The Protecting Americans from Tax Hikes Act (PATH Act), passed by Congress in December 2015, made important changes to tax law and regulations effective for tax years beginning on or after January 1, 2016. Other pieces of legislation impacting 2016 were the Bipartisan Budget Action of 2015, the Surface Transportation and Veteran’s Health Care Choice Improvement Act of 2015, and various IRS administrative announcements (passed throughout 2014 and 2015).
The second installment of our four part series will cover specific items of tax legislation for partnerships. The legislation and administrative actions that directly impact partnerships covered in this installment are the ability of taxpayers to elect new partnership audit rules, clarification of family partnership rules, and new dates for partnership returns.
Be sure to read Part III of our “What’s New for Taxes in 2016?” series for updates that pertain to businesses, including new due dates for business tax returns. Part I of our series focused on items affecting individuals, and Part IV will cover updates for retirement plans.
Electing New Partnership Rules
Under the Bipartisan Budget Act of 2015, the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) uniform partnership audit rules and the electing large partnership rules have been repealed. In their place is a streamlined set of rules for auditing partnerships and their partners at the partnership level, not the individual level.
This new approach means that any adjustments to income, losses, gains, deductions or credits of a partnership, and any partner’s share of those adjustments, will be determined at the partnership level. Consequently, any tax (and penalty) which results from such an adjustment is assessed and collected at the partnership level.
Generally, these new rules apply to partnership tax years that begin on or after January 1, 2018. With the exception of certain small partnerships (100 or less partners), which can elect to opt out of the new rules for any tax year, partnerships may elect for these changes to apply to any return of the partnership filed for partnership years on or after November 3, 2015 and before January 1, 2018.
Clarification of Family Partnership Rules
Partnership tax years beginning on or after January 1, 2016 have an amended general definition of a partner to clarify that when a capital interest in a partnership where the capital is a material income-producing factor, the determination as to whether a person is a partner with respect to that interest is made without regard to whether the interest was derived by a gift from any other person. The Bipartisan Budget Act of 2015 also eliminated the pre-Act rule regarding the recognition of partners.
The changes make clear that family partnership rules were not intended to provide an alternative test to determining who is a partner. The determination of whether the owner of a capital interest is a partner is made under the generally applicable rules classifying partnerships and partners.
New Due Dates for Partnership Returns
Previously, partnership returns were due the 15th day of the fourth month after the close of their tax year, thus those partnerships using a calendar year would have tax returns due on the same day as individual tax returns (April 15th). Partners were often forced to extend their personal returns because they would not have the K-1 from their partnership in time to file their individual returns.
Now, starting with tax years that begin on January 1, 2016, partnerships will be required to file their tax returns by the 15th day of the third month after the end of their tax year. This means that partnership returns will now be due on March 15th for calendar year filers.
Please see our article on new due dates in effect for 2016 and later tax returns for more information.
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