Category Archives: Blog

New Audit Rules Will Have a Big Impact on Partnerships

September 12, 2018

The Bipartisan Budget Act of 2015 introduced new partnership audit rules that took effect this year. Partnerships — including LLCs taxed as partnerships — should pay close attention to these rules. You might assume that audit rules are merely procedural, but the new rules make significant substantive changes, essentially subjecting partnerships to entity-level taxes for the first time.

In a dramatic departure from prior practice, the new rules permit the IRS to collect taxes from partnerships rather than from individual partners. By reducing the administrative burdens associated with partnership audits, the new rules will likely increase the number of audits. In addition, in many cases, application of the new rules will increase partnership tax liabilities. Why? Because the IRS will determine additional taxes by multiplying the net adjustment by the highest marginal individual or corporate tax rate for the year being audited (the “audit year”). The partnership must account for the resulting “imputed underpayment” in the adjustment year.

By imposing tax at the highest marginal rate, partners will lose the benefit of tax-exemptions, lower tax rates, or other partner-level tax attributes that would otherwise reduce their tax liability. However, partnerships will be able to reduce their imputed underpayments by providing the information necessary to establish these tax attributes.

Another burden imposed by the new rules: Since additional taxes are accounted for in the adjustment year, in some cases current partners will be held liable for tax errors that benefited former partners. Partnerships will have two options for avoiding this result:

  1. Arrange for audit-year partners to file amended returns reporting their distributive shares of partnership adjustments and pay the tax within 270 days; or
  2. File an election, within 45 days after the audit, to provide audit-year partners with adjusted information returns that will be reflected in their adjustment-year returns.

The new rules allow certain smaller partnerships to opt out in exchange for assuming additional reporting and disclosure obligations.

The IRS has issued both proposed and final regulations interpreting and clarifying the operation of the new rules. Partnerships should work with their tax advisors to evaluate the potential impact of the new rules and discuss strategies for avoiding harsh consequences.

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It’s a New Day For Tax Planning – 2018-2019 Tax Planning Guide

August 14, 2018

With most of the changes from the Tax Cuts and Jobs Act going into effect this year, it’s a new day for tax planning. To save the most, you need to become familiar with the changes and be sure you’re taking advantage of every tax break you’re entitled to. 

Our 2018-2019 Tax Planning Guide is designed to help you do just that. To view it, simply click on the link, navigate through the guide and learn about important tax law changes and ways to minimize your income tax liability. As you look through the guide, please note the strategies and tax law provisions that apply to your situation or that you would like to know more about.

At RCM, our professional are thoroughly familiar with the latest tax developments and tax-reduction strategies, and are eager to help you take full advantage of them. Let’s talk about ways to lighten your tax burden and better achieve your financial objectives.


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Where You Hold Your Investments Matters

July 27, 2018

When investing for retirement, people usually prefer tax-advantaged accounts, such as IRAs, 401(k)s or 403(b)s. But investments such as municipal bonds and passively managed index mutual funds may be better for traditional taxable accounts. Certain assets are well suited to these accounts, but other investments make far more sense for traditional taxable accounts. Knowing the difference can help bring you closer to your financial goals.

Understand How They’re Taxed

Where you own assets matters because of how they’re taxed. Some investments, such as fast-growing stocks, can generate substantial capital gains, which generally occurs whenever you sell a security for more than you paid for it.

When you’ve owned that investment for over a year, you recognize long-term gains, taxed at a maximum rate of 20%. In contrast, short-term gains, recognized when the holding period is one year or less, are taxed at your ordinary-income tax rate — maxing out at 39.6%.

Meanwhile, if you own a lot of dividend-generating investments, you’ll need to pay attention to the tax rules for dividends, which belong to one of two categories:

Qualified. These dividends are paid by U.S. corporations or qualified foreign corporations. Assuming you’ve met the applicable holding period requirements, qualified dividends are, like long-term gains, subject to a maximum tax rate of 20%.

Nonqualified. These dividends — which include most distributions from real estate investment trusts (REITs) and master limited partnerships (MLPs) — receive a less favorable tax treatment. Like short-term gains, nonqualified dividends are taxed at your ordinary-income tax rate.

Taxable interest (such as from corporate bonds and most U.S. government bonds) also is generally subject to ordinary-income rates.

Finally, there’s the 3.8% net investment income tax (NIIT) for higher-income taxpayers to consider. But the NIIT might be repealed under health care or tax reform legislation. (Contact us for the latest information.)

Tax-Efficient Investments

Generally, the more tax efficient an investment, the more benefit you’ll get from owning it in a taxable account.

Consider municipal bonds (“munis”), either held individually or through mutual funds. Munis are particularly attractive to tax-sensitive investors because their income is exempt from federal income taxes and sometimes state and local income taxes as well. Because you don’t get a double benefit when you own an already tax-advantaged security in a tax-advantaged account, holding munis in your 401(k) or IRA would result in a lost opportunity.

Passively managed index mutual funds or exchange-traded funds, and long-term stock holdings, are also generally appropriate for taxable accounts. Over time, these securities are tax efficient because they’re more likely to generate long-term capital gains, whose tax treatment is relatively favorable. Securities that generate more of their total return via capital appreciation or that pay qualified dividends are also better taxable account options.

Investments that Generate Ordinary Income

What investments work best for tax-advantaged accounts? Taxable investments that tend to produce much of their return in ordinary income, for one. This category includes corporate bonds, especially high-yield bonds, as well as REITs, which are required to pass through most of their earnings as shareholder income. Most REIT dividends are nonqualified and therefore taxed at your ordinary-income rate.

Another tax-advantaged-appropriate investment may be actively managed mutual funds. Funds with significant turnover — meaning their portfolio managers are actively buying and selling securities — have increased potential to generate short-term gains that ultimately get passed through to you. Because short-term gains are taxed at your higher ordinary rate, these funds would be less desirable in a taxable account.

Think Beyond Taxes

The above concepts are only general suggestions for taxable and tax-advantaged accounts. You may, for example, need more liquidity in your taxable account than you do in your IRA account. In this case, you might decide to hold a high-turnover equity fund or high-yield bond investments in the taxable account because you value flexibility more than favorable tax treatment.

Just keep in mind the benefits and risks — including the risk that your investments will lose value — associated with any investment decision, and know that tax issues can be complex. We can help you make the best choices for your situation.

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