With returns stacking up, two developments deserve a quick read: one that could generate refund opportunities for clients, the other a checklist reminder that never gets old.
The Self-Employment Tax Fight Over Limited Partners
A Fifth Circuit decision issued in January is creating some noise around self-employment tax for limited partners, and depending on your client base, it may warrant action now.
The issue centers on Code Sec. 1402(a)(13), which generally excludes a limited partner's distributive share from self-employment tax, except for guaranteed payments for services. The IRS has long applied a functional analysis, looking at how active a partner actually is regardless of their title. The Tax Court agreed with that approach in Sirius Solutions and the related Soroban Capital case.
The Fifth Circuit's majority disagreed. In a 2-1 decision, the court ruled that a limited partner is simply a state-law limited partner with limited liability, no passive investor requirement, no functional analysis. If you're a limited partner under state law, your distributive share is out of SE tax.
The IRS has not accepted this outcome. The appeal deadline is March 2, 2026, and it's unclear whether the agency will petition the Supreme Court. Soroban Capital is pending before the Second Circuit, and Denham Capital before the First, and either could create a circuit split that lands this at the Supreme Court.
For clients in Louisiana, Mississippi, or Texas: consider whether amended returns or protective refund claims make sense. For clients elsewhere, protective claims may still be worth filing, given the statute of limitations. Keep in mind that amending will likely require cooperation with partners to revise the K-1s, which adds a layer of complexity. This is a developing area, and practitioners should flag it, document their advice, and monitor closely.
S Corp Elections: The Deadline Is Now
If any clients are considering S corporation status for 2026, the window is nearly closed. Existing calendar-year LLCs and C corps must file Form 2553 by March 16, 2026. Miss it, and the election rolls to 2027.
Beyond the deadline, the usual traps apply. Eligibility is frequently overlooked. S corporations cannot have more than 100 shareholders, cannot have nonresident alien shareholders or entity shareholders, and must have only one class of stock. Owner-employees must be on payroll with reasonable compensation; low salaries paired with high distributions remain a top audit trigger. Shareholders owning more than 2% cannot receive fringe benefits tax-free. This includes health insurance premiums that must run through W-2 wages.
Finally, remind clients that a federal election does not automatically equal state recognition. New York requires Form CT-6; New Jersey has its own SCORP application. Several jurisdictions, including New York City, New Hampshire, Texas, and the District of Columbia, don't recognize S corporation pass-through treatment at all.
Both of these issues are worth a quick client communication before the filing crunch fully sets in.
Christine Gervais is a licensed CPA, using her skills to help businesses grow and achieve their fullest potential. Christine has a Master’s degree in accounting from Southern New Hampshire University in addition to holding her CPA license for over a decade. Notably, Christine is a nationally recognized speaker providing education to other CPAs on how to best serve clients as well as instruction on a wide variety of topics for business owners on how to maximize success. Christine prides herself on the value she can bring to clients with her extensive tax knowledge and provides strategic, forward-thinking financial strategies to help clients grow. When not behind her desk, you can find Christine spending quality time with her daughter and stepson or tending to the family’s excessively loved farm animals.
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