FOR LIVE PROGRAM ONLY Reconciling GAAP Basis and Tax …media.straffordpub.com/products/reconciling-gaap...Jul 25, 2018 · Reconciling GAAP Basis and Tax Basis in Partnership Income

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Reconciling GAAP Basis and Tax Basis in Partnership

Income Tax Returns and K-1 Schedules

WEDNESDAY, JULY 25, 2018, 1:00-2:50 pm Eastern

FOR LIVE PROGRAM ONLY

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WEDNESDAY, JULY 25, 2018

Reconciling GAAP Basis and Tax Basis in Partnership Income Tax Returns and K-1 Schedules

Jeffrey N. Bilsky, Partner, National Tax Office

BDO USA, Atlanta

[email protected]

Thomas A. Orr, CPA, Senior Manager

BDO USA, Washington, D.C.

[email protected]

Notice

ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY

THE SPEAKERS’ FIRMS TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY

OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT

MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR

RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.

You (and your employees, representatives, or agents) may disclose to any and all persons,

without limitation, the tax treatment or tax structure, or both, of any transaction

described in the associated materials we provide to you, including, but not limited to,

any tax opinions, memoranda, or other tax analyses contained in those materials.

The information contained herein is of a general nature and based on authorities that are

subject to change. Applicability of the information to specific situations should be

determined through consultation with your tax adviser.

GAAP, Tax, & 704(b) Capital Account

Maintenance

Jeff Bilsky, Partner, National Tax Office

Tommy Orr, Senior Manager, National Tax Office

Agenda

• GAAP, Tax, & 704(b) Capital Account Reporting

• Required Reconciliations for Tax & 704(b) Basis Capital

Account Reporting

• Detailed Reconciliation Example

• Financial Statement Implications for Partnerships (ASC

740, FAS 5) Including New Partnership Audit Rules

6

GAAP, Tax, & 704(b) Capital

Account Reporting

GAAP, Tax, & 704(b) Capital AccountsGAAP vs. Tax vs. 704(b)

Partnerships often maintain multiple capital accounts, including:

- Section 704(b) Basis Capital Accounts: Reflect the partner’s

economic interests in the partnership.

- Tax Basis Capital Accounts: Reflects the partner’s interest in the

partnership based on federal income tax principles.

- GAAP Basis Capital Accounts: Determined in accordance with

various financial accounting principles. Limited impact on Tax

Basis and Section 704(b) Basis capital accounts.

8

GAAP, Tax, & 704(b) Capital AccountsGAAP vs. Tax vs. 704(b)

GAAP Basis Capital

(+ / -) GAAP to Tax Differences

Tax Basis Capital

(+ / -) Sec. 704(c) Adjustments

Sec. 704(b) Basis Capital

9

GAAP, Tax, & 704(b) Capital AccountsTax vs. 704(b)

Section 704(b) Capital Tax Basis Capital

Increases: • FMV of property

contributions, including

money

• Tax basis of property

contributions, including money

• Partner share of Section

704(b) income

• Partner share of taxable income

• Positive Section 704(b)

revaluations (book-ups)

• No change due to Section 704(b)

revaluations (book-ups)

Decreases: • FMV of property

distributions, including

money

• Tax basis of property

distributions, including money

• Partner share of Section

704(b) losses

• Partner share of tax losses

• Negative Section 704(b)

revaluations (book-downs)

• No change due to Section 704(b)

revaluations (book-downs)

10

GAAP, Tax, & 704(b) Capital AccountsEffect of Liabilities on Section 704(b) Capital

• Assumption of partner liability by partnership treated as cash

distribution. Includes contribution of property subject to liability

• Assumption of partnership liability by partner treated as cash

contribution. Includes distribution of property subject to liability

• Changes to allocable share of partnership liabilities is not an

assumption and has no effect on capital

11

AB

Example:

Value Basis

Building $100 $50

Mortgage ($ 60) ($60)

$120 of AB’s liabilities are allocable to

A after the contribution.

