Partnerships and Asset Protection - Partnership Tax Rules

The generally favorable partnership federal income tax rules are a common reason for choosing to operate as a partnership with multiple partners instead of as a corporation with multiple shareholders. The most important partnership tax rules can be summarized as follows:

  1. You get pass-through taxation.
  2. You can deduct partnership losses (within limits).
  3. You may be eligible for the Section 199A tax deduction.
  4. You get a basis from partnership debts.
  5. You get a basic step-up for purchased interests.
  6. You can make tax-free asset transfers with the partnership.
  7. You can make special tax allocations.

Partnership taxation is not all good stuff. There are a few essential disadvantages and complications to consider:

  • Exposure to self-employment tax
  • Complicated Section 704(c) tax allocation rules
  • Tricky disguised sale rules
  • Unfavorable fringe benefit tax rules

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