Introduction to the BBA Partnership Representative
Every management role in a business comes with very important responsibilities. One of those important responsibilities is the management of the business’ taxes. Decisions on taxation and management of a business’ taxes are a vital component of a business’ operations. That’s why you should be aware of new tax laws that are effective beginning in 2018 that consolidate all authority for all tax matters in the “partnership representative.” You may have heard of a “tax matters partner,” which will become obsolete language with this new change. Well, the new designation and rules regarding who and what a partnership representative is and does ups the ante of the tax matters partner role.
This article seeks to explain the function of the partnership representative, who is eligible to be a partnership representative, authority granted to the partnership representative, and how to designate and terminate a partnership representative.
Who is Eligible and How Are They Designated?
The partnership tax updates as proposed as of June 2017 start off broad in describing who is eligible to be a partnership representative, allowing any person, and not just partners, shareholders or members, to be designated as the partnership representative so long as they:
- are available to meet in person with the IRS in the United States at a reasonable time and place;
- have a street address in the United States and a telephone number with a United States area code where the person can be reached during normal business hours; and
- have a United States taxpayer identification number.
The emphasis of these requirements is on availability to serve as a contact with the IRS. The partnership representative also cannot be (i) dead, (ii) determined by a court to lack capacity, (iii) incarcerated, (iv) liquidated or dissolved or (v) otherwise in a state that the IRS determines that such person does not have the “capacity to act.” If the designated partnership representative is found at a point to have never met or subsequently fails to meet the eligibility requirements of a partnership representative, the designation remains valid and in effect until the partnership, s-corporation (“S-Corp”) or limited liability company (“LLC”), the partnership representative or the IRS take action to terminate the designation.
Either an individual or an entity may serve as the partnership representative, but an entity must designate an individual that also meets the eligibility requirements of a partnership representative. The entity is referred to as the “entity partnership representative,” and the individual is referred to as the “designated individual” in this situation. If a partnership, S-Corp or LLC does not appoint a designated individual, then the IRS may determine that the partnership representative designation is not in effect, and may subsequently appoint its own designated individual if the partnership fails to select one within 30 days of notice from the IRS.
Authority of the Partnership Representative
The most notable thing about a partnership representative is that an entity taxed as a partnership (most prominently partnerships and LLCs with the addition of S-Corps) and all its partners, shareholders and members will be bound by actions taken by the partnership representative, regardless of what their agreements state, state law or if the partners, shareholders or members agree with the decision. This is a big reason why it is very important for a business owner to figure out who this individual or entity is or is going to be because if this individual or entity is not properly selected, the IRS will pick the individual or entity for you.
The partnership tax updates as proposed as of June 2017 state that the authority of the partnership representative may not be limited by state law or any contract or agreement. Even if a partnership representative makes a decision on their own without consulting the other managing partners, shareholders or members, the partnership representative’s actions will still bind the partnership. As a result, the selection of this individual or entity is massively important.
Designation, Resignation, and Revocation of a Partnership Representative
The designation of a partnership representative must be made on the partnership’s tax return separately for each taxable year for which the designation applies. The designation must also include all of the information required by any IRS forms, instructions and other guidance (which includes designated individual information). Each designation will be effective as of the date the return is filed. It’s also a good idea to include the initial partnership representative in your agreement and set forth a method for ongoing selection of the partnership representative.
A partnership representative may generally resign or be revoked, subject to certain requirements and restrictions. Resignation of a partnership representative requires notifying the partnership, S-Corp or LLC and the IRS in writing with the simultaneous filing of a valid administrative adjustment request. The partnership will then have the opportunity to designate another partnership representative, and if a successor is not designated by the partnership, the IRS will have the opportunity to designate a successor. Revocation of a partnership representative also requires that a written notice be sent to the IRS with the inclusion of a new designated partnership representative. However, don’t revoke too much because if the IRS determines that there have been too many revocations, they will select your partnership representative for you. Both resignations and revocations become effective 30 days from the date the IRS receives the required written notice.
Selecting a partnership representative is becoming almost as important as selecting the general partners, directors and managers or managing members for your business, especially since the changes to the tax code beginning in 2018 include the possibility that your entity could be taxed much more like a corporation than a partnership. The elections and modifications chosen are simply becoming more important to a business’ tax liability, and this is a responsibility that ultimately rests with the partnership representative.
Don’t wait until it’s too late to properly designate your partnership representative or update your documents to align with the new partnership tax changes. Our attorneys at Dodson Legal Group, who you can schedule a consultation with at 844-4DODSON, can help you navigate the basics.