A

What is A’s Capital Account?

What is A’s Basis in AB?


12

AB

AValue Basis

Building $100 $50

Mortgage ($ 60) ($60)

$120 of AB’s liabilities are allocable to A

after the contribution.

Capital = $100 Building Value - $60 Mortgage assumed by AB = $40

Basis = $50 Building Basis - $60 Mortgage + $120 Liability Allocation = $110


13

• No increase for contribution of a partners’ own note until the note

is sold or as principal payments are made.

• No decrease for distribution of the partnership’s own note until the

note is sold or as principal payments are made.

• If note is readily tradable on an established securities market the

forgoing rules are inapplicable.


14

• Partnership may periodically revalue Section 704(b) capital

accounts

• Regulations provide for Mandatory and Optional revaluations

• Revaluations must reflect fair market value of partnership property

at the date of revaluation

• Allocation of book-up or book-down adjustment must reflect the

way the unrealized gain or loss would be allocated if recognized

• Revaluations have no impact on tax basis of assets therefore create

additional Section 704(c) layers

• Revaluations generally have no GAAP impact, but transactions that

trigger purchase accounting rules may have a similar impact (i.e.

partnership merger)

GAAP, Tax, & 704(b) Capital AccountsRevaluations

15

Mandatory Revaluations

• Partnership is required to revalue distributed assets immediately before

the partnership distributes property to any partner

• Partnership is required to revalue capital accounts immediately after an

exercise of a noncompensatory option

Optional Revaluations

• Partnership may choose to revalue capital accounts upon certain events:

- Contributions of money or property for a partnership interest

- Liquidation or distribution as consideration for a partnership interest

- Grant of a partnership interest as consideration for services rendered

- Issuance by the partnership of a noncompensatory option, or

- Generally accepted industry accounting practices (hedge funds)

GAAP, Tax, & 704(b) Capital AccountsRevaluations

16

GAAP, Tax, & 704(b) Capital AccountsDetermination of Section 704(b) Income

• GAAP Income is the typical starting point

• Determine Taxable Income by adjusting for “M-1” items

• Determine Section 704(b) Income (economic income) by adjusting

for differences between tax basis and Section 704(b) basis

• Section 704(b) basis may not equal tax basis as a result of property

contributed with values different than tax basis and Section 704(b)

revaluations

• Differences between Section 704(b) and Tax basis are addressed

through 704(c) allocations

17

• Section 704(c): Income items with respect to property contributed

to the partnership by a partner shall be shared among the partners

so as to take account of the variation between the basis of the

property to the partnership and its fair market value at the time of

contribution.

- GAAP, Tax, & 704(b) Capital reconcile variances between Tax

Basis and Section 704(b) Basis

- Built-in gain or loss on the sale of contributed property must be

allocated back to the contributing partner

- Tax depreciation/amortization on contributed property is

allocated first to the non-contributing partner in an amount

equal to the partner’s Section 704(b) depreciation

GAAP, Tax, & 704(b) Capital AccountsImpact of Section 704(c)

18

Section 704(c) rules apply to:

- Contributions of property where the Section 704(b) value (FMV) is

not equal to the tax basis (“Forward Section 704(c) Layers”)

- Book up or down adjustments caused by Section 704(b)

revaluations (“Reverse Section 704(c) Layers”)

- Possible to have multiple Forward and Reverse Section 704(c)

Layers

GAAP, Tax, & 704(b) Capital Accounts Impact of Section 704(c)

19

• Traditional Method

• Allocations are limited to the tax items associated with the

contributed property.

• Ceiling rule limitations are not fixed, and the built-in gain shifts to

noncontributing partners.

• Traditional Method with Curative Allocations

• Start with the traditional method

• Reallocate other partnership items to overcome ceiling rule

• Other items must generally have the same effect as depreciation.

• Remedial Method

• Provide correct amount to non-contributing partners.

• If figure that exceeds total tax items, contributing partner picks up

offsetting income.

