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Stephen G.
Stephen G., Sr Income Tax Expert
Category: Tax
Satisfied Customers: 6103
Experience:  Extensive Experience with Tax, Financial & Estate Issues
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I have a tax question on guaranteed payments

Customer Question

I have a tax question on guaranteed payments
Submitted: 6 months ago.
Category: Tax
Expert:  Stephen G. replied 6 months ago.
What's the question?
Customer: replied 6 months ago.
guaranteed payment for services for an LLC are payments made to a partner for service they performed is what I have a question on... If I'm doing a return for 2015 is there any way I still take a guaranteed payment (to the partner that did the services) on the 2015 return if no payment was made to the partner in 2015?
Expert:  Stephen G. replied 6 months ago.
No. Even if the partnership was on the accrual basis, since you are dealing with a partner, the partner would have to be on the accrual basis also. What is the problem you are trying to solve; maybe there's another way.How you split partnership profits is pretty flexible by agreement of the partners so if the partner didn't receive his guaranteed payments, if the partners agree (in writing would be preferable) you could allocate the amount of profit which was supposed to go to the partner as a guaranteed payment to that partner first before you split the partnership profits or loss, since the partnership allocations are taxable to the partners whether they are distributed or not.Will that solve your problem?
Customer: replied 6 months ago.
still a little confused. so if the LLC had income of only 1,000 and expenses of 17,000 for a loss of 16,000 in 2015 than would the one partner that did the services(he has never made a capital contribution) be able to take a guaranteed payment on the 2015 return?
Customer: replied 6 months ago.
oh and the partner that did the services has 33.33 of the partnership but your saying that can be overridden if the partners agree and the one partner could get more of the profit in any given year as a guarateed payment?...of course there is a loss this year so not sure this even applies
Expert:  Stephen G. replied 6 months ago.
Yes, it applies, but you can't call it a "guaranteed payment" if it wasn't paid.How much is the partner supposed to get off top as a "so called" guaranteed payment?Does the partnership agreement require the payment irrespective of negative cash flow, losses, etc.?Have you discussed it with the partners yet.How many partners?
Customer: replied 6 months ago.
the agreement does not address how the partner is suppose to take off the top or be paid for services. 2015 was the first year of business and thus the first year for the return to be done. there are two partners.and no dicussion yet as to how much of a payment will be made. So since no money was paid to the partner in 2015 a "guaranteed payment" can not be taken on the 2015 tax return? But you are saying he can be allocated more of the profits on the 2015 return if the other partner agrees to it but it would not be called a guaranteed payment... I guess even though there is not a profit it would just increase the loss more? How would this be handled on the 1065 and k-1 if he was allocated income for service but did not actually recieve the cash?
Expert:  Stephen G. replied 6 months ago.
That's what happens in a partnership when you allocate the profits and loss; it doesn't matter whether any payments are made or not; but that's the same for guaranteed payments.If there's nothing that addresses guaranteed payments, why are you even concerned about it?You wouldn't be allocating anything as a payment for services as nothing was paid.When I suggested the alternative of allocating profits "off the top" to the partner upon agreement of the partners, I didn't realize there was no income;Are you or your spouse one of the partners?
Customer: replied 6 months ago.
As a favor I did the bookkeeping for my relative that owns a small company with two partners...I'm not one of the partners but my relative is). The lady that is doing the return is asking me if the partner that owns 66 of the company (and put capital in) wants to take but my a guaranteed payment on the 2015 return for the services of one of the partners. I was not really understanding how that was possible since 2015 is over and gone and thought maybe I was missing something (like that there might be some rule that you can make a payment for a previous year until 4-15-16 and still deduct on a 2015 return). I could not understand what she was trying to tell me and she could explain it well so I wanted to get another opinion. It does not sound like there is any way to do any sort of guaranteed payment on A 2015 return and since the company had a loss there is no way to allocate more of a profit to one partner that did the service. I thought maybe I was not understanding this but it sounds like the tax preparer could be confused on how this works and is making it more complicated than it is. I guess it just going to be straight forward with the loss being split on the return and each partner being allocated their percentage of the loss on their K-1 based on their percentage in the partnership? Is this correct?
Customer: replied 6 months ago.
sorry, I had a typo in the second should read the lady doing the return is asking me if the partner that owns 66 percent of the company wants to make a guaranteed payment for the services of the other partner on the 2015 return. the tax preparer is saying that the smaller partner will not be able to take the loss from the partnership return unless he gets a guaranteed payment and this is because he has contributed no capital...but it doesnt sound like there is a way to make the guarateed payment and he can just carry the loss foward I am assuming and use it later.
Expert:  Stephen G. replied 6 months ago.
He has no tax basis in the partnership and a guaranteed payment doesn't usually give him any basis because it's paid. I think Tax Preparer is being a little too creative; she's basically asking for a transfer of equity from one partner to the other; this should not be coming from the Tax Preparer or the Bookkeeper either; this is taking money out of one partner's pocket & giving it to the other. Besides, it's useless; all it would do is increase his basis & self-employment tax and then reduce his basis to zero and he'd be left with the self-employment tax. I know what I'd tell her, but I can't publish it here;You've got it right, you should be doing the tax return; sounds like the Tax Preparer needs to go back to work for firm that knows how to do the most complicated returns; problem is they can't do the simple ones..........>00<The "little guy" can carry his loss forward to offset future income, just as you say.Steve G.

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