United States

Limited partners and the self-employment tax

Implications of the Renkemeyer case and other authorities

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When are limited partners exempt from self-employment tax on their partnership earnings? And who qualifies as a limited partner? Does that term include partners in a limited liability partnership (LLP) or members in a limited liability company (LLC)? To many observers, the answers to these questions are far from clear. Tax Notes has published an article by Don Susswein, a principal in our Washington National Tax office, that explains the issues and suggests how they ultimately may be resolved.

After reviewing the relevant provisions of the tax code, statements of the IRS and Treasury Department, and the Tax Court’s decisions in Renkemeyer and Howell, the author concludes that, in his view, a strong argument exists to permit traditional state-law limited partners to exempt from self-employment income all limited partnership income, other than guaranteed payments for services, exactly as the statutory language provides. That would include compensation for personal services provided by the limited partner, as long as it was a share of partnership net income and not a guaranteed payment. In addition, the partnership could not be a sham. There is also a strong argument that partners in LLPs and LLCs can apply the exemption to any portion of their distributive share that is not compensation for their personal services. On the other hand, it is unclear how the exemption applies to LLC and LLP members who perform services, but are paid for those services with a specified share of partnership net income and not with a guaranteed payment.

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