Surviving Technical Terminations; How to Streamline Fixed Assets Management

SURVIVING
TECHNICAL
TERMINATIONSHow to Streamline Fixed Assets
Transfer and Management
White Paper
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SURVIVING TECHNICAL TERMINATIONS
Introduction
The partnership and limited liability company (LLC) ownership structures are increasingly
popular choices for businesses of many types and sizes. The reasons for this are myriad,
including: liability exposure, tax advantages, control of the business, flexibility, and ease of
reporting.
For instance, according to Jim Connors, director of valuation services for Pinnacle
Healthcare Consulting, the most common entity seen in today’s healthcare market is the
LLC, followed by a combination of partnerships and S Corporations.1
Another example of
the popularity of these company structures is real estate companies, which often choose
partnership or LLC structures for individual or groups of properties.
While these types of company structures have many advantages, there is one situation that
can trigger a significant amount of additional work for company tax departments: a technical
termination. Unlike an actual termination of a partnership or LLC where the company ceases
to exist, the partnership or LLC is considered technically terminated for federal income tax
purposes only.
When a technical termination is triggered, many tax departments can count on plenty of
overtime to handle transferring the partnership’s or LLC’s fixed assets from the old company
to the new one. This white paper can help tax professionals understand the challenges of
managing fixed assets involved in a technical termination and how to more efficiently and
accurately handle the set-up, transfer, and management of those assets.
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Large partnerships on the rise
The number of large partnerships has more than tripled to 10,099 from tax year 2002 to 2011. Almost
two-thirds of large partnerships had more than 1,000 direct and indirect partners, were made up of
six or more tiers, and/or self-reported being in the finance and insurance sector, with many being
investment funds.
Source: “Large Partnerships: With Growing Number of Partnerships, IRS Needs to Improve Audit
Efficiency,” U.S. Government Accountability Office, September 18, 2014.
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Is It The End? Triggering A Technical Termination
Unlike other forms of company structures, a partnership or LLC essentially has two different
lifecycles. One is the legal “life” of the business, which continues until the partners agree to
terminate the company. The other lifecycle is based on the tax “life” of the business.
A partnership can be considered terminated for tax purposes while the legal company lives
on. This is called a technical termination because it’s seldom the intent of the partners to
terminate the company. A technical termination ends the tax life of one partnership and
begins the life of a new partnership. It’s a complex transaction that requires special treatment
and often presents significant headaches for the tax department.
Per Section 708 and related regulations, the termination of a partnership or an LLC classified
as a partnership is triggered if there is a sale or exchange of 50 percent or more of the total
interests in the partnership’s capital and profits within a 12-month period (Sec. 708(b)(1)
(B)). A partnership interest that is sold to another partner and then resold to another party
1 Richard Robermo, “The Various Business Entities That Your Healthcare Practice Can Be Modeled After,” The
Ambulatory M&A Advisor, March 21, 2016.

