Tagtax lawyer

IRS Issues Guidance on Qualified Opportunity Zones

By:  Amanda Wilson

The 2017 Tax Cut and Jobs Act included significant new tax benefits for investments in qualified opportunity zones. Specifically, taxpayers can defer tax recognition on capital gains when the gains are reinvested in a qualified opportunity fund, which is a partnership or corporation that invests in qualified opportunity zones. In addition, the gains from the investment in the fund can be permanently eliminated if the investment is held for at least 10 years.

Qualified opportunity zones are a new concept, and tax practitioners and investors have been eagerly awaiting guidance on how these new rules will be implemented. The IRS released its first round of guidance on Friday, in the form of proposed regulations and a revenue ruling. This guidance clarified several important issues. For example, qualified opportunity zone property includes tangible property if the qualified opportunity fund substantially improves tangible property located in a qualified opportunity zone. It was unclear what this meant in the context of property such as a building. Revenue Ruling 2018-29 answers this question by providing that substantial improvement occurs when the cost of the improvements is equal to at least the adjusted basis in the building, rather than requiring the improvements to cost at least the adjusted basis in the building and the underlying land. In addition, the qualified opportunity fund is not required to separately substantially improve the land upon which the building is located.

The proposed regulations also clarify that a qualified opportunity fund does not need to be a newly formed entity, and that only capital gains qualify for this new tax regime. The regulations also clarify that 100% gain elimination (for gains occurring from the investment in the fund) is available if the investment is held for at least ten years, even if the designation of an opportunity zone expires prior to the ten year anniversary of the investment. This last piece of clarification addressed a significant concern of many tax practitioners, as the designation of all of the current opportunity zones expires December 31, 2028. The regulations also provide that taxpayers can generally rely on the proposed regulations at this time.

The regulations leave many questions unanswered for now as the regulations reserved several important issues, including what constitutes the active conduct of a trade or business and . Stay tuned for further developments as additional guidance is issued.

Are Your Partnerships Ready for 2018?

By:  Amanda Wilson

While the news is filled with the ongoing tax reform activity in Congress, there is one tax change that is already in place to take effect January 1, 2018 – the repeal and replacement of the tax audit regime for partnerships.  For all tax years beginning on or after January 1, 2018, the existing TEFRA audit regime is being replaced with a new audit regime.  The tax matters partner is being replaced with a partnership representative – and the partnership representative is the only person that the IRS will deal with when auditing the partnership.  The partnership representative has the sole authority to participate in the audit and bind the partnership when it comes to dealing with the IRS, so it will be important to get the selection of your partnership representative correctly.  Once chosen, the partnership representative cannot be changed for a tax year without the IRS’s consent.  In addition, if there is a partnership audit, any adjustments will be made at the partnership level and will result in a tax liability for the partnership unless the partnership elects to push out the liability to the existing partners.  This means that a partner can be liable for tax adjustments for periods in which that partner did not have an ownership interest even in the partnership!  Due diligence for acquisitions of partnership interests that occur after January 1, 2018 will be much more involved on the tax side as a result.

So, if your ownership structure includes entities that file an IRS Form 1065 Partnership Tax Return (which can and usually does include multi member limited liability companies), you need to look at your organizational documents to see if they address these upcoming audit rule changes.  If you do not see the term “partnership representative” anywhere, then you will likely need to update.

White House: Tax Reform Coming in March

Magnifying Glass and TaxBy:  Amanda Wilson

The White House announced that President Trump’s tax reform plan will be coming soon (around March 13th).  Stay tuned!


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