DPP Overview
Direct Participation Programs are the first alternative investment category you need to know. They operate on a fundamentally different tax model than corporations, and that distinction drives almost everything the exam tests.
What Is a Direct Participation Program?
- A Direct Participation Program (DPP) is a business venture organized to pass income, gains, losses, deductions, and credits directly through to investors
- No corporate-level taxation - this is the defining feature
- Investors participate directly in the cash flow and tax consequences of the business
- Governed by FINRA Rule 2310 (Direct Participation Programs)
Pass-Through vs. Corporate Taxation
The key difference between a DPP and a traditional C corporation:
| Feature | C Corporation | DPP (Pass-Through) |
|---|---|---|
| Entity-level tax | Yes - profits taxed at corporate rate | No - no entity-level tax |
| Shareholder/investor tax | Yes - dividends taxed again | Yes - income flows to personal return |
| Double taxation? | Yes | No |
| Tax form received | 1099-DIV | K-1 |
- In a C corporation, profits are taxed twice: once at the corporate level, and again when distributed as dividends to shareholders
- In a DPP, profits (and losses) pass through directly to investors' personal tax returns; taxed only once
Common DPP Types
DPPs are organized for various business purposes:
- Real estate - property development, rental income
- Oil and gas - exploration, drilling, production
- Equipment leasing - purchasing and leasing business equipment
- Agriculture - farming and livestock operations
Exam Tip: Gotchas
DPPs pass through losses as well as income. However, losses are subject to passive activity rules - passive losses can generally only offset passive income, not wages or investment income.
Now let's look at the most common DPP structure: the limited partnership.