Payroll on Bloomberg Tax is built to get you to the right answer faster and more efficiently. Get all the payroll intelligence you need with Bloomberg Tax expert analysis, perspectives and...
A plan by House Republicans to reshape the tax code may resolve a long-standing dispute between partnerships and the Internal Revenue Service about how to tax partners who have small stakes in partnerships, practitioners believe.
The proposal could make the “dual-status partner problem easier to resolve,” said Kurt Lawson, a partner at Hogan Lovells US LLP who focuses on employee benefits issues.
The proposal seeks to differentiate which income is a return on work versus a return on investment. House Republicans have proposed to treat the compensation paid to a pass-through owner-operator as income taxed at individual rates, while other business income would be subject to a 25 percent pass-through tax.
A change to the tax code would be welcomed by some service partnerships that already are compensating some employees with equity interests. IRS rules do not allow an individual to be a partner and an employee of the same partnership to prevent people from cherry-picking the benefits of both statuses while avoiding the burdens.
The proposal appears similar to a dual-status partner arrangement, but the only difference is whether the income is subject to Self-Employment Contributions Act taxes and quarterly estimated payments or Federal Insurance Contributions Act taxes and withholding, Lawson said.
Because there is not a rate differential between SECA and FICA taxes, there is no concern about a loss of revenue to the government, said Don Susswein, who specializes in partnerships at the consulting firm RSM US LLP. The difficult part of implementing the House Republicans’ plan would be how to determine reasonable compensation, he said.
Reasonable compensation has been subject to much uncertainty in other areas of tax law because it is hard to define what is or is not appropriate in every circumstance.
Individual wage income under the Republican plan would be taxed at a graduated rate, topping out at 33 percent. The pass-through income would be taxed at 25 percent.
Copyright © 2016 The Bureau of National Affairs, Inc. All Rights Reserved.
All Bloomberg BNA treatises are available on standing order, which ensures you will always receive the most current edition of the book or supplement of the title you have ordered from Bloomberg BNA’s book division. As soon as a new supplement or edition is published (usually annually) for a title you’ve previously purchased and requested to be placed on standing order, we’ll ship it to you to review for 30 days without any obligation. During this period, you can either (a) honor the invoice and receive a 5% discount (in addition to any other discounts you may qualify for) off the then-current price of the update, plus shipping and handling or (b) return the book(s), in which case, your invoice will be cancelled upon receipt of the book(s). Call us for a prepaid UPS label for your return. It’s as simple and easy as that. Most importantly, standing orders mean you will never have to worry about the timeliness of the information you’re relying on. And, you may discontinue standing orders at any time by contacting us at 1.800.960.1220 or by sending an email to firstname.lastname@example.org.
Put me on standing order at a 5% discount off list price of all future updates, in addition to any other discounts I may quality for. (Returnable within 30 days.)
Notify me when updates are available (No standing order will be created).
This Bloomberg BNA report is available on standing order, which ensures you will all receive the latest edition. This report is updated annually and we will send you the latest edition once it has been published. By signing up for standing order you will never have to worry about the timeliness of the information you need. And, you may discontinue standing orders at any time by contacting us at 1.800.372.1033, option 5, or by sending us an email to email@example.com.
Put me on standing order
Notify me when new releases are available (no standing order will be created)