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“Limited Partners” Must Pay Self-Employment Tax

Audio version available here:

Length: approx. 1 min. 20 sec.

Partnerships such as “hedge funds, private equity, and other fund sponsors” were recently left reeling after the US Tax Court ruled in favor of the IRS in a case on self-employment tax exemptions on limited partners.

What is a limited partner? This has been a point of contention since the 90s, and still remains ambiguous to this day, but is typically defined as “passive financial investor” with little involvement in the partnership’s management. Those who fall under this description usually seek out an exemption from self-employment taxes on their earnings from the partnership. However, the Tax Court recently ruled that the limited partner title does not automatically grant that exemption, especially when additional services are rendered to the partnership, rather than the partner keeping their involvement simply as a financial contribution.

Despite the ruling, the IRS has yet to release official regulations on the matter, leaving limited partnerships in an uncertain position. Further petitions to the Tax Court are in the works, so new rulings and regulations may be rolled out. Until then, making sure you are in compliance with current precedents is vital, especially as the 2023 tax filing season approaches.

To stay in compliance, make sure you work with a CPA familiar with this case. We encourage you to reach out to our tax professionals at XQ CPA who will walk you through your tax return and send it through several rounds of review before submitting to the IRS. Give us a call or use our online booking service to make an appointment today.

Phone: 832-295-3353



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