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There are several financial and legal implications when adding a new partner to a partnership. Here’s an example to illustrate: You and your partners are planning to admit a new partner. The new partner will acquire a one-third interest in the partnership by making a cash contribution to the business. Assume that your basis in your partnership interests is sufficient so that the decrease in your portions of the partnership’s liabilities because of the new partner’s entry won’t reduce your basis to zero.

More Complex Than it Seems

Although adding a new partner may appear to be simple, it’s important to plan the new person’s entry properly to avoid various tax problems. Here are two issues to consider:

1. If there’s a change in the partners’ interests in unrealized receivables and substantially appreciated inventory items, the change will be treated as a sale of those items, with the result that the current partners will recognize gain. For this purpose, unrealized receivables include not only accounts receivable, but also depreciation recapture and certain other ordinary income items. To avoid gain recognition on those items, it’s necessary that they be allocated to the current partners even after the entry of the new partner.
2. The tax code requires that the “built-in gain or loss” on assets that were held by the partnership before the new partner was admitted be allocated to the current partners and not to the entering partner. In general, “built-in gain or loss” is the difference between the fair market value and basis of the partnership property at the time the new partner is admitted.



The upshot of these rules is that the new partner must be allocated a portion of the depreciation equal to his or her share of the depreciable property, based on current fair market value. This will reduce the amount of depreciation that can be taken by the current partners. The other outcome is that the built-in gain or loss on the partnership assets must be allocated to the current partners when the partnership assets are sold. The rules that apply in this area are complex, and the partnership may have to adopt special accounting procedures to cope with the relevant requirements.

Follow Your Basis

When adding a partner or making other changes, a partner’s basis in his or her interest can undergo frequent adjustment. It’s important to keep proper track of your basis because it can have an impact on these areas:

• Gain or loss on the sale of your interest
• How partnership distributions to you are taxed
• The maximum amount of partnership loss you can deduct

We Can Help

Contact us if you’d like assistance in dealing with these issues or any other issues that may arise in connection with your partnership.

In this episode of Tax Insights, Jeff sheds light on a common concern: IRS notices. These letters can be alarming, but they’re not necessarily a cause for panic. Jeff explains how to interpret and respond to these notices, emphasizing the importance of timely action and seeking assistance from tax professionals. Let’s dive in!

The U.S. Department of Labor (DOL) has issued a new final rule regarding the salary threshold for determining whether employees are exempt from federal overtime pay requirements. The threshold is slated to jump 65% from its current level by 2025 and is expected to make four million additional workers eligible for overtime pay.

If you’re a small business owner and you hire your children this summer, you may be able to obtain tax breaks and other nontax benefits. The kids can gain on-the-job experience, save for college and learn how to manage money. You may also be able to shift some of your high-taxed income into tax-free or low-taxed income. In addition, you could realize payroll tax savings (depending on the child’s age and your business entity). Plus, your kids will spend time with you.

A Legitimate Job

If you hire your child, you’ll get a business tax deduction for employee wage expenses. In turn, the deduction reduces your federal income tax bill, your self-employment tax bill (if applicable) and your state income tax bill (if applicable). However, for your business to deduct the wages as a business expense, the work performed by the child must be legitimate and the child’s salary must be reasonable.

Let’s say you operate as a sole proprietor in the 37% tax bracket. You hire your 16-year-old daughter to help with office work full-time during the summer and part-time in the fall. Your daughter earns $10,000 during 2024 and doesn’t have any other earnings.

You save $3,700 (37% of $10,000) in income taxes at no tax cost to your daughter. That’s because she can use her $14,600 standard deduction for 2024 to completely shelter her earnings.

Your family’s taxes are lower even if your daughter’s earnings exceed her standard deduction. Why? The unsheltered earnings will be taxed to her beginning at a rate of 10%, instead of being taxed at your higher rate.

How Payroll Taxes Might Be Saved

If your business isn’t incorporated, your child’s wages are exempt from Social Security, Medicare and federal unemployment taxes if certain conditions are met. Your child must be under age 18 for this to apply (or under age 21 for the federal unemployment tax exemption). Contact us to learn how this works.

Be aware that there’s no exemption for employing a child if your business is incorporated or is a partnership that includes nonparent partners. And payments for the services of your child are subject to income tax withholding, regardless of age, no matter what type of entity you operate.

Keep Accurate Records

Hiring your child can be a tax-smart idea. Be sure to keep the same records (such as timesheets and job descriptions) as you would for other employees to substantiate the hours worked and duties performed. Issue your child a Form W-2. Contact us with questions about how these rules apply to your situation.

Starting Early Makes a Retirement Garden Grow

An early start on saving for retirement can be key to wealth building. A child who earns income from a job can contribute to a traditional IRA or a Roth IRA and begin funding a nest egg. For the 2024 tax year, a working child can contribute the lesser of his or her earned income, or $7,000, to a traditional or Roth IRA.  

What if your business has a retirement plan? Depending on its terms, your child may qualify to begin earning retirement benefits that can grow for many decades. And the money may be tapped penalty-free for certain eligible reasons, such as paying education costs and making a down payment of up to $10,000 on a first home.