Why are partnership tax rules changing next year?

When the clock moves from 11:59 p.m. on Dec. 31, 2017 to 12:00 a.m. on Jan. 1, 2018, the tax rules will change for partnerships. In 1982, the Tax Equity and Fiscal Responsibility Act was passed and under those rules and regulations, taxes for partnerships have been defined and used ever since. But the rules are about to change in a big way next year.

Signed two years ago, the Bipartisan Budget Act of 2015 was ostensibly about avoiding a government shutdown and preventing the country from breaking the debt ceiling -- but it will also vastly change the way that partnerships deal with their taxes next year.

Under the TEFRA rules, any partnership had to treat all forms of income consistently on their partnership return, otherwise the IRS could charge them fees and penalties. Under the new rules outlined in the Bipartisan Budget Act, any net adjustments to a partnerships forms of income will be taxed at the highest individual or corporate tax bracket. There is also an opt-out option for these new rules pertaining to audits.

So why were these new rules put in to place? Since partnerships have been on the rise since 1982 and the tax code has only become more complicated since then, the IRS was unable to keep up with and maintain the necessary enforcement of audit rules for partnerships. Essentially this is a simplification of processes on the enforcement end -- but one that could cause confusion for partnerships in a year. We will continue our discussion on the BBA in the coming week.

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