Key Tax Provisions in LLC Operating Agreements: Interpreting Special Allocation, Safe Harbor, DRO, QIO Clauses

Note: CLE credit is not offered on this program

Recording of a 110-minute CPE webinar with Q&A

Conducted on Wednesday, December 16, 2020

Recorded event now available

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Program Materials

This webinar will review LLC operating agreements from the perspective of a tax professional. Our partnership veteran will explain how to identify common language in agreements for special allocations, safe harbor provisions, deficit restoration obligations (DROs), and suggestions for handling provisions that may not match the partners' or IRS expectations.


Allocations made following ownership percentages and liquidating distributions based on positive capital account balances are not the norm. Often, partners choose targeted allocations with preferred returns and cash distributions that do not follow allocations of profits or loss.

Partnership allocations must have a substantial economic effect to be recognized under Treasury Regulations. To meet this standard and avoid potential IRS reallocations, capital accounts must be maintained under the Treasury method or meet specific safe harbors, including a DRO or a qualified income offset (QIO). These specific requirements have led to the inclusion of common boilerplate language in operating agreements.

Practitioners familiar with Section 704(b) requirements may struggle to identify these key provisions in operating agreements. Sometimes the operating agreement has not been written to comply with these complex regulations or with the partners' expectations. Finding and understanding often complicated allocation and distribution provisions in partnership and LLC agreements is critical for flow-through tax practitioners.

Listen as our partnership expert walks you through common tax clauses in partnership agreements that tax advisers need to readily recognize to apply allocations properly and avoid unintended tax consequences.



  1. Operating agreements: an overview
  2. Special allocations
  3. Substantial economic effect
  4. Safe harbor agreements
  5. Noncompliant operating agreements
  6. Best practices


Our panelist will cover these and other critical issues:

  • Identifying boilerplate language added for tax compliance to operating agreements
  • Differences between S corporation and partnership allocations
  • The types of safe harbor agreements
  • Meeting Treasury's substantial economic effect requirements
  • Handling language that does not match partners' expectations
  • When a qualified income offset is required


Clayman, Jeffrey
Jeffrey Clayman, CPA, JD, LLM

Tax Senior Manager
Withum Smith+Brown

Mr. Clayman has over 18 years of public accounting experience with a focus on for-profit businesses in many different...  |  Read More

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