Client Alert
Avoiding Self-Employment Tax with a Limited Partner Interest
The best tax planning will often be found where both the form and substance of a transaction align in the client’s interest. One such planning activity focuses on reducing self-employment tax, and while the attempt is admirable, the substance of the transaction might be stronger than its form. Generally, if you’re a partner in a partnership, your distributive share of income is subject to Self Employment Contributions Act (SECA) tax, also known as self-employment tax. This can be up to an additional 15.3 percent on your earnings, unless an exception applies. Many tax pros attempt to mitigate this tax by simply making the spouse of the main business partner a limited partner in the entity. The thought is that an exclusion applies for SECA tax when there is a “limited partner’s” share of partnership income. But be careful! When the underlying substance overrides the form of a transaction, the taxpayer generally will lose. The IRS recently highlighted such a problem with form in its draft partnership tax instructions by saying “For purposes of self-employment tax, however, status as a limited partner is determined under Section 1402(a)(13); whether a partner is a limited partner under state limited partnership law is not determinative.” Simply calling a partner “limited” is not enough. The limited partner exception from self-employment tax creates a significant benefit when applied, but rulings focused on the substance of the partner’s interest have narrowed this exception. Let’s review how to properly qualify as a limited partner in light of the IRS’s recent emphasis in this area. In the process, we will also look at the specifics of how particular forms should still win the day by avoiding SE tax. Keep reading for more.
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2024 Summer Education Series Event Calendar
We are so excited to announce the 2024 Summer Education Series! All summer long we will be bringing our loyal subscribers monthly webinars featuring some of the brightest minds in tax. Each webinar will feature our usual blend of high-quality education and entertainment and include continuing education credits for those who qualify. All of this is included in your regular subscription! Continue reading to see what we have in store…
Working With the IRS Now
The IRS has spent the past several months crowing about the relative ease of filing season 2023 and improvements the service has made on behalf of American taxpayers. Filing season 2024 opened on Monday, January 29 with Commissioner Danny Werfel thanking the tax professional and assuring us that “your efforts make a difference, not just for your clients, but for the IRS and the entire nation.”
Despite Werfel’s rose-colored press releases, there’s still plenty of room for improvement, especially on the tax-professional-facing side of the service.
When Does Married Filing Separately Make Sense?
If your clients are married, at this time of year they’re probably choosing to file their taxes under the status of Married Filing Jointly. But is MFJ the best move? Married folks have other options; one of them is Married Filing Separately (MFS). Despite this status sounding like someone’s dressing for divorce court, it can be useful in certain circumstances – or harmful.