Receiving a Partnership Interest in Exchange for Services
Many partners receive a partnership interest for services they have performed on behalf of the partnership. A Denver tax attorney and business attorney at The McGuire Law Firm assists partners and the partnership in understanding the tax implication upon receipt of the interest and other issues to consider.
When an interest in the capital of a partnership is received in exchange for services performed, the transfer is treated as a transfer of property under IRC Section 83. Under IRC Section 83, property that is transferred in connection with the performance of services is taken into account when the property becomes substantially vested. Property is considered to have a substantial risk of forfeiture if the rights to the property are based upon a future condition or future performance of some service or services.
When property is received for the performance of services, the fair market value of the property received is included in income. A taxpayer can make the IRC 83(b) election whereby the taxpayer can elect to include the value of the property in income upon receipt at the fair market value when the property is subject to a risk of substantial forfeiture. Our Denver business attorneys and tax attorneys feel that making this election can benefit the taxpayer if the property appreciates because the future appreciation and gain would be taxed to the taxpayer as a capital gain as opposed to ordinary income.
An individual receiving an interest in a partnership for services performed should discuss this issue with their tax attorney or business attorney in order to understand the tax implications and their options regarding the transaction.
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