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is only counted once toward the determination of whether a 50 percent or more change in
partnership capital and profit has occurred within the 12-month period (Regs. Sec. 1.708-
1(b)(2)).
Let’s look at a few examples of events and whether they lead to a technical termination:
• Example 1: Partner A has a 40 percent interest, Partner B has a 55 percent interest and
Partner C has a 5 percent interest in partnership ABC. If Partner B sells 50 percent of his
interest in equal parts of 25 percent each to Partners A and C, then a technical termination
has occurred.
• Example 2: Assume the same facts as in example 1 except that Partner A sells his entire
40 percent interest in partnership ABC to Partner B and as a result increases Partner B’s
interest in partnership ABC to 95 percent. If two months later, Partner B sells a 40 percent
interest to Partner C, this does not cause a technical termination because only one 40
percent interest was sold within a 12-month period.
• Example 3: Assume the same facts as in example 2 except that one month later, Partner D
is admitted into ABC partnership with a 30 percent interest after he contributes $300,000,
and two months later Partner D receives a distribution of $300,000. This disguised sale
triggers a technical termination because a 70 percent change in partnership capital and
profit has occurred.
• Example 4: If the transactions in examples #1 and #3 above were gifted interests instead
of sales transactions, these would not be technical terminations. A partnership interest that
is gifted does not trigger a technical termination.
Out With The Old, In With The New
When a technical termination occurs, there can be resulting tax consequences and
opportunities that require insightful planning and compliance work, including filing short-year
tax returns, considering new elections for accounting methods for the new partnership, and
fixed asset lifecycle management to minimize loss of depreciation deductions.
The partnership’s tax year closes on the date of the termination. This results in a requirement
to file two, short-year tax returns. The old partnership is required to file Form 1065 for the
period ending on the date of termination. This partnership tax return is due 3½ months
following the end of the month during which a partnership terminates. A separate extension
can be filed to extend the due date of each respective short-period return by an additional
five months.
The new partnership is required to file Form 1065 for the period beginning the day after the
termination. The new partnership continues using the employer identification number (EIN) of
the old partnership.
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Pass-through businesses aren’t always small
According to the Tax Foundation, the number of pass-through businesses (which includes sole
proprietors, partnerships, LLCs, and S corporations) has nearly tripled since 1980, while the number
of traditional C corporations has declined. Pass-through businesses employed more than 50 percent
of the private sector workforce and accounted for 37 percent of total private sector payroll in 2011.
Source: Kyle Pomerleau, “An Overview of Pass-through Businesses in the United States,” Tax
Foundation, January 2015.
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What’s Mine Is Yours
While generating short-year tax returns adds to the tax compliance effort for companies,
it’s often management of the fixed assets involved in the partnership being terminated that
creates a significant burden for the tax department. When a partnership is terminated for
tax purposes, its assets are considered to be contributed tax-free to the new partnership
(under Sec. 721), and the interests in the new partnership are then deemed distributed to the
members of the old partnership (Regs. Sec. 1.708-1(b)(4)).
Typically the mechanics of accounting for fixed assets include transferring the fixed assets at
net book value and valuing them at the same rate in the new company. The assets are treated as
new assets to the new company and therefore allow full depreciation. The remaining tax basis of
depreciable property is then recovered over a new depreciable life. Bonus depreciation cannot
be taken if it was previously taken for the asset. Table 1 shows an example of how an asset is
handled for a technical termination that occurred on June 30, 2015.
ASSET ATTRIBUTES OLD PARTNERSHIP NEW PARTNERSHIP
Value $20,000 $3,840
Date placed in service (PIS) 01/01/2013
07/01/2015 (the day after the
technical termination)
Life 5 years 5 years
Bonus 50% Not eligible
Net book value (at the time of
technical termination)
$3,840 $3,840
Table 1. Fixed asset transfer from technically terminated partnership to new partnership
The asset used in the example above was placed in service two years prior to the technical
termination and therefore does not qualify for bonus depreciation for the new partnership.
However, property qualifying for bonus depreciation that is placed in service during
the tax year of a technical termination is treated as originally placed in service by the
new partnership on the date the property is contributed by the terminated partnership.
Accordingly, the entire amount of bonus depreciation is then allocated to the new partnership
while the terminated partnership cannot claim any of the bonus depreciation even though it
placed the property in service.
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Fair market value: the Section 754 election
Of all the elections that a partnership may make, the Section 754 election is worth noting. Under
Section 754, a partnership may elect to adjust the basis of partnership property when property is
distributed or when a partnership interest is transferred. As an example, the assets could be revalued
to fair market value. The purpose of a Section 754 election is to reconcile a new partner’s outside and
inside basis in the partnership. Section 743 covers the mechanics of revaluing the assets to fair market
value which is beyond the scope of this paper.
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Managing Fixed Assets For Technical Terminations
The impact of a technical termination on fixed assets management and depreciation can be a
major pain point for many companies. Without robust fixed assets software, businesses are
often faced with paying significant fees to an external accounting firm to handle the proper
transfer and set up of fixed assets from the old partnership to the new one. If companies
attempt to handle the work in-house using Excel spreadsheets, it can generate many hours of
manual labor as well as potential inaccuracies or mistakes.
Even if a business has some type of software in place that supports fixed asset management,
that software may limit the number of books the company can use, or lack the ability to import
data from other software or Excel. Further, current management processes and software may
not be designed to support ending depreciation on the technical termination date, causing
the tax department to again have to rely on manual efforts in Excel spreadsheets.
For companies where handling technical terminations are not a rare occurrence, it pays to
consider software that streamlines the managing and transferring of fixed assets, including
support for technical terminations. While some accounting solutions may help manage
discrete parts of the fixed assets lifecycle — often for GAAP requirements only — most do not
support the needs of the tax department, including technical terminations.
Companies facing technical terminations need expert software designed for managing fixed
assets and depreciation across the entire lifecycle, including technical terminations and
other complex tax situations. Businesses should look for a solution that gives them the ability
to handle a large number of assets and changes at one time, such as what occurs when
transferring assets from an old partnership to a new one.
With the right solution, companies can handle technical terminations far more efficiently and
accurately, while saving money compared to engaging an outside accounting firm for every
technical termination.
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What to look for in fixed assets software
• A centralized place to track companies and assets
• Unlimited companies
• Custom books
• Built-in processes that support closing out fixed assets in the old partnership and transferring them
to the new partnership
• Automatic compliance with frequently changing tax and GAAP regulations
• Automatic, accurate depreciation calculations
• Comprehensive reporting and an audit trail
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Conclusion
Along with the growth in number of partnerships and LLCs comes the burden of the
compliance efforts involved in technical terminations. In asset-intensive industries, a technical
termination can result in a nontrivial amount of additional effort and cost for tax departments.
One way to reduce the burden is by automating as much of the effort as possible. Fixed
assets software designed to handle complex tax situations such as technical terminations
can save time and money as well as improve the accuracy of fixed assets management and
depreciation.
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Learn more about BNA Fixed Assets™ at www.bnasoftware.com, or call 800.424.2938 to contact
your local Bloomberg BNA Representative.
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About BNA Fixed Assets
With BNA Fixed Assets from Bloomberg BNA, it’s easy, efficient, and cost-effective for
companies of any size to manage the complete fixed assets lifecycle from purchase to
retirement – saving you time and money while ensuring accuracy. Bloomberg BNA’s
renowned tax expertise is built right into the software – it’s like having a tax expert at your
side, providing the most up-to-date, comprehensive insight into the latest accounting rules
and regulations. Our unique validation engine enforces compliance with tax regulations and
GAAP rules, automatically ensuring accuracy. Even novice users can correctly and easily use
the software without compromising accuracy.
BNA Fixed Assets delivers all the capabilities of a robust fixed assets management system
and grows with you as your business matures. Whether your company has tens, hundreds, or
thousands of fixed assets, there’s a BNA Fixed Assets solution designed to meet your needs
and budget:
• Desktop – Designed for a single user, it’s powerful, but easy-to-use
• Server – For multiple users within the same company
• Web-hosted – Powerful, secure, anytime, anywhere access with no software to install or
maintain

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About Bloomberg BNA’s Software Products
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resources. With category-leading software and top-rated technical support, we are the
solution of choice for professional firms and corporations of every size. More than 70,000
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Surviving Technical Terminations; How to Streamline Fixed Assets Management

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Surviving Technical Terminations; How to Streamline Fixed Assets Management