New Partnership Audit Rules - 2019

New Partnership Audit Rules PROGRAM KNOWLEDGE LEVEL Basic ADVANCE PREPARATION No advance preparation is required of the course participant.

COURSE CREDIT 1 hour CPE Self - study COURSE DEVELOPMENT AND REVIEW Course material for this course was developed and updated by Edward L. Perkins, JD, LLM(Tax), CPA 1/27/2019 Reviewed by Martin Pezzner, JD, CPA 1/28/2019

New Partnership Audit Rules Created and Presented by

EDWARD L. PERKINS, BA, JD, LLM(Tax), CPA Partner - Gibson & Perkins, PC

Adjunct Professor Villanova University School of Law Graduate Tax Program Author AICPA’s – Taxation of Trusts and Estates Drafting Wills That Work in Pennsylvania AICPA’s – Fundamentals of Trusts PBI – Special Needs Trusts in Pennsylvania

Founder - YourOnlineProfessor.net

New Partnership Audit Rules Created and Presented by

MARTIN J. PEZZNER, BS, JD, CPA Gibson & Perkins, PC

mpezzner@gibperk.com 610.565.1708 ext. 112 Gibson & Perkins, PC is proud to welcome Martin J Pezzner to our experienced lineup of attorneys. He brings with him a wealth of experience as a practicing attorney for over twenty-nine years. After graduating Wilkes College with a Bachelor of Science in accounting, he was employed by the Internal Revenue Service in Philadelphia, PA as a Tax Revenue Agent (Field Agent) for five years. He also worked for one year in the Philadelphia IRS Appeals Office. While employed by the IRS, he became a CPA (1985) in the Commonwealth of Pennsylvania. Mr. Pezzner received his Juris Doctorate Degree from the University of Dayton School of Law in 1989.

Mr. Pezzner is admitted to practice in the Commonwealth of Pennsylvania and the Eastern District of Pennsylvania. Well-versed in all aspects of law, he is especially knowledgeable in the realms of Estate Administration, Estate Planning, Business Matters, and Tax Controversies.

He is a member of the Philadelphia Bar Association and the Probate and Trust Law Section of the Philadelphia Bar. He also maintains his CPA license.

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New Partnership Audit Rules PROGRAM KNOWLEDGE LEVEL Basic ADVANCE PREPARATION No advance preparation is required of the course participant.

COURSE CREDIT 1 hour CPE Self - study COURSE DEVELOPMENT AND REVIEW Course material for this course was developed and updated by Edward L. Perkins, JD, LLM(Tax), CPA 1/27/2019 Reviewed by Martin Pezzner, JD, CPA 1/28/2019

Overview

The so-called “TEFRA” partnership audit rules were enacted by the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA).

• Under those rules the partnership audit proceeding is conducted at the partnership level with a single extension of the statute of limitations binding all partners.

TEFRA Audit Rules

• The individual partners were required to report consistently with the partnership return.

• Any IRS adjustments are made at the partner level.

Overview of the BBA Rules › The Bipartisan Budget Act of 2015 (the “BBA”) made major changes to the partnership audit procedures (the “New Audit Rules”) › The BBA effectively replaced the three existing audit regimes applicable to partnerships (the TEFRA regime, the ELP regime and the small partnership regime outside of TEFRA) with two procedures 1 Audit at the partnership level under the BBA procedures, and 2 Audit at the partner level for partnerships that elect out of the BBA

Overview of the BBA Rules › The New Audit Rules apply to all partnerships

› However certain smaller partnerships are permitted to opt out › The New Audit Rules generally apply to returns for partnership tax years beginning after December 31, 2017

Early Opt-In • The New Audit Rules are generally effective for taxable years beginning on or after January 1, 2018.

• However, a partnership can elect to apply the new rules to a taxable year beginning before January 1, 2018, (an “early opt-in" election) if the partnership meets certain requirements and follows prescribed procedures.

• A partnership may elect to apply the new rules to any partnership return filed for a partnership tax year beginning after November 2, 2015, and before January 1, 2018.

Application of the New Audit Rules ▪

Otherwise the New Audit Rules apply to all partnerships.

