Taxation Essentials of LLCs and Partnerships

Chapter 4Compensatory Payments to Partners

Learning objectives

• Determine whether payments to a partner will be treated as guaranteed payments, distributive shares, or payments to a third party.
• Identify the tax treatment of payments to a partner in his or her capacity as a third party.
• Recognize the tax treatment, both at the partner and the partnership level, of guaranteed payments to a partner.
• Calculate the amount of the guaranteed payment when the partner is to receive the lesser of a fixed dollar amount or a fixed percentage of partnership income.
• Indicate the correct treatment of partnership income by a partner for self‐employment tax purposes.

Introduction

Distinguishing between acting as a partner and acting as a third party

Often partnerships will want to compensate particular partners by making payments to them that are not dependent either on the income of the partnership or their ownership in the partnership. These payments might occur only once, as might be the case if a partner performs nonrecurring services for the partnership. An example of this might be payments for one‐time legal or accounting services provided to the partnership by the partner. On the other hand, these payments might be continuing, as would be the case with payments to a partner who actively manages a business for a partnership. Depending on the circumstances surrounding the payments, if the payments are not dependent on the income of the partnership, they will generally be treated as ...