Board Perspective Series
For decades, a bedrock principle of federal income taxation has been that partnerships are not subject to federal income tax on current income. Instead, a partnership’s current income flows through to its owners and those respective entities are taxed. Further, even if the IRS later audits a partnership’s tax return, the IRS typically cannot hold the partnership itself liable for the payment of any additional tax liability. On November 2, 2015, Congress enacted legislation that fundamentally changes this landscape.
With the enactment of the Bipartisan Budget Act of 2015, the IRS will be able to impose liability at the partnership level if it determines, after an audit, that tax was paid on too little income – unless the partnership is eligible to elect, and properly elects, to be subject to a different set of rules. As a result, an understatement of previous partnership income ultimately could burden the partnership’s assets and current owners.
For more on this new law and its impact on partnerships, read KPMG’s Board Perspective Series article, New Law Creates New Risks for Partnership Investments.
Administrative guidance will be issued in the coming years that will affect due diligence, risk management, creditor and investment relationships, and other significant issues associated with partnership investments. Directors of companies that own interests in or lend to partnerships may want to start thinking now about how to manage risks posed by the new law and should stay tuned for further developments.