Tax Changes for California LLCs to Consider in 2017

The Bipartisan Budget Act of 2015 includes some changes that may affect LLCs taxed as a partnership, and their members, beginning January 1, 2018. Existing LLC managers and members should take a few minutes to consider the impact on their company.

Key changes include: a) any adjustments resulting from an IRS audit will be made at the entity level rather than being passed through to members unless the LLC makes a push-out election; and b) the tax matters partner is being eliminated and replaced by a partnership representative, whose decisions are binding on the LLC and its members.

An LLC with 100 or fewer members and whose members do not include any partnerships, other LLCs, or trusts may elect out of the new rules each year on its return. It must notify all members, and must also provide the IRS with a list of all members and their tax identification numbers, including the shareholders of any S corporation that is a member (each S corporation shareholder counts toward the 100 member limit).

Practically speaking, LLCs should consult with their tax advisor regarding the LLC's eligibilty for, and the advisability of electing out. If electing out is appropriate, it is probably a good idea to establish some mechanism prohibiting a transfer of interest that would make the LLC ineligible in the future, such as one that would increase the number of counted members over 100, or would include a trust, for example.

In the event that the LLC can't or doesn't want to elect out, the LLC should decide in advance whether it will make the election to push out any adjustments (resulting from an audit) to members, whether the burden of any such adjustments should be borne by persons who were members in the year audited instead of the year the adjustment was made, and if not pushed-out, how the LLC payment will be funded.

The LLC should also consider the impact of the partnership representative's power to bind the LLC, including a discussion of indemnification of the partnership representative, and whether any other members should be permitted to participate in any negotiations with the IRS along with the partnership representative.