GAAP, Tax, & 704(b) CapitalSection 704(c) Depreciation Allocation Methods

20

Tax Allocations & Economic Effect

22

Tax Allocations & Economic EffectGeneral Rules

Section 704(a): Except as otherwise provided in the Code, a partner’s

share of partnership income items is determined by the partnership

agreement.

Section 704(b): A partner’s share of income items is determined in

accordance with the partner’s interest in the partnership (“PIP”) if the

allocations per the partnership agreement do not have Economic

Effect. Regulations provide that the allocations must also be

Substantial.

Section 704(c): Income items with respect to property contributed to

the partnership by a partner shall be shared among the partners so as

to take account of the variation between the basis of the property to

the partnership and its fair market value at the time of contribution.

23

Tax Allocations & Economic EffectSafe-Harbor Allocations

Economic Effect

• An allocation must be consistent with the underlying economic arrangement

of the partners.

• Partners that are allocated income or loss must ultimately bear the

economic benefit or burden associated with the allocations

• Regulatory Safe-Harbors

- General Test for Economic Effect

- Alternate Test for Economic Effect

- Economic Effect Equivalence

• Allocations that do not meet a regulatory safe-harbor are allocated based

on the partner’s interest in the partnership (“PIP”)

24


General Test for Economic Effect

1. Partnership maintains Section 704(b)

Capital Accounts;

2. Liquidating distributions made in

accordance with positive Section 704(b)

Capital Accounts; and

3. Partners have obligation to restore any

negative capital account balance (a

“Deficit Restoration Obligation” or

“DRO”)

Alternate Test for Economic Effect

1. Partnership maintains Section 704(b)

Capital Accounts;

2. Liquidating distributions made in

accordance with positive Section 704(b)

Capital Accounts; and

3. In lieu of a DRO, the partnership

agreement contains a Qualified Income

Offset (“QIO”) provision

Economic Effect Equivalence Partnership agreement does not satisfy the General or

Alternate Test of economic effect. However, allocations are deemed to have economic

effect if, as of the end of each partnership taxable year, a liquidation of the partnership at

the end of such year or at the end of any future year would produce the same economic

results to the partners as would occur if the General Test of economic effect had been

satisfied.

25


Substantiality

• The economic effect of an allocation is substantial if there is a reasonable

possibility that the allocation will affect substantially the dollar amounts to

be received by the partners from the partnership, independent of tax

consequences.

- Overall Tax Effect Rule: One partner benefits at the expense of another

- Shifting Tax Consequences: The net increases/decreases in the partners'

respective capital accounts won’t differ substantially from the baseline allocations

and the aggregate tax liability of the partners will be reduced

- Transitory Allocations: There is a possibility that original allocations will be

largely offset by offsetting allocations, providing there is a strong likelihood that

the net increases/decreases in the partners' capital accounts won’t differ

substantially from the baseline allocations and the total tax liability of the

partners will be reduced in present value terms

26

Tax Allocations & Economic EffectTargeted or PIP Allocations

In General

• Liquidating distributions are not based solely on the partner’s

Section 704(b) Capital Accounts

• General and Alternate Test of Economic Effect cannot apply

• Targeted Allocations may have Economic Effect Equivalence or may

be in accordance with PIP

• Profits & loss allocations (including gross income) are generally

made in the amounts necessary to ensure ending Section 704(b)

Capital Accounts reflect the partner’s liquidating distribution rights

27

Tax Allocations & Economic EffectTargeted Allocations

Safe-Harbor Allocations

Capital

Account

Beginning $50

Income/(Loss) $100

Ending

CapitalCalculated

Targeted Allocations

Capital

Account

Beginning $50

Income/(Loss) Calculated

Distribution

Rights$150

28

• Client financial data generally comes as GAAP financial statements,

so you will already have total GAAP capital to begin

• The GAAP amounts by partner are generally presented on the

schedule K-1s as the partner’s ending section 704(b) capital ratio

times total ending GAAP capital

• Difference between GAAP and 704(b) capital will result based on

the schedule M-1/M-3 differences as well as any 704(c) amounts

• Additional differences may result from liabilities that exist for

GAAP purposes but not for tax or 704(b) purposes

• The same event may give rise to GAAP/704(b) differences (i.e. a

purchase accounting transaction for GAAP purposes treated as a

carryover basis transaction for tax purposes, partnership

consolidated for GAAP purposes but stand alone for tax purposes,

etc.)

