Partnership Question

[S T]

Have a taxpayer h/w (form 1065) General partnership 60/40.(Retail business) Husband materially participates 100% in the partnership, spouse does not since she has been diagnosed with ALS (Lou Gehrigs Disease).
Question, if the wife is not active and not materially participating in the business partnership, but she is receiving 40% of the income, is she still subject to the SE tax?

Sandy

[Golden Rocket]

I think so

Sandy, the only way for his wife to avoid self-employment tax is for her to become a limited partner. I hate to hear of people who suffer misfortune such as this.

To make matters worse, I don't know how she "suddenly" can become a limited partner. Perhaps it can be done. But consider her name is probably already countersigned as a guarantor for loans. It would be easier if she were not married to the general partner as the marriage bond may cast a performance union in the operation of the partnership as well.

There are such things as "family limited partnerships" but I don't know how your clients can migrate into something like this at this time. Maybe others can offer encouragement.

[Bees Knees]

Form an LLC. Neither husband nor wife would be subject to SE tax on the Line 1, K-1 profits. Only guaranteed payments in an LLC are subject to SE tax.

Of course, this issue is controversial since IRS tried to make LLC profits subject to SE tax before Congress said no. Nothing has been done since to resolve the issue.

[equinecpa]

Wow Bees...can you elaborate on this statement? Does it only apply if LLC elects to be taxed as S corp or does it apply to any LLC? Can you perhaps PM me some case references?

Thanks

Carolyn

[Bees Knees]

The issue applies to all LLCs. It is discussed in detail on page 5-23 in TTB.