Tax changes to Partnerships and Due Dates for 2016

A large number of important tax changes go into effect for partnerships this year, along with due dates for business tax returns.

Many were ushered in by the Protecting Americans from Tax Hikes (PATH) Act of 2015, although legislation enacted earlier in 2015 and in 2014 also contributed a fair share. Still other changes are the result of various administrative pronouncements by IRS.

This article reviews the important changes that apply to partnerships and those that apply to due dates for business returns. There are a number of other important business tax changes this year that I covered in a previous article (seeMajor Business Tax Changes for 2016).

Partnership ChangesThe recent legislation responsible for the lion's share of the changed rules for 2016 consists of the Protecting Americans from Tax Hikes (PATH) Act of 2015; the Fixing America's Surface Transportation (FAST) Act; the Bipartisan Budget Act of 2015; the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015; the Trade Preference Extension Act of 2015; and the Achieving a Better Life Experience Act of 2014 (ABLE Act), part of the Tax Increase Prevention Act of 2014

Taxpayers may elect new partnership rules: The Bipartisan Budget Act of 2015 repeals the TEFRA uniform partnership audit rules and similarly repeals the electing large partnerships rules. These rules are replaced with a streamlined single set of rules for auditing partnerships and their partners at the partnership level. Under the new streamlined audit approach, any adjustment to items of income, gain, loss, deduction or credit of a partnership for a partnership tax year (and any partner's distributive share of such adjustment) is determined at the partnership level. Similarly, any tax attributable to such an adjustment is assessed and collected, and the applicability of any penalty, addition to tax, or additional amount which relates to an adjustment to any such item or share is determined, at the partnership level.

The new rules generally apply to partnership tax years that begin after Dec. 31, 2017. However, except for certain small partnership election-out rules, partnerships may also elect (as directed by the IRS) for the changes to apply to any return of the partnership filed for partnership tax years beginning after Nov. 2, 2015 and before Jan. 1, 2018.

Family partnership rule clarified: A partnership generally is an unincorporated organization in which the parties (i.e., partners) have joined together to conduct an active trade or business. Under former Code Sec. 704(e)(1), a person can also be recognized as a partner if capital is a material income-producing factor, whether his partnership interest was obtained by purchase or by gift (the so-called "family partnership rule").

Some taxpayers have argued that this family partnership rule provides an alternative test for determining who is a partner without regard to how the term is generally defined in the partnership tax rules. Thus, they asserted that if a partner holds a capital interest in a partnership, the partnership must be respected regardless of whether the parties have demonstrated that they joined together to conduct an active trade or business.

For partnership tax years beginning after Dec. 31, 2015, the Bipartisan Budget Act of 2015 (1) amends the general definition of a partner to provide that, in the case of a capital interest in a partnership in which capital is a material income-producing factor, whether a person is a partner with respect to that interest is determined without regard to whether that interest was derived by gift from any other person (Code Sec. 761(b)) and (2) eliminates the pre-Act rule (at Code Sec. 704(e)) regarding the recognition of partners.

These changes clarify that family partnership rules were not intended to provide an alternative test for whether a person is a partner in a partnership. The determination of whether the owner of a capital interest is a partner is made under the generally applicable rules defining a partnership and a partner.

Due Dates for Business Returns
Revised due dates for partnership and C corporation returns: Domestic corporations (including S corporations) currently must file their returns by the 15th day of the third month after the end of their tax year. Thus, corporations using the calendar year must file their returns by March 15 of the following year. The partnership return is due on the 15th day of the fourth month after the end of the partnership's tax year. Thus, partnerships using a calendar year must file their returns by April 15 of the following year. Since the due date of the partnership return is the same as the due date for an individual tax return, individuals holding partnership interests often must file for an extension to file their returns because their Schedule K-1s may not arrive until the last minute.

Under the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015, in a major restructuring of entity return due dates, effective generally for returns for tax years beginning after Dec. 31, 2015 (i.e., for 2016 tax year returns filed in 2017):

• Partnerships and S corporations will have to file their returns by the 15th day of the third month after the end of the tax year. Thus, entities using a calendar year will have to file by Mar. 15 of the following year. In other words, the filing deadline for partnerships will be accelerated by one month; the filing deadline for S corporations stays the same.

• C corporations will have to file by the 15th day of the fourth month after the end of the tax year. Thus, C corporations using a calendar year will have to file by Apr. 15 of the following year. In other words, the filing deadline for C corporations will be deferred for one month. (Under a special rule, for C corporations with fiscal years ending on June 30, the rule change won't apply until tax years beginning after Dec. 31, 2025.)

Revised automatic extension rules for corporations: Under the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015, effective generally for returns for tax years beginning after Dec. 31, 2015, the three-month automatic extension of time for corporate returns in Code Sec. 6081(b) is changed to an automatic six-month extension (this change conforms the statutory rule with the six-month automatic extension for corporate returns in Reg. § 1.6081-3(a)).

However, for any return for a tax year of a C corporation which ends on Dec. 31 and which begins before Jan. 1, 2026, the automatic extension period is five months (not six months). And, for any return for a tax year of a C corporation which ends on June 30 and begins before Jan. 1, 2026, the automatic extension period is seven months (not six months).

Note that the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 also revised the extended due dates for various other returns.

Thanks to Thompson Reuter's Robert Trinz  for much of this research