Guaranteed Payments = Partnership


B

bindinki

My brother and his brother-in-law started a partnership in 2006. The
partnership had no activity except organization costs. The
partnership is set up where they are each 50/50 on all. During 2007
the Partnership received a few jobs (they do construction work) and
they also built my brother a house. My brother and his wife received
a construction/convertible mortgage loan to finance the construction
and "hired" the partnership to be the foreman construction company of
the job. Throughout the year the partnership paid what my brother is
referring to "wages" to him and his brother-in-law based upon their
"rates"/hours worked. Due to their experience, my brothers wage rate
was higher than his brother-in laws.

As these are ultimately "costs" to complete the jobs, since they did
90% of the work themselves, is this considered guaranteed payments,
i.e. deductible on the partnership tax return to reduce the net income
of the Parntership? Are these technically "1099" items to my brother
and his brother-in-law? Or what is the best manner in which these
payments should be treated. I understand that we can record them as
distributions, however that reduces the partners basis unequally and
is ultimately not the intent of what my brother and his brother-in-law
wanted to do.

Any advice on the treatment of these "payments" would be appreciated.

Thanks!
 
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B

Benjamin Yazersky CPA

My brother and his brother-in-law started a partnership in 2006. The
partnership had no activity except organization costs. The
partnership is set up where they are each 50/50 on all. During 2007
the Partnership received a few jobs (they do construction work) and
they also built my brother a house. My brother and his wife received
a construction/convertible mortgage loan to finance the construction
and "hired" the partnership to be the foreman construction company of
the job. Throughout the year the partnership paid what my brother is
referring to "wages" to him and his brother-in-law based upon their
"rates"/hours worked. Due to their experience, my brothers wage rate
was higher than his brother-in laws.

As these are ultimately "costs" to complete the jobs, since they did
90% of the work themselves, is this considered guaranteed payments,
i.e. deductible on the partnership tax return to reduce the net income
of the Parntership? Are these technically "1099" items to my brother
and his brother-in-law? Or what is the best manner in which these
payments should be treated. I understand that we can record them as
distributions, however that reduces the partners basis unequally and
is ultimately not the intent of what my brother and his brother-in-law
wanted to do.

Any advice on the treatment of these "payments" would be appreciated.

Thanks!

--

First of all there should be a partnership agreement that deals with
these type of things.
Contact your attorney.

A partnership that pays a partner a guaranteed payment deducts that on
page 1 of form 1065.
It also goes on the respective partner's K1.
A partnership does NOT give a partner a 1099MISC.
You should contact your CPA/tax advisor.


___________________________________
<<< Benjamin Yazersky, CPA [NJ & NY] >>>
-----> real address on hobokeni or hobokenx <-----



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E

eagent

My brother and his brother-in-law started a partnership in 2006.  The
partnership had no activity except organization costs.  The
partnership is set up where they are each 50/50 on all.   During 2007
the Partnership received a few jobs (they do construction work) and
they also built my brother a house.  My brother and his wife received
a construction/convertible mortgage loan to finance the construction
and "hired" the partnership to be the foreman construction company of
the job.  Throughout the year the partnership paid what my brother is
referring to "wages" to him and his brother-in-law based upon their
"rates"/hours worked.  Due to their experience, my brothers wage rate
was higher than his brother-in laws.

As these are ultimately "costs" to complete the jobs, since they did
90% of the work themselves, is this considered guaranteed payments,
i.e. deductible on the partnership tax return to reduce the net income
of the Parntership? Are these technically "1099" items to my brother
and his brother-in-law? Or what is the best manner in which these
payments should be treated.  I understand that we can record them as
distributions, however that reduces the partners basis unequally and
is ultimately not the intent of what my brother and his brother-in-law
wanted to do.

Any advice on the treatment of these "payments" would be appreciated.

Thanks!

--
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You are in over your head, swim as fast as you can to a local EA or
CPA who does partnership tax work.

First, you should refer to the partnership agreement - THAT document
will address the specifics of how payments to partners get treated.

Second, partners are not allowed to take wages - it is either a
guaranteed payment, a distribution, or the pass through of net income
without any correlation to cash distributed.

Thirdly, a 1099 for just about any payment to a partner is almost
certainly incorrect - payments to partners are almost always reported
on the K-1.

Fourthly, basis is frequently impacted in an unequal manner,
especially when one partner takes more or less than the other. BTW,
as a tax professional this is one of the biggest headaches I deal with
when working with clients. Partner (or LLC Member A) puts in more or
takes out more than partner B, but both partners insist that they are
50/50 so their capital accounts and basis should match - WRONG.

Fifth, you talked about basis but didn't mention the capital
accounts. Capital accounts will add an additional layer of work.

Sixth, you also have to understand and deal with the "At-Risk Rules".
This is especially true when the partnership is working with money for
which the partners themselves are not responsible. This may or may
not be the case depending on how the loan and the construction
contract was structured.

I'll repeat my first comment - you are in over your head, get
professional help.

Good luck,
Gene E. Utterback, EA, RFC, ABA
 

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