Future changes to partnership audit rules will impact estate planning. Typically, one would not assume these changes would impact estate planning but they do, considering many estates have LLCs taxed as partnerships to obtain valuation discounts. Entities taxed as partnerships will need to update their operating agreements so they:
- reflect the new rules,
- appoint a partnership representative and define their authority, and
- determine whether to elect out of the unified audit rules.
Effective January 1, 2018 both existing and new partnerships will be subject to new partnership audit rules. The new rules allow for partnership level determination of deficiencies if the partnership is audited as the default regime. There are several potential problems to consider:
- Current partners could be liable for past deficiencies if there were different partners during the year under audit.
- Allocation issues may arise since the IRS will not undo errors; rather, they will assess the net increase against the partnership.
- The deficiency will be assessed at the highest tax rate.
In addition, under the new rule, the tax matters partner (the partner that represents the partnership before the IRS in all tax matters) no longer exists. Under the new rule, the partnership representative does not even need to be a partner. A potential problem to consider:
- Electing a representative should be a high priority as the IRS can select one if one is not appointed.
These potential problems may motivate partnerships to opt out, keeping determinations at the partner level. If so, the question will be whether trustees that own partnership interests on behalf of trusts will have the capability to opt out. Under the new audit rules, opting out is allowed only if:
- there are less than 100 K-1s and
- the partner of the pass-through entity reveals the identity of its members. This is so that the master partnership can confirm that the pass-through entity has 100 or fewer direct and indirect partners who are US individuals, C corporations or foreign entities that would be treated as C corporations if they were US entities.
At this time, it is uncertain whether partnerships that have trusts as owners will be able to opt out as the new code section does not address trusts or trustees.
Entities taxed as partnerships should ensure compliance by including portions of the new code in partnership and operating agreements. This will be especially important should a scenario arise where the partners do not return to amend the agreements.
Regarding existing partnerships, waiting to make modifications is best as the IRS will likely issue more regulations. For now, remain cautious regarding trusts as owners since it is uncertain whether they can opt out.
The professionals in our office can answer any questions you may have about the new audit rules. Call us today.
Penalty Eliminated for Employer Health Insurance Reimbursements
Last year, the IRS began enforcing a penalty on employers who reimburse employees for the cost of health insurance premiums. The fine was up to $100 per day ($36,500 per year), per employee. On Wednesday, December 7th, legislation was passed eliminating that penalty. Employers can now reimburse employees for the cost of health insurance premiums without being penalized.
In order to qualify, small employers must set up a stand-alone health reimbursement arrangement.
Small Employers Able to Use Stand-Alone Health Reimbursement Arrangements
The legislation passed on December 7th allows employers to fund employee HRAs to pay for qualifying out-of-packet medical expenses and health insurance premiums (including plans purchased from the exchange). Reimbursements to the employee for medical expenses are tax-free only if the employee is enrolled in other health coverage that is minimum essential coverage. Employees that are covered by an HRA will not be eligible for subsidies for health insurance purchased on the exchange. The act takes effect for plan years beginning after December 31, 2016. To qualify for the funding of HRAs, the employer must have fewer than 50 full-time employees (or equivalents) and they must not sponsor a group health plan. The following are a list of additional requirements for the HRA’s:
- The HRA’s must be funded solely by employer contributions
- Must provide payment or reimbursement for medical care expenses or health insurance premiums. Employees must provide documentation/receipts for medical expenses or health insurance premiums paid.
- The maximum reimbursement for health expenses through HRAs is $4,950 for single coverage and $10,000 for family coverage
- If an employer chooses to offer HRA’s, they must be offered to all full-time employees, unless one of the following applies:
- The employee has not yet completed 90 days of service
- The employee is under 25 years old
- The employee is covered by a collective bargaining agreement for accident/health benefits
- The employee is a part-time or seasonal worker
- An employer must make the same HRA contributions for all eligible employees, however the following items may cause the amount to vary:
- Price of the insurance policy
- Age of the employee/eligible family members
- Number of family members covered
The professionals in our office can answer any questions you may have about the new legislation. Call us today.
