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Lev, Tax Advisor
Category: Tax
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Experience:  Taxes, Immigration, Labor Relations
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I am wondering why a partner in an LLC would take

Customer Question

***** *****. I am wondering why a partner in an LLC would take a guaranteed payment for services on the 1065? what is the advantage of that?
JA: Thanks. Can you give me any more details about your issue?
Customer: I am helping with a return and am just curious. There are two partners in an LLC. One put capital in but the other one did not. The one that did not put capital in gives lessons for a sport. I was wondering if we should show guarateed payments for the services rendered for the one partner? and if so what are the advantages of doing this?
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Submitted: 6 months ago.
Category: Tax
Customer: replied 6 months ago.
I am also wondering what the advantage is to the partner to take the guaranteed payment. If a partner takes a guaranteed payment for services does he have to pay self employment tax on that on his personal return or would a loss from the partnership off set the guaranteed payment on his personal return so the partner would not have to self employment tax
Expert:  Lev replied 6 months ago.
The LLC with several member is classified as a partnership for income tax purposes.Correspondingly - partners may agree to any distribution - that is based on the agreement between partners - and that distribution may be different for every year based on certain condition set in the agreement.Please consider following illustration exampleAssuming the LLC has two equal partners and made $$10,000 in net business income,but one partner performed all the work while you essentially spent very little time for that LLC.To compensate another partner for his work - the partnership pays guaranteed payments $9000.Sor the partnership net profit is $1000 and divided equally between partners - $500 each..Guaranteed payments are those made by a partnership to a partner that are determined without regard to the partnership s income. A partnership treats guaranteed payments for services, or for the use of capital, as if they were made to a person who is not a partner. This treatment is for purposes of determining gross income and deductible business expenses only. For other tax purposes, guaranteed payments are treated as a partner s distributive share of ordinary income.The partnership generally deducts guaranteed payments on line 10 of Form 1065 as a business expense. They are also listed on Schedules K and K-1 of the partnership return. The individual partner reports guaranteed payments on Schedule E (Form 1040) as ordinary income, along with his or her distributive share of the partnership s other ordinary income..So K1 for other partner will look as 1 = $500box 4 = $9000For you - K1 will only have amount in box 1 = $500..That is an illustration example when guaranteed payments are appropriate.If that is an active partner - guaranteed payment for services and other income passed in box 1 - both are subject to self-employment tax.Questions?
Customer: replied 6 months ago.
are guaranteed payment for services have to actually be payments of cash for services or can there be no payment made and the partner just gets an increase in capital in the partnership?
Customer: replied 6 months ago.
Does that make sense? When one partner gets a guaranteed payment does he get an actual payment from the partnership or can it just increase his capital or basis in the partnership
Customer: replied 6 months ago.
hello, are you there?
Customer: replied 6 months ago.
are you able to answer my last question?
Expert:  Lev replied 6 months ago.
are guaranteed payment for services have to actually be payments of cash for services or can there be no payment made and the partner just gets an increase in capital in the partnership?Guaranteed payments must be artificially paid.The partner may use payments he/she received to contribute back to the partnership and increase the basis in the partnership interest.
Expert:  Lev replied 6 months ago.
But these are separate transactions.When guaranteed payments are made - that amount is reported on K1 and included into partner's taxable income - and that is regardless if the partner chooses to contribute that amount back to the partnership...I appreciate if you take a moment to rate the answer.Experts are ONLY credited when answers are rated positively.If you still have any doubts, need clarification - please be sure to ask.I am here to help you with all tax related issues.

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