▪

There is no exception from the New Audit Rules that is similar to the TEFRA exception for small partnerships with 10 or fewer partners.

▪

However, partnerships with 100 or fewer eligible partners may elect out of the New Audit Rules for each tax year.

In order to elect out, the partnership

If certain requirements are met, a partnership may also elect out of the BBA procedures altogether.

Election Out

▪

Must be an “eligible partnership,” which means that the partnership has 100 or fewer partners.

▪

Make the election with a timely-filed partnership return (including an amended return filed before the return due date);

▪

Notify each partner (not the shareholders of an S corporation partner) within 30 days after making the election.

▪

If a partnership elects out of the partnership audit rules, the IRS will make any partnership-level adjustments on each individual partner's return.

Election Out

â–Ş If a partnership elects out of the partnership audit rules, the IRS will make any partnershiplevel adjustments on each individual partner's return. â–Ş Due to the potential mismatching of adjustments and other complications under the BBA partnership audit rules, an eligible partnership should seriously consider electing out.

Interactive Exercise Which of the following is a correct statement? â–Ş This Interactive a test - but ratherwith is included A. The New AuditExercise Rules do is notnot apply to Partnerships less than 100 partners. to help you reinforce some of the important concepts B. The New Audit Rules cannot apply to any Partnership Return filed covered in the last section. before January 1, 2018. â–Ş Have fun and see if you can pick the correct answer on your C. The New Audit Rules effectively replaced the three existing audit firstregimes try applicable to partnerships (the TEFRA regime, the ELP regime and the small partnership regime outside of TEFRA) with two new procedures

Interactive Exercise Which of the following is a correct statement?

A. The New Audit Rules do not apply to Partnerships with less than 100 partners.

B. The New Audit Rules cannot apply to any Partnership Return filed before January 1, 2018.

C. The New Audit Rules effectively replaced the three existing audit regimes applicable to partnerships (the TEFRA regime, the ELP regime and the small partnership regime outside of TEFRA) with two new procedures

Interactive Exercise A is Incorrect – The New Audit Rules apply to all Partnerships, however Partnership with less than 100 partners may elect out.

Interactive Exercise B is Incorrect - The New Audit Rules generally apply to any Partnership Return filed after January 1, 2018; however a partnership can elect to apply the new rules to a taxable year beginning before January 1, 2018, (an “early opt-in" election) if the partnership meets certain requirements and follows prescribed procedures.

Interactive Exercise C is Correct – The New Audit Rules effectively replaced the three existing audit regimes applicable to partnerships (the TEFRA regime, the ELP regime and the small partnership regime outside of TEFRA) with two procedures – (1) audit at the partnership level under the BBA procedures, and (2) audit at the partner level for partnerships that elect out of the BBA.

Default Rule/Administrative Proceedings

Notice of Selection for Examination The New Audit Rules provide that the IRS will issue a written notice of selection for examination to the partnership if a partnership return for an “eligible taxable year” has been selected for examination.

▪

▪ ▪

The IRS must issue this notice before it issues any other notices.

This notice of selection provides a 30-day window within which the partnership is able to file an opt-in election to have the New Audit Rules apply to the partnership audit and/or an AAR.

Partnership Representative Conducts the Audit ▪

Under the New Audit Rules the “Partnership Representative” conducts the audit on behalf of the Partnership

▪

The “Partnership Representative” (“PR”) replaces the concept of the “Tax Matters Partner” (“TMP”)

▪

The role of the PR in a BBA partnership is expanded over the role of the TMP in a TEFRA partnership.

Partnership Representative Conducts the Audit ▪ All of the actions taken for a BBA partnership are taken by “the partnership.”

▪ The PR is the sole person authorized to act on behalf of the partnership.

▪ The acts of the PR bind all partners

Partnership Representative Conducts the Audit â–Ş

The corollary of giving the PR all of the rights in a BBA partnership proceeding is that all of the other partners lose their notification and participation rights.

â–Ş

The other partners do not receive notices concerning the important events in the proceeding.

â–Ş

The other partners do not have the opportunity to file a petition contesting the FPA if the PR fails to do so.

