Who benefits from partnership flexibility?

Partnerships (including LLCs) account for more than one-third of US business profits. A key feature they offer owners is the ability to allocate income and losses flexibly across partners rather than strictly in proportion to equity shares, which can reduce taxes if partners have different tax situations. Using anonymized tax records, I estimate over $200 billion of net tax benefits associated with this flexibility over stricter allocations of the same income between 2011–2020. These benefits are narrowly concentrated in only 6 % of firms, generally larger and more complex firms, while the vast majority of firms—especially smaller operating firms—do not utilize this flexibility at all. I also estimate $100 billion of net tax benefits from carried interest and similar profit interest arrangements relative to ordinary compensation of service partners between 2011–2020.