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Tax Planning For Partnerships

January 21, 2015

Partnerships are unique entities with unique tax attributes; unlike traditional corporations, they are ‘pass-through’ entities. The income that a partnership earns is ‘passed through’ in manner described by the partnership agreement, to the partners, though a standard partnership is unlimited in its liability. Typically, this means that a standard partnership is an inferior entity to a C-corporation, but there important exceptions that have seen increasing use in the past decades.

partnership-gbh-accounting-blogA limited liability company (LLC) has limited liability for its members, and typically files either as a partnership (1065) or as an S-corporation (1120S). A limited partnership (LP) has some of the attributes of both for tax purposes, and offers a variety of planning possibilities to limit the taxes paid by operating partners, as the income earned by the partnership passes through to the individual partner with the same characteristics with which it is earned within the partnership.

One plan for limited partnerships, which limits the self employment tax for the partners participating in the organization, is to use a thinly capitalized general partner entity (generally a standard C-corporation) and a mixture of guaranteed payments and pass through income for those partners that are actively working in the limited partnership. The guaranteed payments are then the only amounts that are subject to self employment and available for pension plan contributions.

Without this plan, $250,000 of income for a single filer is subject to the self employment tax of 15.3% on the first $117,000 of income and 2.9% on the additional income up to $200,000 and 3.9% after that on the unlimited income from the entity. This simple plan has a tax savings on $250,000 of partnership income for a single filler of over $4,300 per year.

Please contact an attorney before beginning any process to create a corporation, partnership, or any other such legal entity, and consult your tax professional before enacting any tax planning, as the particulars of your situation might not fit the typical case used as an assumption in these blog posts.

The content of this blog post is not to be relied upon for the preparation of a tax return or to avoid tax penalties imposed by the Internal Revenue Code. If you desire a formal opinion on a particular tax matter for the purpose of filing a return or avoiding the imposition of any penalties, please contact us to discuss the further Treasury requirements that must be met and whether it is possible to meet those requirements under the circumstances, as well as the anticipated time and fees involved.

Image credits: MyTudut

Herbert Kalman

Written by Herbert Kalman

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