GAAP, Tax, & 704(b) Capital AccountsGAAP Capital In Summary

29

Detailed Reconciliation Example

30

Exercise 1, Part 1

Individuals A, B and C form equal partnership ABC. A contributes

depreciable equipment worth $18,000 with a basis of $9,000 subject to a

$8,000 liability. B contributes land with a basis of $7,200 and value of

$10,000. C contributes $10,000 cash. In the first year of operations, ABC

earns GAAP net income of $10,000. In the first year tax and book

depreciation are $3,000 and $5,000, respectively. The traditional

method is chosen to apply section 704(c).

• Determine the section 704(b) and tax basis capital accounts.

GAAP, Tax, & 704(b) CapitalExercise

31

704(b) Book A B C

Contribution

Income

Depreciation

Tax Basis A B C

Contribution

Income

Depreciation


32

704(b) Book A B C

Contribution 10,000.

Income

Depreciation

Tax Basis A B C

Contribution 1,000.

Income

Depreciation

A contributes depreciable equipment worth $18,000 with a basis

of $9,000 subject to a $8,000 liability.


33

704(b) Book A B C

Contribution 10,000. 10,000.

Income

Depreciation

Tax Basis A B C

Contribution 1,000. 7,200.

Income

Depreciation

B contributes land with a basis of $7,200 and value of $10,000.


34

704(b) Book A B C

Contribution 10,000. 10,000. 10,000.

Income

Depreciation

Tax Basis A B C

Contribution 1,000. 7,200. 10,000.

Income

Depreciation

C contributes $10,000 cash.


35


GAAP to Tax Income Conversion:

GAAP Net Income 10,000

GAAP Depreciation 5,000

Taxable Income Before Depreciation 15,000

Tax Depreciation -3,000

Taxable Income 12,000

Tax to 704(b) Income Conversion:

Taxable Income Before Depreciation 15,000

704(b) Depreciation (Tax depr. on $18,000 of basis) -6,000

704(b) Net Income 9,000

36

704(b) Book A B C

Contribution 10,000. 10,000. 10,000.

Income 5,000. 5,000. 5,000.

Depreciation

Tax Basis A B C

Contribution 1,000. 7,200. 10,000.

Income 5,000. 5,000. 5,000.

Depreciation

In the first year of operations, ABC earns taxable income of

$15,000 before tax depreciation on the equipment of $3,000.


37

704(b) Book A B C

Contribution 10,000. 10,000. 10,000.

Income 5,000. 5,000. 5,000.

Depreciation (2,000) (2,000) (2,000)

13,000. 13,000. 13,000.

Tax Basis A B C

Contribution 1,000. 7,200. 10,000.

Income 5,000. 5,000. 5,000.

Depreciation

704(b) Depreciation is proportionate to tax depreciation:

Equipment Tax Depr./ Tax Basis = $3,000 / $9,000 = 1/3rd

Equipment 704(b) Depr. = 1/3 x $18,000 = $6,000


38

Under the traditional method, tax depreciation is allocated first to the non-contributing

partners to match 704(b) depreciation, but only to the extent of tax depreciation

704(b) Book A B C

Contribution 10,000. 10,000. 10,000.

Income 5,000. 5,000. 5,000.

Depreciation (2,000) (2,000) (2,000)

13,000. 13,000. 13,000.

Tax Basis A B C

Contribution 1,000. 7,200. 10,000.

Income 5,000. 5,000. 5,000.

Depreciation (0) (1,500) (1,500)

6,000. 10,700. 13,500.


39

704(b) Book A B C

Contribution 10,000. 10,000. 10,000.

