Is there a change happening in the Limited Partner Landscape?

The Fifth Circuit clarified that the term “limited partner” in IRC § 1402(a)(13) focuses on a partner’s limited liability, rather than whether they perform services. This means that many partners who are officially limited partners might be able to exclude their distributive share from self-employment tax, even if they do work for the partnership. While this ruling doesn’t currently apply to Florida taxpayers, it’s a good reminder to review your partnership agreement as tax rules evolve. Staying informed helps you make the best decisions for your partnership’s future.

A partnership called Sirius Solutions and its partners debated whether certain partnership income should be subject to self-employment (SE) tax. The IRS argued that the partners’ shares were taxable because they performed services. The Tax Court agreed, using a test that looked at the level of activity of the partners. However, the Fifth Circuit reversed this decision, stating that the law excludes the distributive share of a limited partner. They emphasized that a “limited partner” should be understood in its usual sense—as someone who has limited liability—not based on how much the partner works for the business.

What this means for limited partners in Florida

Florida is in the Eleventh Circuit, so the Fifth Circuit’s ruling isn’t binding in Florida courts. Still, the decision offers valuable guidance and will be helpful for Florida taxpayers and their advisors when deciding whether to claim the § 1402(a)(13) exclusion or pursue refunds. If later on, the Eleventh Circuit or the IRS reaches a different conclusion, that could change the outcome for Florida taxpayers.

Practical consequences for limited partners and their advisors

• Take a moment to review your current status. If you’re a limited partner according to your partnership agreement and state law, your share of the distributive income might be exempt from SE tax, even if you’re performing services.
• Looking back at previous years can be helpful, too. If you paid SE tax on partnership shares during years still within the statute of limitations, you might be able to amend your returns or file for refunds. Just remember, timing and proper documentation are key.
• It’s also important to keep good records of your limited partner status. Make sure your partnership agreements, certificates of limited partnership, and state filings clearly show your limited partner role and limited liability. Having solid documentation can really support any refund claims.
• Also, consider the jurisdictional aspect. Since the court decision is binding only in the Fifth Circuit, relying on it in Florida could involve some litigation risk if the IRS or courts in the Eleventh Circuit take a different stance. Weigh the costs and benefits of filing an amended return or a protective claim.
• Finally, plan your future arrangements carefully. To keep the exclusion intact, make sure your partnership documents and filings reflect your status as a limited partner, and try to avoid informal setups that might blur the lines between limited and general partner roles.

How can we help

If you’re a limited partner in Florida, we’re here to make things easier and more straightforward for you. We can review your partnership documents and tax returns to help identify opportunities for refunds, prepare amended returns or protective refund claims when needed, and provide helpful advice on documentation and governance changes to support better tax outcomes as tax laws continue to evolve. If you have any questions or need support with federal taxes or planning, please feel free to reach out to Lamarre Law Group, P.A. Our friendly team has over 11 years of experience guiding clients through even the most complex tax matters. Give us a call at (833) 526-2773 or visit lamarrelawgroup.com to schedule a consultation today.