September 26, 2017
This probably sounds like a boring subject that only we bean counters would care about, but don’t ignore this important topic. If your partnership experiences an ownership change, it might apply to you.
A technical termination occurs when 50% or more of the total ownership interest in a partnership’s capital and profits changes during a 12-month period. This could be an ownership change between just two people on one day, or between multiple people on multiple days throughout the year-long period. The exchange can be with a family member, other partners in the partnership, an unrelated person, or even with a corporation that is owned by the selling partner. A technical termination occurs as the result of a sale or exchange of the ownership interest. It does not occur as the result of a gift or inheritance.
It is important to notify your tax adviser immediately when any ownership changes occur. When the partnership experiences a technical termination, it is actually terminated for tax purposes. A tax return must be filed for the partnership, but the partnership’s normal filing deadline no longer applies. The new filing deadline is three months and 15 days after the date the technical termination occurs. Harsh penalties may be imposed if the new filing deadline is missed.
At the same time that the partnership terminates for tax purposes, a new partnership begins (although the tax ID number remains unchanged). Owners have the opportunity to change elections that for the old partnership had been irrevocable, as well choose a new accounting method and tax year-end. A tax return must be filed for this new partnership. This is in addition to the return that must be filed for the old partnership.
Note that these rules also apply to LLCs that are taxed as partnerships. If you are contemplating any changes in your partnership’s or LLC’s ownership, please contact us to determine if the technical termination rules will apply to you.
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