As various forms of private equity continue to invest in middle market businesses, the number of business tax returns filed as partnerships (GPs, LPs, LLLPs and LLCs) is increasing. Private equity-backed operating businesses are often structured as partnerships because of the nearly unlimited economic flexibility they offer fund managers and investors. Partnership equity grants can also be an effective way to reward and retain key employees. These awards offer a valuable deferred compensation opportunity that ties employee success to the business’s future growth. However, because partnership tax rules can be complex, recipients often have questions about what it means to own a profits interest and how it may affect their personal tax situation. In this article, we explain the tax consequences of receiving a profits interest in exchange for services, including §83(b) elections, Schedule K-1 reporting and partnership compensation planning. redacted