Partnership Representative Conducts the Audit

▪ The other partners do not have the opportunity to participate in the litigation concerning the FPA. ▪ The only apparent way for the other partners to retain a right to participate in the partnership proceeding is … …by internally restricting the rights of the PR through the partnership agreement or otherwise.

Items Subject to Audit

▪ The New Audit Rules partnership audit rules are distinctly broader than the pre-2018 TEFRA procedures which limited the audit scope to “partnership items” ▪ TEFRA “partnership items” were essentially the items the partnership should have determined and reported on the partnership return

Items Subject to Audit ▪ The term “partnership-related items” refers to any item or amount with respect to the partnership that is relevant in determining the income tax liability of any person, without regard to whether the item or amount appears on the partnership's return.

▪ And is intended to include partnership items, partner share of partnership liabilities, partner basis, computational items and imputed underpayments.

Partnership Related Items Reg. §301.6241-1(a)(6)(v)) lists the following items as examples of partnership-related items: ▪ The character, timing, source, and amount of the partnership's income, gain, loss, deductions, and credits; ▪ The character, timing, and source of the partnership's activities; ▪ The character, timing, source, value, and amount of any contributions to, and distributions from, the partnership; ▪ The partnership's basis in its assets, the character and type of the assets, and the value (or revaluation such as under Reg. §1.704-1(b)(2)(iv)(f) or Reg. §1.704-1(b)(2)(iv)(s)) of the assets; ▪ The amount and character of partnership liabilities and any changes to those liabilities from the preceding tax year; ▪ The category, timing, and amount of the partnership's creditable expenditures; ▪ Any item or amount resulting from a partnership termination; ▪ Any item or amount of the partnership resulting from an election under section 754; ▪ Partnership allocations and any special allocations; and ▪ The identity of a person as a partner in the partnership.

The BBA Streamlined Audit Approach ▪

Under the BBA's streamlined audit approach, the IRS audits partnership related items for a particular year of the partnership (the “reviewed year”).

▪

Any adjustments are made at the partnership level and are taken into account by the partnership in the year that the audit or any judicial review is completed (the “adjustment year”).

▪

The adjustment is calculated generally using the highest rate of federal income tax applicable either to individuals or to corporations that is in effect for the reviewed year

The New Audit Rule greatly simplify the administrative stages of the partnership proceeding. â–Ş

First, because there is no retroactive assessment of the partnership item flow-through amounts at the partner level, all of the computational adjustment and affected item procedures are eliminated.

â–Ş

Second, greater control over the administrative proceeding is given to the partnership representative.

â–Ş

The proceeding is therefore simplified by elimination of the rights that exist under the TEFRA procedures for other partners.

Partnership

The Default Rule ▪

The New Audit Rules rules are intended to be easier than TEFRA for the IRS to administer, especially for larger partnerships.

▪

Once assessed, the IRS may then collect the assessment by lien, levy or judicial enforcement as with any assessment, and deficiency procedures do not apply

▪

The partnership payment is not deductible

▪

The payments decrease the partner’s outside basis

The Determination of the “Imputed Underpayment ” The “imputed underpayment” is generally computed by following five steps: (1)

Grouping the partnership adjustments;

(2)

Netting the partnership adjustments;

(3)

Calculating the total netted partnership adjustment;

(4)

Multiplying the total netting partnership adjustment by the highest rate of Federal income tax in effect for the reviewed year; and

(5)

Increasing or decreasing the resulting product by certain net positive adjustments and certain net negative adjustments.

The Determination of the “Imputed Underpayment” ▪ The “reviewed year” is defined as the partnership taxable year to which the item being adjusted relates – the year under audit.

▪ The default mechanism under the New Audit Rules is to assess the “imputed underpayment” against the partnership in the “adjustment year.”

The Determination of the “Imputed Underpayment” • The “adjustment year” is defined as the partnership taxable year in which: • The decision of a court in a proceeding brought under §6234 becomes final; • An administrative request under §6227 is made; or • Notice of the final partnership adjustment (FPA) is mailed.

