A qualified income offset is a provision in partnership or limited liability company agreements that ensures partners or members with a deficit capital account balance receive an allocation of income or gain to restore the deficit to zero, thereby preventing unintended imbalances in their capital accounts. This clause is designed to comply with IRS regulations, maintaining the partnership's tax classification and ensuring proper allocation of tax burdens and benefits among partners or members.
Minimum Gain Chargeback and Qualified Income Offset. Notwithstanding anything to the contrary contained in Section 3 of this Agreement, the allocations of income or gain described in the Treasury Regulations Sections 1.704 2(f), 1.704-2(i)(4), and 1.704 1(b)(2)(ii)(d) (last paragraph) shall be made in the circumstances described in such Sections of the Treasury Regulations or any successor provisions thereto. This Section 3.2.1 is intended to constitute a minimum gain chargeback provision and a qualified income offset provision under such Sections of the Treasury Regulations and shall be so interpreted for all purposes.
To the extent a Member shall have a negative capital account balance, there shall be a qualified income offset, as set forth in Treasury Regulations Section 1.704.1(b)(2)(ii)(d).
Qualified Income Offset. Any Venturer who unexpectedly receives an adjustment, allocation or distribution described in Treasury Regulations Section 1.704-1(b)(2)(ii)(d)(4), (5) or (6) that causes or increases a deficit balance in its Capital Account in excess of any obligation to restore a deficit balance in its Capital Account (including any deemed deficit restoration obligation pursuant to the penultimate sentences of Treasury Regulations Sections 1.704-2(g)(1) and (i)(5), and adjusted as provided in Treasury Regulations Section 1.704-1(b)(2)(ii)(d)) shall be allocated items of income and gain (consisting of a pro rata portion of each item of income, including gross income, and gain for the Fiscal Year) in an amount and a manner sufficient to eliminate, to the extent required by the Treasury Regulations, such deficit balance as quickly as possible. This Section 5.5 is intended to constitute a qualified income offset under Treasury Regulations Section 1.704-1(b)(2)(ii)(d) and shall be interpreted and applied in a manner consistent therewith.
Qualified Income Offset. If a Partner unexpectedly receives any adjustments, allocations or distributions described in Sections 1.704-1(b)(2)(ii)(d)(4), (5) or (6) of the Regulations, and such Partner has an Adjusted Capital Account Deficit, items of Partnership income (including gross income) and gain shall be specially allocated to such Partner in an amount and manner sufficient to eliminate the Adjusted Capital Account Deficit as quickly as possible as required by the Regulations. This Section 5.01(d)(iii) is intended to constitute a “qualified income offset” under Section 1.704-1(b)(2)(ii)(d) of the Regulations and shall be interpreted consistently therewith.
Qualified Income Offset and Minimum Gain Chargeback Provisions. (a)The Code and Treasury Regulations contain certain economic sharing requirements in order for income tax allocations among the Members to be respected for tax purposes. In general, such requirements are designed to eliminate the allocation of tax losses which have no economic effect to the Members. In order to comply with such requirements, the qualified income offset and minimum gain chargeback provisions provided for in Treasury Regulation Sections 1.704-1 and 1.704-2, as amended, shall be followed. The parties understand and agree that such provisions are not expected to alter the allocations described in Section 7.1, except in unusual and unforeseen circumstances. (b)If a special allocation of an item of net profit or net loss is made to a Member under this Section, future allocations of profit and loss shall be adjusted to take into account such special allocations.
Qualified Income Offset. If any Member unexpectedly receives any adjustment, allocation or distribution described in Section 1.704 -l(b)(2)(ii)(d)(4), (5) or (6) of the Treasury Regulations that causes it to have an, or increases the amount of its. Adjusted Capital Account Deficit, items of Cooperative income and gain shall be allocated to such Member in an amount and manner sufficient to eliminate, to the extent required by the Treasury Regulations, such Member’s Adjusted Capital Account Deficit as quickly as possible, provided that an allocation pursuant to this Section shall be made to a Member only if and to the extent that such Member would have an Adjusted Capital Account Deficit after all other allocations provided for in this Article have been tentatively made as if this Section were not in this Agreement. This Section is intended to constitute a “qualified income offset” as defined in Section 1.704 -l(b)(2)(ii)(d) of the Treasury Regulations.
