Advanced Tax Saving Strategies for LLCs Taxed as Partnerships

LLCs with multiple members are taxed by default as partnerships, a flexible structure that allows creative and complaint ways to allocate income, deductions, and distributions. When optimized properly, partnership taxation can dramatically reduce your effective tax rate.

Here's a FULL breakdown of how our clients do it.

1.) Maximize the 20% QBI Deduction

Pass-through income from partnerships may qualify for the Section 199A Qualified Business Income (QBI) deduction - which is effectively 20% off taxable income. To effectively qualify for this you need to carefully plan around W-2 wage limits and qualified property (UBIA) thresholds and consider separating "specific services trades" into separate legal entities.

2.) Re-Structure Gaurenteed Payments

Guaranteed payments (similar to salaries for partners) but not quite qualified as a "partner distribution" are NOT eligable for QBI deductions. In order to be effective YOU need to restructure these payments into distributive shares or tiered allocations linked to capital accounts or performance metrics to preserve your QBI benefit.

3.) Optimize Self-Employment Tax Exposure

Active business partners pay self-employment (SE) tax, while passive members may not. Consider using an S-Corp management company, or limited partner structure to reduce SE tax liability while maintaining IRS compliance.

4.) Use Accelerated Depreciation and Cost Segregation

If your Partnership owns real estate or equipment, or a tangible fixed asset, a cost segregations study can identify assets eligible for 5-, 7-, or 15 - year depreciation instead of 39 years. Combine this strategy with bonus deprecation or Section 179 expensing to front-load deductions and improve your business cash flow. Wow that felt long!

5.) Elect Section 754 Basis Step-Up

Unfortunately life goes on and business can be left behind. When a partner exits or dies, a Section 754 election allows a step up in the inside basis of partnership assets. This step up increases future depreciation deductions and lowers taxable income for the remaining partners inside of your business.

What about the other key benefits that don't include all this tax jargon?

The thing is - not all businesses are alike in the way that the owners wish to handle their taxation. In my experience as an accountant i've seen the following two strategies be used extensively to save ownership tons of money and reduce tax headaches at the end of the year! Check it out.

1.) Implement Retirement & Benefit Strategies

Partneships can create SEP-IRA's, 401k's or profit sharing plans. You might associate these plans with the cushy benefits at your 9-5 but the truth is any type of business has the option to enroll in these plans . These plans are a GOLDMINE for your small business because they reduce the amount of taxable income and reward your key partners. It's important to note here that why they might not be the BEST WAY for your business to get cushy. benefits these cash cow plans still offer meaningful tax-deferred growth in your business.

2.) Leverage Family Limited Partnerships (FLPs)

You are probably asking is that just a fancy name for a "family business"? and the answer is YES but with a small little caveat. Family limited partnerships allow you to gift ownership interests at a favorable and I mean FAVORABLE discount while maintaining control of your business.

This is one of the MOST POWERFUL estate planning and wealth transfer strategies for medium to high net worth individuals.

So why the heck does all this even matter?!

LLCs taxed as partnerships offer durability, flexibility, and versatility that C-corps cannot even match. By combining QBI optimization, depreciation acceleration, and strategic income allocation, you as a small business owner can drastically lower your business's overal tax burden - legally and efficiently.

Considering C-Corp taxation for your LLC? Explore how to leverage the 21% rat and QSBS benefits here.