As a result of changes made by the Tax Reform Act of 2017, business owners should review their governing documents. The new rules became effective for tax years beginning after December 31, 2017.

The changes apply to any general partnership, limited partnership, limited liability partnership or limited liability company taxed as a partnership. LLCs with only one owner and those that have elected to be taxed as a corporation are not affected.

Tax Reform May Change Tax Liability for Partnerships

Under the rules prior to the Act, the tax on the income of a partnership was paid by the partners and the partnership had no liability.

With the changes, the partnership is responsible for tax liability adjustments made as a result of an audit and the resulting liability.

If the members in an LLC or partners in a partnership remain the same, there is minimal concern. But if the ownership changes, the partnership may become liable for a departed partner/member’s tax liability. Issues could also arise when partner percentages have changed.

Remedies to Address Tax Reform Impact

Partnerships with only individuals, estates or corporations as partners can elect out of these new rules.

If a partner is a trust, partnership or LLC, such election is not permitted.
In a situation where a partnership is not eligible to elect out of the rules, the partnership can still make an election for the tax liability from an audit to be the responsibility of the partners, instead of the partnership. Such elections would likely be made by an amendment to the partnership agreement or operating agreement.

The agreement would also need to provide for a tax representative who has the authority to make such elections to the IRS. This representative would have more authority than the tax matters partner provided for in current law.

Expert Counsel to Understand Tax Reform Effects

The Act also introduced several other changes.

As a result, partners and LLC members should consult with their lawyers and accountants to understand the effects of the law on their business documents and whether or not amendments are needed.

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Shawna L. L’Italien is a business lawyer with Harrington, Hoppe & Mitchell, Ltd. She can be reached at slitalien@hhmlaw.com or at (330) 337-6586.