Income 5,000. 5,000. 5,000.

Depreciation (2,000) (2,000) (2,000)

13,000. 13,000. 13,000.

Tax Basis A B C

Contribution 1,000. 7,200. 10,000.

Income 5,000. 5,000. 5,000.

Depreciation* 1,000. (2,000) (2,000)

7,000. 10,200. 13,000.* Remedial Method

Under the remedial method, tax depreciation is allocated first to the non-contributing

partners to match 704(b) depreciation whether or not there is enough tax depreciation


40

704(b) Book A B C

Contribution 10,000. 10,000. 10,000.

Income 5,000. 5,000. 5,000.

Depreciation (2,000) (2,000) (2,000)

13,000. 13,000. 13,000.

Tax Basis A B C

Contribution 1,000. 7,200. 10,000.

Income 6,000. 4,500. 4,500.

Depreciation* 0. (1,500) (1,500)

7,000. 10,200. 13,000.* Curative Method

Under the curative method, tax depreciation is allocated first to the non-

contributing partners using the tradition method, and other items are reallocated

to make up for any shortfall


41

Assuming the GAAP contributions were equal to fair market value, the same as 704(b)

capital, the GAAP capital should be as follows

GAAP Books A B C

Contribution 10,000. 10,000. 10,000.

Income 5,000. 5,000. 5,000.

Depreciation (1,667) (1,667) (1,666)

13,333. 13,333. 13,334.


• In this example income and depreciation are broken out for

consistent presentation, the full net income would be allocated in

proportion to ownership in this case

42

Exercise 1, Part 2

On the first day of year 2, the value of land has increased to $16,000 and

the company has created goodwill value of $30,000. Partner D is

admitted as an equal partner in exchange for a $25,000 cash

contribution.

What are the 704(b) capital accounts immediately after D’s admission…

• If the partnership agreement calls for revaluations?

• If the partnership agreement does not call for revaluations?


43

With Revaluation A B C D

Beginning 13,000. 13,000. 13,000. 0.

Revaluation Gain

Contribution

Without Reval. A B C D

Beginning 13,000. 13,000. 13,000. 0.

Revaluation Gain

Contribution


44


Beginning 13,000. 13,000. 13,000. 0.

Revaluation Gain 12,000. 12,000. 12,000. 0.

Contribution


Beginning 13,000. 13,000. 13,000. 0.

Revaluation Gain0. 0. 0. 0.

Contribution

The value of land has increased by $6,000 to $16,000 and the company

has created goodwill value of $30,000 ($36,000 unrealized gain)


45


Beginning 13,000. 13,000. 13,000. 0.

Revaluation Gain 12,000. 12,000. 12,000. 0.


25,000. 25,000. 25,000. 25,000.


Beginning 13,000. 13,000. 13,000. 0.

Revaluation Gain 0. 0. 0. 0.


13,000. 13,000. 13,000. 25,000.

Partner D is admitted as an equal partner in exchange for a $25,000 cash

contribution.


46


Beginning 25,000. 25,000. 25,000. 25,000.

704(b) Gain on Sale

Final Distribution


Beginning 13,000. 13,000. 13,000. 25,000.

704(b) Gain on Sale

Final Distribution

The partnership sells all its property shortly after D’s admission for $100,000 and

distributes the proceeds in accordance with the Capital Accounts (ignore pre-sale activity)


47


Beginning 25,000. 25,000. 25,000. 25,000.

704(b) Gain on Sale 0. 0. 0. 0.

Final Distribution


Beginning 13,000. 13,000. 13,000. 25,000.

704(b) Gain on Sale9,000. 9,000. 9,000. 9,000.

Final Distribution

The partnership sells all its property shortly after D’s admission for $100,000

and distributes the proceeds in accordance with the Capital Accounts (ignore

pre-sale activity)


48


Beginning 25,000. 25,000. 25,000. 25,000.

704(b) Gain on Sale 0. 0. 0. 0.

Final Distribution 25,000. 25,000. 25,000. 25,000.


