Tax consequences of liquidating a partnership

19-Mar-2017 06:20 by 2 Comments

Tax consequences of liquidating a partnership - datingbar ru

A: From a tax perspective, the primary reason employers issue profits interests is that a profits interest does not result in taxable income to the recipient upon grant.

This treatment is different from the grant of restricted stock/restricted capital interest where, upon the grant of restricted stock/restricted capital interest, the recipient is subject to tax, at ordinary income rates, upon the difference between the price she paid for the equity and the value of the equity.

Entrepreneurs familiar with the corporate form of business likely have received equity incentives themselves, possibly in the form of restricted stock, stock options or stock appreciation rights (SARs).

Now that LLCs have become a popular choice of entity, more service providers are receiving LLC equity incentives.

Because the grantee is now a partner, she should not be treated as an employee for tax purposes.

Thus, the grantee will receive Forms K-1, reporting her share of the LLC’s fiscal year profit and loss (if any) in accordance with the LLC’s Operating Agreement and payments for services (i.e., formerly “salary”).

One such LLC equity incentive is a “profits interest.” This article answers two questions of importance to the recipient of a profits interest: (1) what exactly is a “profits interest” and (2) what are the tax pros and cons to the recipient?

Q: My employer, an LLC, promised me equity incentives.

Careful review of the terms governing the profits interest, which are typically contained in a Grant Agreement and the LLC’s Operating Agreement, is necessary.

» Will the class or series share in distributions of operating income, as well as liquidating distributions?

Partners must include partnership items on their tax returns.

For a discussion of business expenses a partnership can deduct, see Publication 535, Business Expenses.

» Is the class or series entitled to distributions to pay taxes on its allocable share of LLC income each year? » Is the class or series subject to other restrictions which do not apply to other LLC interests, such as transfer restrictions or restrictions on access to information about the LLC?

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