Trump Tax Plan May Impact Partnership Distributions


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There are plenty of big changes from the Tax Cuts and Jobs Act (aka Trump Tax Plan) and in the discussions and planning for the big things, some of the lesser known changes may get lost.

Here’s one that could be a possible problem if you meet the special considerations. It has to do with partnerships that have foreign resident or foreign corporation partners. In my practice, we saw a lot of foreign residents investing in real estate when real estate went down in price at the same time that the US dollar was down against other currencies. Now, we’re seeing people from other countries selling into the US market via Amazon or other online marketplaces. And sometimes, US taxpayers set up foreign companies to invest in US partnership in order to try to avoid US taxes.

All of those activities means additional reporting. If you don’t report as required, you can be looking at penalties of $10,000 or more, 50% of your account balance at the highest point and even criminal time. So, pay attention to the rules. This is definitely a time when you need an experienced CPA and/or tax attorney helping you.

One new change from the Trump Tax Plan is in regards foreign partners (individuals or corporations) who invest in partnerships. The partnership is required to withhold 10% on any sale of partnership interests. Additionally, if any assets that are held by the partnership are sold, there is a withholding requirement based on the amount that is allocated to the foreign partner. If the amount is not withheld from the partner distribution, the other partners are liable for the amount.

Partnerships must get two things from any buyers of partnership interests (and from existing partners)

  • Assurance that they are US taxpayers,
  • Statement from qualified persons that discusses whether transactions are subject to withholding.

A US taxpayer could be a foreign resident who provides a Form W-9 and has a valid ITIN. The foreign resident would have to file a Form 1040NR annually with the IRS as well as applicable state tax forms. In the case of a foreign corporation, it would need to be authorized to do business in the US, receive an EIN and file a Form 1120 along with applicable state forms.

As we move more into a global marketplace and the economic lines among nations become more blurred, it’s more important than ever to keep the requirements in the back of your mind. You don’t need to be the expert. You just need to know when to call an expert!

The Trump Tax Plan has radically changed tax planning. Sadly, a lot of people are going to be in for a rude awakening next spring, come tax time.

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