Beginning 13,000. 13,000. 13,000. 25,000.

704(b) Gain on Sale9,000. 9,000. 9,000. 9,000.

Final Distribution 22,000. 22,000. 22,000. 34,000.

The partnership sells all its property shortly after D’s admission for $100,000

and distributes the proceeds in accordance with the Capital Accounts (ignore

pre-sale activity)


49

Partnership Audit Rules

51

• Bipartisan Budget Act of 2015 (the “BBA”) significantly changes the way in which

partnerships are audited:

• Applicable to tax years beginning after 12/31/2017

• Default rules apply to ALL partnerships

• Small partnerships may be eligible to elect out

• Audits are conducted at partnership level

• Unfavorable audit adjustments result in an “imputed underpayment” obligation

payable by the partnership

• Favorable audit adjustments allocated out to the partners in the year the audit is

completed

• Push-out election eliminates partnership’s obligation to satisfy the imputed

underpayment obligation

Partnership Audit RulesOverview

52

Eligible Partners:

- Individuals

- C-corporations

- Foreign entities that would be treated

as a C-corporation if domestic

- S-corporations (each shareholder is

counted for purposes of determining

the 100 partner limit)

- An estate of a deceased partner

Ineligible Partners:

- Partnership entities, i.e., upper-tier

partnerships

- Trusts

- Disregarded entities such as single-

member LLCs and grantor trusts

- Estate of an individual other than a

deceased partner

- Nominee partner

• Small Partnerships (those with 100 or fewer eligible partners) may elect out of the

new rules

• In order to elect out, partnerships must make an annual affirmative election and

disclose required partner information


• (Net Positive Adjustments * Highest Tax Rate) – Adjusted Credits

Step 1: Partnership first groups its adjustments into (i) Reallocation Grouping;

(ii) Credit Grouping, or (iii) Residual Grouping

Step 2: Partnership adjustments within each grouping/sub-grouping are then

netted. Netted amounts resulting in a non-positive adjustment are disregarded

for purposes of calculating the imputed underpayment.

Step 3: The total netted partnership adjustment calculated in Step 2 is

multiplied by the highest effective federal tax rate under section 1 or section

11.

Step 4: The product resulting from Step 3 is then reduced, but not below $0 by

the net adjustments to partnership credits.


54

Ordinary

Sub-Group

Capital

Sub-Group

Increase Ordinary Income 200.00 - -

Decrease Depreciation Expense 30.00 - -

Increase Long-Term Capital Gain - 75.00 -

Decrease Long-Term Capital Loss - 50.00 -

Decrease Tax Credit - - 2.00

Total Audit Adjustments 230.00 125.00 2.00

Assumed Highest Tax Rate 40% 40%

Initial Imputed Underpayment 92.00 50.00 2.00

Imputed Underpayment Obligation

Imputed Underpayment (Ordinary Sub-Group) 92.00

Imputed Underpayment (Capital Sub-Group) 50.00

Imputed Underpayment - Residual Grouping 142.00

Add: Credit Grouping 2.00

Net Imputed Underpayment 144.00

Residual GroupingCredit

GroupingAudit Adjustments


55

Ordinary

Sub-Group

Capital

Sub-Group

Increase Ordinary Income 125.00 - -

Decrease Long-Term Capital Gain - (125.00) -

Decrease Tax Credit - - -

Total Audit Adjustments 125.00 (125.00) -


Initial Imputed Underpayment 50.00 - -


Imputed Underpayment (Ordinary Sub-Group) 50.00

Imputed Underpayment (Capital Sub-Group) -


Add: Credit Grouping -

Net Imputed Underpayment 50.00

Audit Adjustments

Residual GroupingCredit

Grouping


56

Partner A

Sub-Group

Partner B

Sub-Group

Reallocate Ordinary Income 30.00 (30.00)

Reallocate Depreciation Expense (70.00) 70.00

Total Audit Adjustments (40.00) 40.00


Initial Imputed Underpayment - 16.00


Imputed Underpayment (Partner A Sub-Group) -

Imputed Underpayment (Partner B Sub-Group) 16.00


Audit Adjustments

Reallocation Grouping


57

• In lieu of the default payment rules the partnership can elect to push-out the

imputed obligation to its partners.

