It’s not often that we get to wave a magic wand and turn a taxable transaction into a non-taxable transaction, but partnership taxation offers us this opportunity. Partnership taxation is extraordinarily flexible and combines tax-favored aspects of both corporate entity taxation and individual taxation.
Proper planning and use of this flexibility can actually turn a contribution in return for a partnership interest from a recognition event that results in taxable income to you to a non-recognition event that merely adds to your basis in the partnership.
The difference between contributing services versus property for a partnership interest is huge. Contribute services, and you have taxable compensation. Contribute property, and you have a non-recognition event. Determining whether your contribution is classifiable as property rather than services saves a ton in tax. Keep reading to learn how.