(v) Qualified Income Offset. Any Member who unexpectedly receives an adjustment, allocation or distribution described in subparagraphs (4), (5) or (6) of Section 1.704-1(b)(2)(ii)(d) of the Treasury Regulations, which adjustment, allocation or distribution creates or increases a deficit balance in such Member’s Capital Account, shall be allocated items of “book” income and gain in an amount and manner sufficient to eliminate or to reduce the deficit balance in such Member’s Capital Account so created or increased as quickly as possible in accordance with Section 1.704-1(b)(2)(ii)(d) of the Treasury Regulations and its requirements for a “qualified income offset.” The Members intend that the provision set forth in this Section 4.4(e)(v) will constitute a “qualified income offset” as described in Section 1.704-1(b)(2)(ii)(d) of the Treasury Regulations and shall be interpreted consistent therewith.
Qualified Income Offset Provision. Notwithstanding anything else to the contrary contained in this Agreement, to the extent the allocation of any loss or deduction would cause any Member to have a deficit Adjusted Capital Account Balance, such Member will not be allocated a loss or deduction which will cause or increase such Member’s deficit Adjusted Capital Account Balance in excess of any dollar amount of such deficit balance that the Member is obligated to restore upon liquidation, as of the end of the Company’s taxable year to which such allocation relates. For purposes of this Section 7.4(c), the Capital Account of each Member shall be reduced (i) for any distributions that, as of the end of such year, reasonably are expected to be made to such Member to the extent they exceed offsetting increases to such Member’s Capital Account that reasonably are expected to occur during (or prior to) the Company taxable years in which such distributions reasonably are expected to be made, (ii) adjustments that as of the end of such year reasonably are expected to be made for depletion adjustments, and (iii) allocations that, as of the end of such year, reasonably are expected to be made pursuant to Code Section 704(e)(2) (dealing with purchases of interests by family members), Code Section 706(d) (dealing with changes in Members’ interests) and Treasury Regulations Section 1.751-1 (dealing with unrealized receivables and inventory items), all as described in Treasury Regulations Section 1.704-1(b)(2)(ii)(d). A Member who unexpectedly receives an adjustment, allocation or distribution described immediately above which causes or increases such Member’s deficit Adjusted Capital Account Balance (in excess of any dollar amount of such deficit balance that such Member is obligated to restore upon liquidation, as of the end of the Company’s taxable year to which such allocation relates), will be allocated items of income and gain in an amount and manner sufficient to eliminate such deficit balance as quickly as possible. To the extent this Section 7.4(c) prevents the allocation of a deduction or loss to a Member, such deduction or loss shall be allocated among the Members in accordance with their interests in the Company as determined under Treasury Regulations Section 1.704-1(b)(3). This Section 7.4(c) is intended to constitute a “qualified income offset” within the meaning of Treasury Regulations Section 1.704-1(b)(2)(ii)(d) and shall be so interpreted and applied.
A Qualified Income Offset (QIO) is a provision commonly found in partnership agreements, particularly those structured as Limited Liability Companies (LLCs). It is a regulatory requirement under the Internal Revenue Code and associated Treasury Regulations. The purpose of a QIO is to prevent the allocation of losses or deductions to a partnership member or partner that could cause their capital account to become negative, unless there is a reasonable expectation that the member will receive income allocations in the future to offset that deficit.
A Qualified Income Offset should be included in partnership agreements when:
When drafting a Qualified Income Offset, clarity and compliance with regulatory requirements are essential. A typical QIO provision in a partnership agreement might read:
“If a Partner unexpectedly receives any adjustments, allocations, or distributions described in Treasury Regulation section 1.704-1(b)(2)(ii)(d)(4), (5), or (6) that create or increase a deficit balance in such Partner’s Adjusted Capital Account, then such Partner shall be allocated items of Partnership income and gain (consisting of a pro rata portion of each item of Partnership income, including gross income and gain) in an amount and manner sufficient to eliminate the deficit in such Partner’s Adjusted Capital Account as quickly as possible.”
Qualified Income Offset provisions are typically found in:
In these contracts, the QIO provision helps ensure that financial operations remain in compliance with tax laws and partner capital accounts are maintained appropriately.
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