Question

How are non-compensatory options treated for partnerships?

Answer 1

Hi;

Partnership options are subdivided into compensatory options and non compensatory options

The department of Treasury and internal revenue service issued final guidelines effective from February 2013 are related to treatment of non compensatory options

1. Tax consequences: if there is any transfer of appreciated or depreciated property to a partner ship in in exchange of noncompensatory option the transferor will recognise the gain or lose on transfer of such assets. The partner ship will not recognise any income or revenue untill option is excercised.

2. Accounting:

At the time issue of option: The issuance of noncompensatory option by a partner ship firm is a permisable revluation event.

Excercise of option: upon excerise of the option, The option holders capital account is credited equal to the cost of option plus the fair market value of any property that is contributed. partnership is required to revalue its property and make capital allocations first to the option holder to the extent his right share in the partnership and then to the historic partners.