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What are Partnership Profits Interests and How are they Taxed? - YouTube
Channel: Untracht Early
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when receiving partnership interests in
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exchange for services rendered
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there are two types of interests to
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consider capital interests and profits
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interests several factors will determine
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which type of interests will be most
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appropriate each has its own pros and
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cons and each has their own tax
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considerations in this video I'll
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discuss what profits interests are and
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how both vested and unvested profits
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interests are taxed a profits interest
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gives the person a right to a percentage
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of future profits and no right to any
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current capital essentially it's an
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interest in the future profits and
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appreciation of the partnership an owner
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of a profits interest doesn't have an
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immediate capital account at the time
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the interest is granted capital would
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only accumulate if there are future
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profits to share it
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a vested profits interest is fully
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vested and unrestricted if the interest
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is transferable free of substantial risk
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of forfeiture or if it isn't subject to
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a substantial risk of forfeiture if a
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person receives their profits interest
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for providing services to or for the
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benefit of a partnership in their
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capacity as a partner or in anticipation
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of becoming a partner then the grant of
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the interest is not a taxable event and
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the person won't recognize income upon
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the grant of the interest that said
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there are three exceptions to the
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general rule of non tax ability number
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one the profits interest relates to a
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substantially certain and predictable
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stream of income from partnership assets
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such as income from high-quality debt
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securities or high-quality net lease
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number two within two years of receipt
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the partner disposes of the profits
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interest or number three the profits
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interest is a limited partnership
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interest in a publicly traded
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partnership as it's defined in the
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Internal Revenue Code
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initially the tax treatment of an
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employee or service provider who
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received a substantially unvested
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profits interest was unclear in 2001 the
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IRS issued rulings to offer more clarity
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on the issue which essentially states
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that even if a partnership grants is
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substantially unvested profits interest
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in the partnership the person will be
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treated as receiving the interest on the
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date of its grant provided that all the
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following requirements are met number
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one
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both the partnership and the person
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being granted the interest treat the
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person as a partner from the date the
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profits interest is granted
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number two the person being granted the
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interest takes into account the
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distributive share of partnership income
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gain loss deduction and credit
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associated with that interest in
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computing their income tax liability for
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the entire period during which the
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service provider has the interest and
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number three no compensation deduction
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is taken by the partnership or any
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partner in connection with the grant of
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the profits interest it's important to
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note that the ruling requires the gains
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and losses of the partnership be
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allocated to the person being granted
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the interest from the date of the grant
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it also requires consistent tax
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treatment by all parties if you have
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questions about taxation of either
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vested and unvested profits interest
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contact your untracked early
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representative to learn more and be sure
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to watch our videos on capital interests
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to see how they differ from profits
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interests in nature and in taxation
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matters I am jaws FG bar with on track
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early
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you
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