When is a limited partner subject to self-employment tax?

A limited partner is not subject to self-employment tax on his or her distributive share of partnership income. The Tax Court had reasoned that if a limited partner was actively involved in business activities, then he or she should be treated like a general partner (i.e., subject to self-employment tax on the distributive share of partnership income). The court’s reasoning has been referred to as a functional analysis test. But an appellate court in a 2-1 decision rejected the Tax Court’s view, saying “the touchstone of a ‘limited partner’…was limited liability.” So, while the distributive share to limited partners is not subject to self-employment tax, guaranteed payments to limited partners continues to be subject to self-employment tax. #IdeaoftheDay

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