Partnerships and Tax Strategy
In a corporation, it is difficult to change the profit structure without tax backlash. If the owners want to change the profit structure of a corporation, for whatever reason, it can result in a higher tax liability for one or more of the principals. In a partnership, the profit structure can be changed easily and without any tax drawbacks to any of the principal parties.
A partnership is the most commonly used entity for real estate ownership because of a partnership’s flexibility. Many real estate holdings result in losses because of depreciation deductions. Even though an S or C corporation can take losses, it is often tough for the owners of S and C corporations to realize the immediate tax benefits from those losses. A partnership can realize tax benefits from its losses much more easily.
In a partnership, you can transfer assets out of the partnership without incurring tax consequences. A partnership is free to distribute assets to a partner without tax liability to the partner or partnership. The same sort of transfer in an S or C corporation generally results in the owners having to pay more taxes.
Partnerships are often used in estate planning because you can transfer assets outside of the estate, thereby reducing estate taxes, but still maintain control over them because of the partnership. Here is a probable example of such a use of a partnership in estate planning. You create a partnership and place yourself in control. You transfer some assets out of the estate and into the partnership. Next, you gift part ownership to your beneficiaries. You have removed some of the assets of the estate out of the estate while still maintaining control over them for as long as you wish.
Flexibility is a key element in maintaining a tax strategy. Partnerships are the most flexible business entities when it comes to taxes. Therefore, it just makes sense to consider partnerships as a primary entity in developing your business interests in accord to your tax strategy. As with any business enterprise, it is good to seek the consultation of a tax professional before making any business tax decisions. There are plenty of tax experts who specialize in partnerships. Seek one out and find out what their advice is concerning partnerships as business entities.
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In: Taxes · Tagged with: business, partnerships, real estate, tax
