Discussion:Splitting Partnership Income and Losses
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Discussion Forum Index --> Tax Questions --> Splitting Partnership Income and Losses
| 5 February 2008 | |
| We have a 2 person llc, that is taxed as a partnership. Partner 1 put in 75% of the investment, Partner 2 put in 25% of the investment. Can we give Partner 1 90% of the losses in 2007, and in 2008 change that percentage to some other amount?. If so, is there a special election form or do we simply do an annual LLC resolution each time we change the percentages? | |
RoyDaleOne (talk|edits) said: | 5 February 2008 |
| Why are you changing the percentages? Can not be done if the only reason is tax motiviated. | |
| 5 February 2008 | |
| Write an agreement between the partners that specifically states what the tax % will be. They don't have to be 75/25. But you can't change them once it is decided on a %. The 75/25 speaks to the basis of each partner, not necessarily the income/expense %. taxea | |
RoyDaleOne (talk|edits) said: | 5 February 2008 |
| Actually, you can change them, however I believe there is an economic substance test.
That is why I asked for the reason. | |
| 5 February 2008 | |
| W/o any written agreement, isn't the IRS "default" here 50/50? In any case, client can optionally do a records search for any backdated operating agreement. :-) | |
| February 6, 2008 | |
| If the overall economic deal is to split profits and losses 75/25, changing the economic deal to 90/10 can be done provided such allocations have substantial economic effect. That being said, my guess is that you want to allocate losses 90/10 in year 1 because one partner needs more losses to offset greater income outside the partnership and that you will “correct” this allocation in a subsequent year with an offsetting allocation. If my guess is correct, then the end result of these offsetting allocations is that the partners ultimately get back to sharing profits and losses 75/25 as originally intended and the only motive/benefit to the offsetting allocations is to reduce the present value of the partners’ tax liabilities. Accordingly, the 90/10 loss allocation (and subsequent offsetting allocations) would probably be considered to lack substantiality and would be reallocated in accordance with the partners' percentage interests (i.e., 75/25 if that is the economic deal). | |
| February 6, 2008 | |
| The partners' motive doesn't matter. Whether the agreement is in writing doesn't matter.
Either the allocation has economic substance or it doesn't. If the 90/10 allocation for the current year is for real, and won't be reversed too quickly, it's going to have substantial economic effect. | |
| February 6, 2008 | |
| LH - While an examination of the partners' motives in making allocations is not necessary in determining whether or not an allocation has substantial economic effect, if the partners' motives in making such allocations are solely tax driven, the allocations will likely fail the “substantial” requirement. The objective of testing an allocation for “substantiality” is to determine if such allocation has economic effect independent of tax consequences.
You say that if the allocation is “real” and isn't “reversed too quickly” then we have achieved substantial economic effect. How do you define “real?” What do you mean by “reversed to quickly?” The Regs. provide that “transitory allocations” made within five years are not substantial if such allocations do not substantially impact the partners' capital accounts and the present value of the partners' total tax liability is less than it would be without the allocations [see Reg. 1.704-1(b)(2)(iii)(c)]. The OP is clearly contemplating a 90/10 allocation in 2007 followed by a “different“ allocation in 2008, which is less than five years - as to what allocations he is contemplating, it's anyone's guess. However, if my “guess” is correct (see above post), it is probable that the offsetting allocations (i.e., transitory allocations) will not be considered substantial. If my guess is not correct and the allocations are not transitory, such allocations may very well have substantial economic effect. | |