Succession planning has fallen off the radar for many companies in the current competitive landscape where there is a steady demand driven by a demographic shift and healthy economy. Firms are concentrating their efforts on growing their businesses. Many business owners do not start their succession planning until the owners are ready to retire. By this time, it is too late to design and implement a plan to accomplish all of their goals in their retirement timeframe. Furthermore, depending on how you plan on transferring your company, there are a number of preliminary steps that you should take to ensure that your succession plan is executed as you would like it to be. This is especially true if you plan to transfer your company internally to existing or future employees. Below are four key considerations owners should be addressing when considering an internal succession plan.
- Determine whether you need to look externally to strengthen your management team
Begin the succession process early. It will provide you with enough time to identify and groom the right candidate. Begin by identifying whether you have employees who have the skills or the potential to acquire the skills necessary to take over the company. Assess not only their technical skills, but also their leadership potential. This will help you decide whether you need to search for someone from the outside to strengthen your management team.
Training is one of the most important ways that you can ensure a successful transition. Many owners do not know where to start, so they avoid it. Other owners have serious reservations about letting an employee in on the inner workings of the business too soon, sometimes out of fear of losing control and other times out of fear of losing their key employees and company secrets to a competitor. Both of these are legitimate fears; but by giving in to them and not training your employees to take over, you risk the future of your legacy and your retirement.
Once the individual or group of individuals is chosen, you need to begin to develop them into your future leaders. Begin by cross-training them in all aspects of the business. This helps them learn the inner workings of the company and become more well-rounded leaders and problem solvers. Beyond just the workings of the business, you need to train them in the soft skills and leadership skills that will make them successful. Invest in a program that will provide those skills to your future leaders. Once a transfer begins to get closer, some companies may even find benefit in bringing in an executive coach to continue to develop leadership skills for transferees.
One of the most important steps that you as an owner can take is to share as much knowledge as possible about the company to your successors. As the old adage goes, knowledge is power; and leaving a company without a good knowledge basis can spell its demise. Transferring knowledge can be one of the most difficult parts of the succession process, but it is also one of the most vital.
A mentorship program can produce great dividends. The program should offer young, future leaders access to the business owner – or other senior members of your leadership team – in order to ask questions and receive advice from a trusted source in the upper echelons of management.
Succession can certainly be a difficult bridge to cross, but the professionals at our firm can help you begin the journey. Call us today.
Do you know what will happen to your business when you retire? By necessity, many busy small business owners spend all of their time thinking about the here and now, with little opportunity to focus on the future. But your company’s long-term survival -— and your own retirement security -— may depend on establishing a realistic and workable exit strategy.
Set a retirement date
Here is your first question: When do you plan to quit working? You may have a general idea of the age range when you would like to retire, but now is the time to set a precise date. That gives you a timeline to work with, which will make all your other planning easier.
Consider your options
The next essential question: Who do you expect will take over your business? Many companies make one of two choices: either someone buys the company from you or a family member or employee takes over as chief executive when you retire. It is important to consider which one is the most realistic option so that you can ensure a smooth transition down the road. Depending on your plans, there are different steps you should take now to ensure a smooth transition.
If you plan to sell
If you are going to sell your company to another business or individual, you will need an accurate idea of what it is worth. You should get a business appraisal when you are ready to sell; but it may be a good idea to get one now, even if there are many years until your planned retirement. An appraisal can help to spot your company’s strengths and weaknesses so you can analyze how those attributes impact its overall worth.
The information in the appraisal can be used to make changes that improve operations, sales and revenues and make you a more competitive player in the marketplace. Those steps will help increase your company’s value and its appeal to potential buyers at the time you decide to sell.
If you plan to promote from within
It is always a good idea to have a current idea of your company’s worth, but there are also other necessary factors to consider if you are hoping that someone within your company will one day take over the reins of leadership. The first question, of course, is who will that person be? Is there a very talented younger employee who you believe could one day take over? If so, begin grooming him or her now. This includes introducing the employee to key clients, increasing his or her level of responsibility and including the person in decision making whenever possible.
Even if you expect to sell your business, it is a good idea to have a promising future leader ready to take over the reins. In most cases, a potential buyer will be happy to see that there is someone in place to carry on.
There are many possible exit strategies available to small business owners. No matter which you choose, it will be a good idea to have an accurate sense of the company’s worth and to have a strong management team in place. Our firm’s professionals can help you develop a strategy to suit your business. Call us today.