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

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 DROs, QIOs, and loss limitation provisions. These particular 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 critical 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

Learning Objectives

After completing this course, you will be able to:

• Recognize key tax provisions in LLC operating agreements
• Identify how to make special allocations
• Verify debt restoration obligations
• Ascertain that transactions meet safe harbor requirements
• Discern the differences between S corporation and partnership allocations
• Determine when qualified income offset is required

Strafford Publications, Inc. is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of Accountancy have final authority on the acceptance of individual courses for CPE Credits. Complaints regarding registered sponsons may be submitted to NASBA through its website: www.nasbaregistry.org.

IRS Approved Provider

Strafford is an IRS-approved continuing education provider offering certified courses for Enrolled Agents (EA) and Tax Return Preparers (RTRP).