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Can guranteed payment reported on the 1125 Cost of Goods

Customer Question

Can guranteed payment reported on the 1125 Cost of Goods Sold?
Submitted: 1 year ago.
Category: Tax
Expert:  Lev replied 1 year ago.

Actually for the partnership - Guaranteed payments are treated differently compare to partnership distributions.

In simple words - Guaranteed payments are payments for services partners provided and not related to the partnership interest allocation.

On K1 - that amount is reported in box 4 - not box 1.

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. Guaranteed payments are not subject to income tax withholding.

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.

Depending on circumstances - it is possible that all or some of guaranteed payments are NOT reported on line 10.

For instance - payments and credits that should be capitalized. For example, although payments or credits to a partner for services rendered in syndicating a partnership may be guaranteed payments, they aren't deductible on line 10. They are capital expenditures.

Another possible situation when guaranteed payments are included as a cost of labor and reported on 1125A line 3.

there is nothing to prohibit such treatment - but that option is not mentioned in instructions.

While there is no any tax benefits for including a part of guaranteed payments into COGS - You still may do that.