The Notice of Proposed Adjustment (NOPPA) • At the end of the audit the PR will be notified of the proposed imputed underpayment to be assessed against the partnership by the NOPPA • The PR is then afforded the opportunity to submit information to correct or modify the imputed underpayment computation.

• The NOPPA is the equivalent of the TEFRA 60day letter, which was not statutorily required.

• The NOPPA is required by §6231(a)(2).

Notice of Final Partnership Adjustment (FPA) • The FPA represents the notification of the final partnership adjustment.

• There are two important deadlines after the FPA is issued.

• First, within 45 days after the FPA, the PR can make the “push-out election” pursuant to §6226 – discussed in the subsequent material.

•

This replaces the assessment of the imputed underpayment against the partnership with an assessment of the tax based on the partnership adjustments against the reviewed year partners in the reporting year.

•

This election has a shorter deadline than the 90-day deadline to file a judicial proceeding contesting the FPA.

• The second important deadline is the deadline to file a petition to contest the FPA in court. The petition must be filed within 90 days of the FPA

How Does a Partnership Request Judicial Review?

▪

Only the partnership representative may file a petition to contest the adjustments in the FPA on behalf of the partnership.

▪

The petition for judicial review of the FPA can be filed in the Tax Court without any form of payment or in the federal district court for the partnership's principal place of business or the Court of Federal Claims if a deposit is made in the amount of the imputed underpayment as of the date of the petition.

▪

Once a petition contesting the FPA has been filed, that court acquires jurisdiction over all partnership-related items, and the applicability of any penalty, addition to tax or additional amount for which the partnership may be liable in the year specified in the FPA.

Consistency Requirement • Each partner is required to treat each partnership-related item on the partner's return in a manner that is consistent with the way in which the partnership treated that item on its return. • The primary consequence of inconsistent treatment by the partner is that the IRS is authorized to assess any tax resulting from the inconsistency without implementing the BBA procedures or any deficiency procedures.

Interactive Exercise Which of the following is a correct statement in regard to the “default rule� under the New Audit Rules: A. The default rule is that the partnership must pay for any adjustments.

B. The default rule is that the adjustments are passed through and paid for by the partners.

C. The default rule is that the personal representative is responsible to pay any adjustments.

Interactive Exercise A is Correct – The New Audit Rules contemplate the assessment and collection of an “imputed underpayment" against the partnership. The default rule is that the partnership must pay for any adjustments.

Interactive Exercise B is Incorrect - The default rule is that the partnership must pay for any adjustments, however as will be discussed in the following material there are options which allow the partnership to modify this liability by having the partners assume responsibility to pay all or part of the adjustments

Interactive Exercise C is Incorrect – The personal representative is the sole person authorized to act on behalf of the partnership, and the acts of the personal representative all partners, but the personal representative is not responsible to pay any adjustments.

Modification Options

What Are Some Significant Considerations for the Partnership Under the New Audit Rules?

When a partnership is selected for audit and the IRS determines there is an imputed underpayment for a reviewed year, a decision will need to be made whether: â–Ş The partnership will pay for any adjustment; or â–Ş Will the partnership select an option which allows the partnership to modify the partnership liability

Modification Request

Modification of the partnership liability is generally based on an alternative to the default rule which passes the tax liability associated with the imputed underpayment in whole or in part to the partners

Modification Request

Modification can be based on one of the following: • Partners filing amended returns • The “pull in procedure” • The “push out procedure”

Modification Request ▪

The PR can submit information to request to modified the imputed underpayment liability of the partnership

▪

The request for modification must: ▪

Be filed within 270 days after the date of the NOPPA (except as extended in writing by the PR and the IRS);

▪

Contain all information requested by the IRS, including a description of the proposed modification, the allocation to the partners, any ownership changes, and information concerning the pass-through and indirect partners (if applicable); and

▪

Provide substantiation of all information needed to support the specific basis of the modification request.

Partners Filing Amended Returns • The first modification applies to the extent that reviewed year partners file amended returns for the reviewed year and pay the corresponding tax due.

Partners Filing Amended Returns • If the IRS “imputes” an adjustment at the partnership level • This adjustment amount can be reduced if reviewed year partners file amended reviewed year returns for any portion of the adjustment items allocated to their distributive share.

