Mastering Partnership Minimum Gain Chargeback Provisions for the Tax Professional

Minimum gain chargeback provisions are found in nearly every partnership agreement and LLC operating agreement. Few practitioners fully understand what minimum gain chargebacks require—including many attorneys who draft partnership agreements. Simply stated, a minimum gain chargeback provision is required by law to be included in partnership and LLC agreements to allocate non-recourse deductions in any manner other than on a strict pro-rata basis.

The minimum gain provisions require that partners who have previously received the benefit of non-recourse deductions must have those deductions "charged back" when the asset subject to the non-recourse debt is disposed or if the non-recourse debt has a change in character. There are several notable exceptions to these requirements, and tax practitioners need to know when chargeback provisions apply and when they don't.

Partnerships may also anticipate a chargeback and take steps to avoid the negative tax consequences of a chargeback. Partners may contribute capital to cover their portion of the non-recourse debt, or the partnership may request a waiver of the requirement if the chargeback would lead to unintended economic distortions. By understanding the chargeback provisions, tax advisers can avoid negative tax consequences for clients through proper planning.

Listen as our experienced panelists provide an in-depth, practical guide to the planning and reporting components of minimum gain chargeback provisions, using concrete examples to illustrate how to handle various real-life scenarios.