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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 10096
Experience:  Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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Does a K-1 need to be the same partner in a PC? In other

Customer Question

Customer: Does a K-1 need to be the same for each partner in a PC? In other words, if bonuses are based upon individual partners productivity %, does the K-1 need to reflect the same amount and the difference taken as salary?
JA: Thanks. Can you give me any more details about your issue?
Customer: Each partners overall compensation is based upon the individuals collections. So if there is $100,000 in the bank on Dec 31st, and one partners % is 50 and the other two are 25% each, the distribution of money in the bank is 50,000, 25,000, and 25,000. For the one getting the 50,000, can it be all taken as distribution or can only 25,000 be taken as distribution and the remaining 25,000 has to be salary?
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Submitted: 11 months ago.
Category: Tax
Expert:  Lane replied 11 months ago.

Hi,

...

There are a couple of options for handling this:

...

(1) Be very sure that the basis for compensation is individual's collections IN THE OPERATING AGREEMENT/PARTNERSHIP AGREEMENT.

...

That's the beauty of an LLC (taxed as a partnership) or a partnership - you can have profit and loss allocations based on essentially anything that the partners/members agree to.

...

(2) You could also treat these as guaranteed payments, so that this portion of their compensation would be based on some formula (also would neet to be in the agreement) BUT this would let any other income/losses flow through equally (if that's what the ownership inter IS, equal ownership)

...

If there's NOTHING in the agreement, then, yes, having different K-1's for partners with equal ownership could raise a flag... and would not be in accordance with state LLC/Partnership law which always defaults to equal ownership if there IS no agreement

Customer: replied 11 months ago.
if one partner is owed nothing at the end, the other two need to take it as salary? Any other way to compensate to avoid the additional tax. thanks
Expert:  Lane replied 11 months ago.

Again, you would simply write the operating agrement such that would be a "specioal; allocation of profits and losses that is based on the following formula_______"

...

(That formula could be as simple as, say, all profits are allocated based on the level of collections each partner makes MINUS the firm's operating expenses)

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If this is an LLC or partnership, owners don't take salaries, they have self-employment income (essentially the company's profits).

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BUT you can have something called "guaranteed payments," (you might want simply to google the phrase Members' guaranteed payments ... or ... Partners' guaranteed payments) which for OWNErS is LIKE a salary, in that they are guaranteed this amount regardless of the profits and losses of the partnerswhip itself .... BUT, the guaranteed payment can also be based on the individual's collection level.

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What this would do is have the collections come through to the indivual as a guaranteed payment and then all other income and expenses, whatever they may be, be distributed equally on the K-1 to each of them.

...

Guaranteed payments are an expense of the partnership and show up on:

  1. Form 1065 Page One
  2. Form 1065 Schedule K
  3. Form 1065 Schedule K-1 (for each owner who receives them)
  4. Form 1040 Schedule E (although it is buried in the taxable amount listed for the partnership or LLC)

... here's an excellent overview of Guaranteed payments: http://lindakeithcpa.com/why-guaranteed-payments-are-not-guaranteed/

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