Partners Filing Amended Returns • The taxes paid by the reviewed year partners can reduce the imputed adjustment amount at the partnership level. • This may be beneficial if the reviewed year partners have a lower marginal tax rate than the highest marginal federal income tax rate applicable to individuals or corporations in effect during the reviewed year.

Partners Filing Amended Returns • In order to qualify for amended return modification of an imputed underpayment, all of the following requirements must be met: • The partner must file an amended return for all affected tax years

• The partner filing the amended return must pay all tax, penalties, additions to tax and interest due as a result of taking into account the adjustments in the first affected year and all modification years; • If the amended return involves reallocation adjustments, all affected parties must file corresponding amended returns (or sign a closing agreement).

Pull-In Procedure Instead of filing amended returns, partners may apply a “pull-in procedure” Under this procedure:

▪

The individual partners agree to take account of the adjustments to tax attributes,

▪

Pay the tax that would have been be due with an amended return, and

▪

Provide, in the format required by the IRS, any information that may be required by the IRS to substantiate that the amount of tax was properly calculated

To the extent the reviewed year partners participate, then the partnership will have fewer imputed adjustment payments to make at the partnership level.

▪ The “pull in procedure” allows the partnership to reduce its responsibility for the partnership's imputed underpayment by transferring the tax liability to the partnership's reviewed year partners without requiring the partners to file an amended return ▪ This procedure may reduce the incentive of the partnership from electing out of the New Audit procedures.

Pull-In Procedure

Pull-In Procedure â–Ş

The agreement regarding tax attributes is binding for the partner's tax year that includes the reviewed year and any tax years for which the attribute is affected by the adjustment.

â–Ş

Failure to abide by the agreement is treated in as a failure to report consistently with the partnership.

â–Ş

Neither the statute of limitations on assessment nor the limitations period on refunds and credits apply with respect to the payment of tax under this procedure

Pull-In Procedure â–Ş Not all reviewed year partners need to participate in the pull-in procedure, but for those who do, there is no filing of amending returns. â–Ş Although no amending returns are filed, the pull-in procedure would have the same corollary effects on tax attributes in other taxable years. â–Ş The IRS will provide the form and manner for the reviewed-year partners to participate.

Push Out Election

third option the push-out election “reviewed year”

Push Out Election ▪ The election is made on a year-by-year basis as tax years are reviewed by the IRS. ▪ This may be beneficial if the reviewed year partners have a lower marginal tax rate than the highest marginal federal income tax rate applicable to individuals or corporations in effect during the reviewed year.

▪ A push-out election allows partners to take into account both items that increase or decrease their tax liability.

▪ On the other hand, the partner assessment approach could increase the total amount of taxes paid to be in excess of the amount of the partnership's imputed adjustment.

Push Out Election Timing of Election.

Information Required.

Interactive Exercise Which of the following is a correct statement in regard to the “pull in procedure”?

A. Under the pull in procedure all reviewed year partners need to participate.

B. Under the pull in procedure the partners are not required to file amended tax returns.

C. Whether an individual partner participates in the “pull in procedure” is determined at the partnership level.

Interactive Exercise A is Incorrect – Not all reviewed year partners need to participate in the pull-in procedure.

Interactive Exercise B is Correct -Although no amending returns are filed, the pull-in procedure would have the same corollary effects on tax attributes in other taxable years.

Interactive Exercise C is Incorrect – Whether an individual partner participates in the “pull in procedure” is determined by each individual partner, not by the partnership.

Special Issues

May an Administrative Adjustment Request be Made Instead of Waiting for an IRS Audit?

▪ Rather than wait for an audit, the partnership can make an administrative adjustment request (AAR).

▪ Once the adjustment is made by the IRS, the partnership may apply most of the procedures for modification under a partnership audit in a manner similar to modification of an imputed underpayment.

▪ An AAR filed under the BBA may not be filed earlier than January 1, 2018.

What Are the Statute of Limitations Under the BBA Partnership Audit Rules?

▪

Under the New Audit Rules statute of limitations issues are simplified.

