5th Circuit Rewrites 15.3% Tax Test for Limited Partners, Focusing on Managerial Role
Updated
Updated · CPAPracticeAdvisor.com · Aug 24
5th Circuit Rewrites 15.3% Tax Test for Limited Partners, Focusing on Managerial Role
1 articles · Updated · CPAPracticeAdvisor.com · Aug 24
Summary
An Aug. 12 substitute opinion in K Alain withdrew the 5th Circuit’s earlier taxpayer-friendly ruling and now ties the self-employment tax exclusion to whether a limited partner significantly manages or runs the business.
Section 1402(a)(13) can shield partnership income from the 15.3% self-employment tax, but the new standard allows services without automatically losing the break if the partner lacks a significant managerial role.
The ruling binds only state-law limited partnerships in Texas, Louisiana and Mississippi, leaving LLC members and LLP partners outside its direct reach and preserving uncertainty elsewhere.
Tax advisers face Sept. 15 and Oct. 15 deadlines to identify affected clients, weigh inconsistent-return disclosures, and review open years for possible refund claims that could reach tens or hundreds of thousands of dollars.
The IRS is still running compliance campaigns on limited-partner self-employment tax, while related cases in the 1st and 2nd Circuits mean the outcome still depends heavily on where a dispute is heard.