A recent court decision has upended how self-employment tax is imposed on certain partners and created a potential refund opportunity. The deadline to act is approaching quickly on older tax years.

A Major Court Win for Certain Limited Partners

In January 2026, a federal appeals court ruled in Sirius Solutions v. Commissioner that partners in a limited partnership who have limited liability are not subject to self-employment tax on their partnership income, even if they actively participate, as long as they remain limited partners under state law. This overturns the IRS's longstanding position that only passive investors qualify for the exemption, as determined by a functional analysis.

Who This May Apply To

You may be impacted if:

•  You are a partner in a limited partnership, and
•  You paid self employment tax on your distributive share of partnership income (excluding guaranteed payments or wages).

The ruling is legally binding only in Texas, Louisiana, and Mississippi. Its impact on other jurisdictions and to LLC and LLPs is persuasive but still uncertain. Importantly, the IRS continues to contest this issue, and other additional decisions on the matter are expected soon. 

Critical Deadlines Approaching for Refunds

Time is of the essence:

• April 18, 2026 is the deadline to file a refund claim for tax year 2022 under normal rules, however if you extended and filed later it is 3 years from that date.
• Another court case (Kwong) may extend the April deadline for 2019 – 2021 to July 10, 2026, but that extension is uncertain and still under appeal.

Because of the uncertainty, filing a protective refund claim now should be considered for these prior years. This preserves your right to a refund while the courts and IRS continue to sort out the rules. If you miss the deadline, the opportunity for older tax years may be lost.

Important Considerations

This is an unsettled and rapidly developing area of law. Even if a refund is ultimately allowed, processing may take time. In addition, a reduction in self-employment tax may affect your Social Security earnings record, which is worth reviewing if you are approaching retirement age.

Next Steps

This decision provides a significant precedent within the Fifth Circuit for limited partners in a limited partnership to exclude certain partnership income from self-employment tax. Limited partners in other jurisdictions or entity types should at a minimum watch for developments in other court cases expected later this year. If you’d like assistance evaluating whether you may qualify, estimating the potential refund, and filing a protective refund claim, we can help. Acting quickly on older years can preserve potential refunds. 
 

Published: 04/07/2026

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