▪

Since the New Audit Rules eliminate retroactive partner-level assessments, the statute of limitations rules under the BBA procedures are simpler than under TEFRA.

▪

If no election is made to opt out of the BBA partnership procedures and a push-out election is not made, the ultimate assessment of tax in a BBA proceeding is made against the partnership.

What Are the Statute of Limitations Under the BBA Partnership Audit Rules?

▪ The general statute of limitations requires that the assessment of tax attributable to a partnership adjustment be made within three years after the latest of: — The date the partnership tax return was filed; — The due date for the partnership tax return; or — The date an administrative adjustment request (AAR) is filed.

The Partnership Representative ▪

The Tax Matters Partner (TMP) concept is replaced with a “partnership representative.”

▪

The partnership representative is given more powers than the TMP, i.e., the partnership representative is the only person who may act on behalf of the partnership regarding an IRS audit.

▪

Other partners have no statutory rights to participate in any examination by the IRS of the partnership, and the partnership and all its partners are bound by actions taken by the partnership representative.

▪

Neither the partnership agreement nor state law can restrict the power of the partnership representative.

▪

The eligibility rules for a partnership representative are much simpler than those for the TMP.

The Partnership Representative ▪

The partnership representative does not need to be a partner of the partnership and does not need to have an economic interest in the outcome of an examination.

▪

In addition, the partnership representative is not subject to termination for events such as bankruptcy or criminal investigation.

▪

A partnership must designate a single partnership representative (PR) for each partnership tax year.

▪

The designation remains in effect until it is terminated by (1) resignation of the partnership representative, (2) revocation by the partnership, or (3) the IRS determines the designation is not in effect.

The Impact on the Partnership’s Agreements ▪

Partnership agreements will need to be revisited and amended in light of the BBA partnership audit rules, and the 2018 CAA, technical corrections.

▪

If eligible (100 or fewer partners), consideration should be given to electing out of the BBA partnership audit rules on a timely filed return.

▪

Tax-exempt investors and lenders may pressure the partnership to elect out of the BBA partnership audit rules to protect their economic interests.

The Impact on the Partnership’s Agreements Although the authority of the partnership representative is defined by statute and may not be restricted by the partnership agreement or state law, the partnership agreement should define the contractual relationship between the partnership representative and the partnership, including: ▪

the extent to which the partnership representative must obtain approval from the managing partners to make various elections or take other actions that bind the partnership;

▪

the partnership representative's fiduciary responsibilities to the partnership; and

▪

under what circumstances the partnership representative will be indemnified for challenges related to performance of its duties.

The Impact on the Partnership’s Financial Statement ▪

The AICPA has released non-authoritative guidance taking the position that any imputed adjustments assessed against the partnership is really an administrative convenience on the part of the government to collect the underpayment of income taxes from the partners.

▪

The income taxes due should continue to be attributable to the partners, and the partnership would not apply

▪

When considering purchasing a partnership or just a partnership interest, the acquiring party should apply due diligence to understand the partners’ tax responsibilities in the partnership, and whether uncertain tax positions could result in the IRS imputing adjustments against the partnership.

The Impact on the Partnership’s Financial Statement

▪ Has or will the partnership elect out of the BBA partnership audit rules?

▪ Will the partnership make the push-out election under §6226 ?

▪ Historically, the partner bore the economic burden of any IRS proposed adjustment, …

….but under the BBA partnership audit rules, the economic burden of that adjustment can be shifted, such that a partner may end up bearing more of the economic burden of the IRS imputed adjustment than the partner would have borne if that partner had been personally assessed.

What’s New on Form 1065

WHAT’S NEW ON FORM 1065 The following material will provide an overview of what is new on the Form 1065 for 2018

Address change for filing returns

The filing address for partnerships located in certain states has changed.

See Where To File, in the Instructions to Form 1065.

On page 1, in Item G, the check box for technical terminations has been removed because technical terminations don't apply for partnership tax years beginning after 2017.

Technical Terminations

Tax, payments, and refunds The following payments can now be made with Form 1065, and refunds of overpayments can be claimed using the new Tax and Payment section on page 1 of the form 1065.

