Tax Season 2026: Key Tax Considerations for Operating & Partnership Agreements

As tax season approaches, small businesses often focus on filing deadlines, but one of the most important tax planning tools is often overlooked: your operating or partnership agreement.

Partnerships and multi-member LLCs are widely used for business and investment activities due to their tax advantages, particularly pass-through taxation. They generally do not pay federal income tax at the entity level. Instead, income, deductions, gains, and losses pass through to the owners, making governing documents essential for allocating and managing tax obligations.

Understanding the Tax Structure

• Partnerships and LLCs taxed as partnerships must allocate their tax items to owners annually. Each partner or member receives a Schedule K-1, which reports their share of the entity’s income, deductions, and credits.
• Even if no cash distributions are made, owners are still required to report their allocated income on their individual tax returns. This makes it essential that agreements address how tax burdens will be handled. 

For additional information related to Schedule K-1 and Partner’s Instructions for Schedule K-1, click here.

Three Key Tax Considerations to Address in Your Agreement

1. Guaranteed Payments to Partners: Guaranteed payments are payments made to partners for services or the use of capital that are not dependent on partnership income.

• These payments are generally deductible by the partnership, treated as ordinary income to the receiving partner, and must be reported based on the partnership’s tax year, even if paid later. Clearly defining guaranteed payments in your agreement helps ensure consistent treatment and avoids confusion during tax reporting.

2. Allocation of Profits and Losses: While many businesses allocate profits and losses based on ownership percentage, partnerships may adopt alternative allocations if structured properly.

• Your agreement should clearly define allocation methods, ensure allocations align with economic reality, and anticipate potential tax implications if allocations are challenged.

3. Tax Basis and Partnership Liabilities: A partner’s ability to deduct losses and receive distributions depends on their tax basis in the partnership.

• A partner’s basis increases with contributions and their share of liabilities.
• Classification of liabilities (recourse vs. nonrecourse) affects how the basis is calculated.
• Basis limitations may restrict the ability to claim losses.
• Your agreement should address how liabilities are allocated and classified to avoid unintended limitations.
  

Upcoming Tax Filing Deadlines for Businesses

As part of your tax season compliance review, ensure that required tax filings are submitted on time: 

• Maryland Entities: Most taxes must be filed and paid electronically through the Comptroller’s systems, including the Maryland Tax Connect portal.
• Filing Corporation Taxes: Form 500 must be filed by the 15th day of the 4th month following the tax year end (April 15 for calendar year filers).
• Filing Pass-Through Entities (PTE) Taxes: Form 510 is due by the 15th day of the 4th month following the close of the tax year. If the PTE has elected to pay tax at the entity level, Form 511 is also due on the same date. For calendar-year entities, this is typically April 15th.
• Extension of Time to File: Maryland corporations may request up to a 7-month filing extension with Form 500E, and PTEs may request up to a 6-month filing extension with Form 510/511E. 

• DC Entities: Small businesses in DC are generally required to file and pay most taxes electronically through the Office of Tax and Revenue’s online portal, MyTax.DC.gov.
• Filing Corporation Taxes: DC corporations, including LLCs electing corporate federal treatment, must file Form D-20 on or before April 15, 2026, for calendar year filers or before the 15th day of the fourth month following the close of the taxable year for fiscal year filers.
• Filing Pass-Through Entities Pass-Through Entities (PTE): Partnerships and LLCs taxed as partnerships must file Form D-65 on or before April 15, 2026, for calendar year filers or on or before the 15th day of the fourth month following the close of the taxable year for fiscal filers.
• Extension of Time to File: DC businesses may request a 6-month filing extension for Form D-20 using DC Form FR-120 and for Form D-65 using Form FR-165, respectively, no later than the return due date. An extension of time to file is not an extension of time to pay. You must pay any tax liability with the extension request, otherwise the request will be denied, and you may be subject to penalties for failure to file or failure to pay. 

We Are Here to Help

At The SJS Law Firm, we support businesses in navigating tax compliance and minimizing risk through proactive planning. Contact us at (202)-505-5309 to schedule a consultation.