• Reviewed year partners are liable for tax, penalties and interest on their

respective shares of partnership adjustments

• Reviewed year partners are bound by the election and must take the

adjustments into account and report and pay additional tax, penalties and

interest

• A partnership making the push-out election must furnish statements to the

reviewed year partners with respect to the partner’s share of the

adjustments and file those statements with the IRS

• The rate of interest imposed on the underpayment is increased by two

percentage points creating a surcharge to use the push-out method

• Under proposed regulations, make push-out election through multiple tiers


58

Partner A

Sub-Group

Partner B

Sub-Group

Reallocate Ordinary Income 30.00 (30.00)

Reallocate Depreciation Expense (70.00) 70.00

Total Audit Adjustments (40.00) 40.00


Initial Imputed Underpayment - 16.00


Imputed Underpayment (Partner A Sub-Group) -

Imputed Underpayment (Partner B Sub-Group) 16.00


Audit Adjustments

Reallocation Grouping


59

• Partnerships are required to have a person function in the role of partnership

representative (“PR”). The PR has sole authority to act on behalf of the

partnership

• All partners are bound by the actions of the PR and they have no right to

contradict its decisions. This broad authority cannot be limited by state law,

the partnership agreement or any other document or agreement

• The PR does not have to be a partner but can be any person, including an

entity, as long as it has a substantial presence in the United States and the

capacity to act

• The proposed regulations require a partnership to designate the PR on the

partnership’s return filed for each taxable year

• If a partnership fails to designate a PR the proposed regulations allow the IRS to

select a PR


60

Operating Partnership

Equity Investor

Legacy Partners

GPManager

Limited Partners

CorporatePartner

Entity StructureSpecific considerations vary based

on entity characteristics

Common considerations

• Partnership agreement

amendments

• Risk assessment of existing

positions for

partners/partnerships

• Transactional considerations

(i.e., enhanced due-diligence)

• Financial statement impact

Partnership Audit RulesConsiderations

61


Equity Investor

Legacy Partners

GPManager

Limited Partners

CorporatePartner

Entity StructureCONSIDERATIONS

• Not eligible to elect out because Equity

Investor is an ineligible partner

• Should not have ASC 740 exposure but

consider FAS 5 liabilities

• Consider due diligence exposure if

potential candidate for capital

transaction

• Increased reporting requirements for

investors to assess tax risk (and

reserves)

• Amend partnership agreement

• Imputed underpayment obligation risk

assessment

• Analyze capital accounts and

allocations

• Develop information needed by

partners for ASC 740 or due diligence

purposes


62


Equity Investor

Legacy Partners

GPManager

Limited Partners

CorporatePartner


• Not eligible to elect out because GP

Manager is an ineligible partner

• Consider ASC 740 implications if issuing

audited financial statements

• Consider due diligence exposure if

potential candidate for capital

transaction

• Assess LP indemnification potential

(and fund indemnification for LPs)

• Consider co-investor rights and

obligations

• Amend partnership agreement

• Imputed underpayment obligation risk

assessment

• Analyze capital accounts and

allocations

• Financial statement impact analysis


63


Equity Investor

Legacy Partners

GPManager

Limited Partners

CorporatePartner


• Evaluate possible ASC 740

exposure resulting from imputed

underpayment obligations at the

partnership level

• Exposure exists regardless of

whether Operating Partnership

decides to pay the imputed

underpayment obligation

directly or make the push-out

election

• Financial statement impact

analysis

• Understand potential exposure

from investment in Operating

Partnership


64

Documents

FOR LIVE PROGRAM ONLY Reconciling GAAP Basis and Tax …media.straffordpub.com/products/reconciling-gaap...Jul 25, 2018 · Reconciling GAAP Basis and Tax Basis in Partnership Income