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What is a Direct Participation Program?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 25 November 2016
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    Conjecture Corporation
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A direct participation program is an investment option that allows the investors to be involved in the cash flow and tax benefits associated with the company that issues the security. Sometimes referred to as a direct participation plan, this type of program was once considered an excellent tax shelter for investors who wished to form some type of partnership. However, changes in tax laws in recent years have reduced the benefit of using a direct participation program in order to gain significant tax advantages in some situations.

For the most part, the direct participation program is a somewhat passive investment option. An investor who is involved with this type of program or plan is able to realize a return based on the amount of cash flow associated with the underlying investment that serves as the reason for the creation of the plan. Depending on the terms and conditions associated with the program, the investor may receive a fixed amount as long as monthly revenues exceed a certain amount, or may benefit from a percentage of any net income generated by the underlying security. The investor really has to do nothing in order to enjoy this benefit.

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It is not unusual to see a direct participation program established in order to attract investors to such projects as real estate deals. As interest in alternative energy options has increased, the direct participation program model has also been utilized to connect with investors who see potential in the further development and implementation of products involving the harnessing of solar energy, wind energy and biofuel production.

Investors who choose to participate in a direct participation program usually take steps to organize in some way, in order to gain the most benefit from the effort. Both general partnerships and limited partnerships are used to structure the program. In some cases, investors choose to go with a subchapter version of an S corporation. The choice of structure is usually influenced by the nature of the investment opportunity and the agreement among the investors that a particular form of organization will bring about the most benefit to the partners.

While newer tax laws have minimized the tax benefits derived from involvement with a direct participation program, there are still a few tax breaks that are available with this type of plan. If investors believe the return on the investment is sufficient when coupled with remaining the remaining tax breaks available, there is a good chance that seriously considering a program of this type is a viable option.

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