What is a targeted capital account?

The typical targeted capital account formula assumes the partnership “hypothetically” liquidates at year end by selling its assets at their assumed fair market values (“FMVs”) and distributing the funds remaining after the satisfaction of its liabilities.

What is a layer cake allocation?

Allocation provisions like this are sometimes referred to as “layer cake” allocations because they provide for multiple tiers of allocations, such as “first, to the members to offset all prior loss allocations; second, to the preferred members until their capital accounts equal their unreturned contributions; third, to …

Do target allocations have substantial economic effect?

Under the first test, the allocations must have economic effect. The second test is to make sure the economic effect is substantial, meaning it must substantially affect the dollar amounts to be received by the partners from the partnership.

How does a qualified income offset work?

905.24 A qualified income offset requires the partnership to allocate items of gross income and gain to the partner who has an unexpected deficit capital account but no obligation to restore it. Correspondingly, the other partners are allocated gross deductions and losses of an equal amount.

Can depreciation be specially allocated?

While the preceding description of a special allocation arrangement is often accurate, you can also have special allocations of specific tax items, such as depreciation, rather than special allocations of overall partnership losses.

Can LLC make disproportionate distributions?

Partnerships and LLC agreements will sometimes allow investors to distribute assets to investors “disproportionately,” although many partnership agreements call for these disproportionate distributions to be cured at some later date (such as upon winding up of the business or the sale of the ownership interest).

What is a regulatory allocation?

Tax Allocations –– section 704(b) deal, such as allocating profits in accordance with relative capital or profit percentages (i.e., “Percentage Interests”). ➢ The second section (regulatory allocations) overrides the first. section and is designed to comply with the book income tax regulatory safe harbors.

What is a tax waterfall?

A distribution waterfall describes the method by which capital is distributed to a fund’s various investors as underlying investments are sold for gains. Essentially, the total capital gains earned are distributed according to a cascading structure made up of sequential tiers, hence the reference to a waterfall.

What does target allocation mean?

A Target Allocation is a high level asset allocation we believe represents an appropriate mid to long term strategy for your investments. It is driven by the profile questions you have answered and data from your financial dashboard.

What is being targeted in a targeted income allocation calculation?

Targeted Allocations at Work Under the typical targeted allocations approach, the starting point is a partner’s partially adjusted capital account, which is usually defined as the partner’s capital account adjusted to reflect distributions to or contributions by the partner during the tax year.

What requirements must be met in order for an allocation of income or loss to have economic effect?

For an allocation to be substantial, there must be “a reasonable possibility that the allocation (or allocations) will affect substantially the dollar amounts to be received by the partners from the partnership, independent of tax consequences” (Regs. Sec. 1. 704-1(b)(2)(iii)(a)).

What is a special allocation?

If a business splits up profits and losses in a way that does not correspond to the owners’ percentage interests in the business, it’s called a “special allocation.” The IRS pays careful attention to special allocations to be sure business owners aren’t playing hide and seek with potential tax dollars — for example.