Partner Profits Interests: IRS Safe Harbor, Migrating From Employee to Partner, Ensuring Capital Gains Treatment

Description

Granting a profits interest is not a taxable event, assuming the transfer meets the applicable IRS safe harbor requirements. At the date of the grant, a profits interest is deemed to hold no value and would not share in an immediate liquidation of the company. The absence of upfront taxes upon grant is a powerful incentive for utilizing this method of transfer. However, a recipient is no longer considered an employee of the company, and instead attains partner status, along with all of the rights and responsibilities that come with partnership.

Profits interests can be subject to various vesting requirements, similar to stock options and restricted stock. Properly structuring the profits interest can allow the recipient to share in the future appreciation of the company and enjoy long term capital gains rates on an eventual disposition. Tax advisers must be well-versed in the benefits and requirements of a profits interest to guide clients and report these transfers accurately.

Listen as our panel of experts explains the nuances of partnership profits interests, including meeting the IRS's safe harbor requirements, the effect of the grant on the recipient and grantor, and the tax consequences of its ultimate redemption.