Accounting For Complex Tiered Entities
When one company owns an interest in another company, this is defined as a tiered business entity. For example, a holding company may be the upper tier of underlying lower-tiered entities. Another example of an upper-tier is an operating entity that may have multiple assets where one or more of the assets are investments/ownerships in other entities.
Lower tier entities may comprise a combination of:
1. Non-marketable or marketable ownership interest
2. Non-controlling or controlling ownership interest
3. Non-voting or voting ownership interest
4. Non-operating or operating asset/business interest
Sometimes, the tiered entities are interrelated. In other cases, they may be independent of other tiers. Several structures may form multi-tier entities. Some complex tiered entities may have four or more tier levels. As you may see, unique ownership structures may make complex tiered entity tax planning difficult.
Special Considerations: Partnership Property Transfers
Besides tax planning strategies designed to protect assets and shield liabilities, one example of the challenging areas of tiered partnership arrangements may be the transfer of property.
Section 743 (B) of the tax code express that in the case of transferring an interest in a partnership by purchase, death, or exchange (with respect of tax code 705 being in effect or unless the partnership has substantial built-in loss) such transfer shall fall under two categories: tax code I.R.C. § 743(b)(1) or I.R.C. § 743(b)(2). Both of these result in special ramifications not aligned with the general rule of the basis of partnership property not being adjusted. As you may see, complex tiered entity arrangements may be difficult to understand.
Additional Tax Considerations
The challenges of complex tiered entity tax planning may not end with the transfer of property. You also need to understand the treatment of allocations deductions. An experienced small business accountant should be able to help you understand such aspects of financial management. Our accountants here at Fusion C.P.A., recommend working with an expert who is familiar with I.R.S. partnership audit rules that could permit a push-out election. They should also be familiar with how the 20 percent pass-through tax deduction can be applied, which, if utilized correctly, may increase your profits.
Tax Laws That Can Impact Complex Tiered Entity Tax Planning
The qualified business income, also known as the Q.B.I. deduction, makes it possible for some complex tiered entities to receive a 20 percent deduction. However, in order to receive the deduction, the entities may need to pass must pass through several hurdles in reporting their income. It may be helpful for individuals considering the Q.B.I. deduction to consult speak it over with an experienced tax adviser to see if they are eligible for it. If so, their tax adviser should be able to may help them see what steps they need may be able to take today to become eligible for the deduction.
In recent years, the I.R.S. has also changed the way it administers audits of complex partnerships. The Centralized Partnership Audit Regime regulations give partners more flexibility when a complex entity is audited.
Partners now may have the option to:
- Completely elect out of the new rules each year if they meet certain qualifications.
- Be totally subjected to the new rules. When an audit is complete on the partnership level, the partnership may have to pay the additional tax liability, including penalties and interest.
- Partially elect out of the new rules. In this scenario, an audit is done on the partnership level. However, the tax liability is pushed out. This is then paid by the partners.
Complex tiered entities may provide liability protection for all partners involved and may be complicated to set up for many business owners. At Fusion C.P.A., we have experience dealing with complex tiered entities. We offer guidance that may help our clients understand potential tax liabilities, tax planning, accounting, and financial advisory. You can learn more about our services by clicking the button below to schedule a complimentary discovery call today!
This blog article is not intended to be the rendering of legal, accounting, tax advice or other professional services. Articles are based on current or proposed tax rules at the time they are written and older posts are not updated for tax rule changes. We expressly disclaim all liability in regard to actions taken or not taken based on the contents of this blog as well as the use or interpretation of this information. Information provided on this website is not all-inclusive and such information should not be relied upon as being all-inclusive.