Retirement costs both departing and remaining partners

Article Abstract:

Sec. 736 governs the taxation of distributions to partners who decide to resign from a partnership. Liquidating payments to retiring partners are categorized into two groups: Sec. 736(a) payments and Sec. 736(b) payments. The former is concerned with the present deductions for the partnership and ordinary income to the retiring partner while the latter focuses on payments that are given in return for the partner's share of unrealized receivables and goodwill. After the payments are grouped into Sec. 736(a) payments and Sec. 736(b) payments, the latter is further divided into sales proceeds (Sec. 751) and distributions (Sec. 731). Changes in the Revenue Reconciliation Act of 1993 should also be considered when planning partnership distribution to retiring partners.

Laws, regulations and rules, Partnership distributions

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Partners can control tax effects of retirement payouts

Article Abstract:

Partners about to retire from an operating partnership must plan for their retirement as income and self-employment taxes, and implications on Social Security benefits may accompany post-retirement payments. Specific focus of a partner's retirement plan should be the strategic timing of payments and retirement benefits covered by Section 736(a), which specifies payments that liquidate the retiring partner's interest in the partnership. If needed, the retiring partner should bargain with the partnership for the timing of the payments so that those payments are not subject to self-employment tax. Proper timing of Section 736(a) payments can also keep a retiring partner's Social Security benefits intact.

Retirement income, Retirement benefits

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