Key Takeaways:
- Pass-through entities are reassessing their structure due to potential changes in corporate tax rates and increased IRS scrutiny on partnerships.
- Pass-through entities should stay vigilant about audits and M&A due diligence so they can proactively improve internal controls and leverage tax technology to further mitigate pitfalls and risk.
- As pass-through entities are increasingly exposed to employment tax disputes — especially regarding partners’ self-employment income — they should evaluate their tax positions with a professional’s guidance.
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Pass-through entities, including partnerships, S corporations, and LLCs, can benefit from many tax advantages due to their structure, but they also encounter distinct challenges. BDO polled senior tax executives about their most pressing concerns and plans for the year ahead. It highlighted the specific tax risks and challenges they’re facing. You can read more here: 2024 Tax Strategist Survey.
Read more below to discover the top three takeaways from the data, as well as actionable steps your tax leaders can take to address these issues.
Takeaway 1: Changing Tax Policy May Motivate Pass-Through Entities to Reevaluate Structure
According to the BDO survey, tax executives cited expiring provisions in the Tax Cuts and Jobs Act (TCJA) and potential changes to the corporate tax rate as their top election-related tax concerns for pass-through entities. With the 2024 election behind us, tax leaders are closely monitoring potential tax policy shifts, such as a lower corporate tax rate.
The election outcome and subsequent tax policy changes may influence some pass-through entities to consider restructuring. Moreover, recently issued IRS guidance highlights an increased scrutiny of partnerships and the structuring of certain partnership transactions. Pass-through entities should watch tax policy developments closely to assess how they might impact choice of entity, and they should be prepared to run analyses as legislation moves through Congress.
Takeaway 2: Pass-Through Entities Are Preparing for Increased IRS Enforcement
52% of pass-through entities considered increased IRS funding a key issue to monitor in the 2024 election. Now that the election outcome is clear and the new president is in office, concerns about IRS enforcement may have waned, but pass-through entities should still be diligent about preparing for a potential audit which can come at any time. It’s possible that the new administration may seek to reduce IRS funding and/or unwind existing IRS guidance, including regulations. It’ll be important to monitor potential developments and be ready to quickly evaluate their potential impacts on your company’s tax position.
Your company may also face increased scrutiny if you are planning a transaction like an acquisition or sale. Due diligence during a transaction is essential and should be top of mind — it’s expected that M&A activity is anticipated to increase in 2025.
To prepare for an IRS examination or potential increased scrutiny during sell-side due diligence, pass-through entities should proactively address their tax vulnerabilities. This approach can include several different routes; they can include meticulously reviewing tax positions and reported amounts on tax return filings, improving internal controls to reduce risks and enhance accuracy and efficiency in return preparation, and adopting tax technology and automation to streamline processes. Collaborate with your service providers; they can help you proactively identify risks in returns and processes, enabling entities to potentially avoid or be better prepared for IRS audits or examinations. If faced with an audit, it may be strategic to outsource exam preparation.
Takeaway 3: Pass-Through Entities Grapple with Employment Tax Disputes
Tax disputes can impact any company, but BDO data reveals that pass-through entities are more susceptible to employment tax-related disputes compared to other business structures. In the past year, 32% of pass-through entities involved in tax disputes faced issues related to employment taxes.
Employment tax disputes have been a recurring challenge for pass-through entities, especially partnerships, since the IRS intensified scrutiny of how partnerships report partners’ self-employment income. Individuals actively participating in a partnership’s business may soon be unable to rely on the “limited partner” exception to avoid self-employment taxes. Consequently, pass-through entities should carefully evaluate their self-employment tax positions in anticipation of upcoming judicial guidance and consider collaborating with external professionals to help navigate the complexities of partnership tax.
How MGO Can Help
At MGO, we know the pass-through entity taxation landscape is evolving quickly. Our team of qualified advisors stays ahead of the curve, navigating advancements in tax technology, complex international tax regulations, global tax planning, and state and local tax intricacies. We take a proactive approach to make sure your business remains compliant with these changing regulations, so you can avoid costly issues and maintain long-term financial stability. Contact us for more.