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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.
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