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Lev, Tax Advisor
Category: Tax
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Experience:  Taxes, Immigration, Labor Relations
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Are partners guaranteed payments deductible for texas franchise

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Are partners guaranteed payments deductible for texas franchise tax?

Lev :

Hi and welcome to Just Answer!

Unless a taxable entity qualifies and elects to file using the E-Z Computation, the revised tax base for the Texas franchise tax is the taxable entity's margin. Margin equals the lowest of three calculations:
--total revenue minus cost of goods sold;
--total revenue minus compensation; or
--total revenue times 70 percent.

A partnership must include the net distributive income to natural persons in the wages and cash compensation component of compensation.

Net distributive income for a pass-through entity is the net amount of income, gain, deduction, or loss reportable to the owners on an IRS Form K-1 for the tax year of the entity. Guaranteed payments to partners are included when computing net distributive income.To compute Net Distributive Income for a partnership:
From IRS Form 1065 K-1, add items 1, 2, 3, 4, 5, 6a, 7, 8, 9a, 10, and 11. Subtract from that result the sum of items 12, 13, and 16, Code L (Foreign taxes) and any depletion that the partnership included in its margin calculation.
See for reference

Lev :

So far - if the margin equals the total revenue minus compensation (lowest of three calculations) - then - because the compensation includes guaranteed payments - such payments are deductible for TX franchise tax.
Otherwise - if the margin equals to other of three calculations - guaranteed payments do not affect TX franchise tax.

Customer: Ok. So if revenue is $1.5K and guaranteed
Customer: payments are $500K ( that's 1.5 mil before)
Customer: $1.5mil revenue with guaranteed pmts of $500K . Are the GP deductible?
Lev :

Technically - there is no direct deduction for guaranteed payments.
However - when the margin which is used to calculate TX franchise tax.equals to equals the lowest of three calculations.
One of these calculations is total revenue minus compensation,
Because guaranteed payments are included into compensation - they are deducted for that ONE calculation only.
In additional - such deduction is limited by $330,000 per person in 2012 and 2013. So if for instance guaranteed payments of $500K paid to two partners as $100k and $400k - only $430k is deductible.
So - yes - guaranteed payments are deductible in general - but if that deduction will affect calculations of TX franchise tax in your specific situation depends on many circumstances.

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