▪

Interest due under the look-back method for the completed contract method and the income forecast method

▪

Bipartisan Budget Act of 2015 (BBA) Administrative Adjustment Request (AAR) imputed underpayment

▪

Other taxes

▪

Refunds of overpayments

▪

Modification payment made under section 6225(c)(2)

Changes to Schedule B questions

The questions relating to the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) have been removed from Schedule B because TEFRA has been repealed and replaced by BBA.

Changes to Schedule B questions Question 21

New question 21 asks if the partnership is a section 721(c) partnership defined in Regulations section 1.721(c)-1T(b)(14).

Question 22 New question 22 is added for section 267A that provides that a deduction for certain interest or royalties paid or accrued to a related party pursuant to a hybrid transaction, or by or to a hybrid entity, may be disallowed to the extent the related party doesn't include the amount in income or is allowed a deduction with respect to the amount. See section 267A for more information.

Changes to Schedule B questions Questions 23 and 24 New question 23 and question 24 are added for section 163(j).

For tax years beginning in 2018, every taxpayer who deducts business interest is required to file Form 8990, Limitation on Business Interest Expense Under Section 163(j), unless an exception for filing is met.

For more information, see Form 8990 and its instructions.

Changes to Schedule B questions Question 25

New question 25 is added for the centralized partnership audit regime elect out provision under section 6221(b).

Question 26 New question 26 is added for the qualified opportunity fund. See Form 8996 and its related instructions for more information.

Designation of partnership representative On page 3, the tax matters partner signature block has been replaced with the designation of partnership representative (PR), and includes the identity of the designated individual for the PR if the PR is an entity.

Changes to Schedule B questions Changes to Schedule K â–Ş New line 6c is added for dividend equivalents.

â–Ş Changes have been made to the codes for lines 11, 13, 16, and 20.

Changes to Schedule B questions Qualified business income deduction

For tax years beginning after 2017, individuals, estates, and trusts may be entitled to a deduction of up to 20% of their qualified business income from a trade or business, including income from a pass-through entity (but not from a C corporation), plus 20% of qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership (PTP) income.

The deduction is subject to multiple limitations such as the type of trade or business, the taxpayer's taxable income, the amount of W-2 wages paid with respect to the trade or business, and the unadjusted basis immediately after acquisition of qualified property held by the trade or business.

The deduction can be taken in addition to the standard or itemized deductions.

For more information, see section 199A and Pub. 535, Business Expenses.

Changes to Schedule B questions Small business taxpayers Effective for tax years beginning after 2017, the eligibility of small business taxpayers to use the cash method has been expanded.

Treatment of deferred foreign income upon transition to participation exemption system of taxation U.S. shareholders of specified foreign corporations, as defined in new section 965(e), may have an inclusion based on post-1986 deferred foreign income of such corporations determined as of November 2, 2017, or December 31, 2017.

The U.S. shareholders may elect to pay the liability under section 965 on the post-1986 deferred foreign income in eight installments. See section 965.

Changes to Schedule B questions Inclusion of Global Intangible Low-Taxed Income (GILTI) New section 951A requires U.S. shareholders of controlled foreign corporations to determine and include their GILTI in taxable income every year.

Section 951A is effective for tax years of foreign corporations beginning after 2017, and for tax years of U.S. shareholders in which or with which such tax years of foreign corporation’s end.

See section 951A for more information.

Foreign-Derived Intangible Income (FDII) New section 250 allows a domestic corporation a deduction for the eligible percentage of FDII and GILTI. Section 250 is effective for tax years beginning after 2017.

If applicable, the partnership must provide the necessary information to each domestic corporate partner for its calculation of FDII benefit.

Domestic production activities deduction (DPAD)

â–Ş The DPAD has been repealed for tax years beginning after 2017, with limited exceptions. See Form 8903 and its instructions for details.

Changes to Schedule B questions

Changes to Schedule B questions â–Ş Treatment of gain or loss from sale or exchange of partnership interchange of interests in partnerships engaged in U.S. trade or business â–Ş New section 864(c)(8) provides that gain or loss from the sale, exchange, or other disposition of a partnership interest by a nonresident alien or foreign corporation is generally effectively connected with the conduct of a trade or business in in the United States to the extent that the person would have had effectively connected gain or loss had the partnership sold all of its assets at fair market value. â–Ş See the instructions for Schedule K, line 20, code AH for a new reporting requirement.

