule regarding the recognition of partners has been eliminated.
This new definition appears to be aimed at cutting off aggressive reporting and litigating positions taken by some taxpayers who claimed that, under previous rules, IRS and the courts had no ability to employ traditional doctrines, such as substance over form, economic substance, and debt/equity principles, to determine whether a person was a genuine partner possessing an equity interest in the partnership. The definition of “partner” is now much clearer.
Due Dates for Business Returns
Revised due dates for partnership and C corporation returns
Under the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015, entity return due dates were majorly restructured, affecting returns for tax years beginning after Dec. 31, 2015 (i.e., for 2016 tax year returns filed in 2017):
- Partnerships and S corporations will have to file their returns by the 15th day of the third month after the end of the tax year. Thus, entities using a calendar year will have to file by Mar. 15 of the following year. In other words, the filing deadline for partnerships will be accelerated by one month; the filing deadline for S corporations stays the same.
- C corporations will have to file by the 15th day of the fourth month after the end of the tax year. Thus, C corporations using a calendar year will have to file by Apr. 15 of the following year. In other words, the filing deadline for C corporations will be deferred for one month. Under a special rule, for C corporations with fiscal years ending on June 30, the rule change won't apply until tax years beginning after Dec. 31, 2025.
Revised automatic extension rules for corporations
Under the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015, for returns for tax years beginning after Dec. 31, 2015, the three-month automatic extension of time for corporate returns is changed to an automatic six-month extension. However, for any return for a tax year of a C corporation which ends on Dec. 31 and which begins before Jan. 1, 2026, the automatic extension period is five months. And, for any return for a tax year of a C corporation which ends on June 30 and begins before Jan. 1, 2026, the automatic extension period is seven months.
The changes mentioned here are significant and directly affect your business. Depending on your situation, a review of your current business structure may be warranted.
