Applying Waterfall Allocations: Calculating Standard and Complex Layered and Target Allocations

Waterfall allocations are complex. Yet, there is common language used in operating agreements that practitioners need to recognize. An agreement may be allocation-based, where income and loss are allocated based on explicit allocation rules and accounts are liquidated based on capital accounts, or distribution-based, where cash is distributed based on explicit rules and income or loss is allocated in accordance with expected distributions.

Allocations can be target or layered. Target allocations are made so that a partner's ending capital equals the target amount. Layered allocations compute each partner's share of profit and loss based on specific allocation rules. Distribution-based agreements with target allocations are now the norm for complex deals. Identifying specific types of agreements and allocations in partnership documents is not enough. Practitioners must interpret the language and be able to make the required allocations properly by partner. Nuances in operating agreements can dramatically alter the allocation, distribution, and liquidation requirements.

Listen as our panel of waterfall allocation experts walks you through interpreting and calculating waterfall allocations in partnership agreements.

1. Waterfall provisions
2. Types of agreements
   1. Allocation based
   2. Distribution based
3. Types of allocations
   1. Layered allocations
   2. Target allocations
4. Examples
5. IRS requirements
6. Issues with waterfall allocations

The panel will cover these and other critical issues:

• Differences in layered and target allocations
• How deficit restoration obligations and qualified income offsets affect waterfall allocations
• Maintaining substantial economic effect under IRC Section 704(b)
• The importance of granting override authority in agreements so that allocation provisions function as intended

Learning Objectives

After completing this course, you will be able to:

• Identify waterfall allocations in operating agreements
• Determine whether allocations are layered or target
• Decide how granting authority to override allocation provisions helps address allocation issues
• Ascertain whether a target allocation has substantial economic effect

• Field of Study: Taxes
• Level of Knowledge: Intermediate
• Advance Preparation: None
• Teaching Method: Seminar/Lecture
• Delivery Method: Group-Internet (via computer)
• Attendance Monitoring Method: Attendance is monitored electronically via a participant's PIN and through a series of attendance verification prompts displayed throughout the program
• Prerequisite: Three years+ business or public firm experience preparing complex tax forms and schedules, supervising other preparers or accountants. Specific knowledge and understanding of pass-through taxation, including taxation of partnerships, S corporations and their respective partners and shareholders.

Strafford Publications, Inc. is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of Accountancy have final authority on the acceptance of individual courses for CPE Credits. Complaints regarding registered sponsons may be submitted to NASBA through its website: www.nasbaregistry.org.

IRS Approved Provider

Strafford is an IRS-approved continuing education provider offering certified courses for Enrolled Agents (EA) and Tax Return Preparers (RTRP).