Changes to Schedule B questions Special rules for eligible gains invested in Qualified Opportunity Funds ▪ Effective December 22, 2017, section 1400Z-2 provides partners investing eligible gains in Qualified Opportunity Funds (QOF) tax-favored investments.

▪ If the partnership is operating as a QOF, see Other Forms, Returns, and Statements That May be Required, later.

▪ For additional information please see Opportunity Zones Frequently Asked Questions on IRS.gov.

Changes to Schedule B questions Three-year holding period requirement for applicable partnership interests ▪ New section 1061 increases the required longterm capital gains holding period for an applicable partnership interest from more than 1 year to more than 3 years.

▪ The new holding period applies only to applicable partnership interests held in connection with the performance of services as defined in section 1061.

▪ See section 1061 and Pub. 541 for details.

Changes to Schedule B questions Credit for paid family and medical leave ▪ Eligible employers may qualify for a credit for wages paid in tax years beginning after 2017 to qualifying employees on family and medical leave.

▪ See section 45S. Also see Form 8994 and its instructions.

▪ At the time these instructions went to print, several credits and deductions available to partnerships expired December 31, 2017.

▪ To find out if legislation extended the credits and deductions and made them available for 2018, go to IRS.gov/Extenders.

Changes to Schedule B questions Negative Capital Accounts ▪ The new instructions for Form 1065 include an under-theradar requirement to disclose a negative capital balance, which is essentially the money partners would receive if the partnership was liquidated, if it's not already on the partner's K-1 form.

▪ The requirement could draw closer Internal Revenue Service scrutiny of a tax-planning scheme some partners may not be aware is still on the books.

▪ If partnerships miss the requirement—which is on page 30 of a 55-page document, they could face penalties of $195 per partner, per month for up to a year.

▪ That would add up quickly for large firms with hundreds of partners.

Bipartisan Budget Act New Audit Rules ▪ As discussed in the prior material the Bipartisan Budget Act of 2015 (BBA) created a new centralized partnership audit regime effective for partnership tax years beginning after 2017.

▪ A partnership can elect out of the centralized partnership audit regime for a tax year if the partnership is an eligible partnership that year.

▪ A partnership is an eligible partnership in the tax year if it has 100 or fewer eligible partners.

▪ Eligible partners are individuals, C corporations, S corporations, foreign entities that would be C corporations if they were domestic entities, and estates of deceased partners.

Bipartisan Budget Act New Audit Rules ▪ An election under must be made on the eligible partnership’s timely filed return, including extensions, for the taxable year to which the election applies and include all information required by the Internal Revenue Service (IRS) in forms, instructions, or other guidance.

▪

The Election is made by Filing Schedule B-2

▪

Schedule B-2 must be attached to a timely filed (including extensions) Form 1065 for every tax year the partnership is electing out of the centralized partnership audit regime.

The End The End

COURSE EVALUATION Thank you for attending our program.

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Quizzer 1.

True or False – Under the New Audit Rules the role of the partnership representative is expanded over the role of the TMP in a TEFRA partnership.

2.

True of False - However, partnerships with 100 or fewer eligible partners may elect out of the New Audit Rules for each tax year.

3.

Under the New Audit Rules which of the following is an not an option to modify the liability of the partnership to pay audit adjustments:

4.

5.

a.

The pull in procedure

b.

The push out election

c.

Amending the partnership tax return

Under the New Audit Rules which of the following is a correct statement: a.

Partnerships may elect to have the New Audit Rules to apply to returns filed after November 2, 2015.

b.

The New Audit Rules apply to all partnership returns filed after January 1, 2017

c.

The partnership representative must be a partner of the partnership.

In calculating the “imputed underpayment” which of the following tax rates for the reviewed year is used:

a.

The highest corporate tax rate

b.

The highest individual tax rate

c.

The highest rate of federal income tax