Thanks much for taking this question up and for asking for a clarification. I will do my best based on what I think I know!
Partners in a partnership are paid in two common ways. One is by distributive share of income to the partners based on the partnership agreement. The distributive payment is reported on the K1 form to the partners and it is taxed as ordinary income. The other form of payment is by way of Guaranteed Payments; these are made by advance agreement without regard to the partnership's income. Normally, guaranteed payments are considered a business expense and are reported as such on each partner's K1 form provided by the partnership. In this case, the partner(s) gets to take advantage of that deduction on their 1040 tax return Schedule E. Because of the way Schedule E income gets transferred over to the 1040 form, this deduction can be significant in terms of the calculated taxable income.
However, normally, a guaranteed payment established at the beginning of the year only gets to keep that status to the extent that it is greater than what the partner's distributive share of partnership income would have been before taking into account the guaranteed payment. If the partners distributive share of the partnerships net income is greater than the guaranteed amount, there is no guaranteed amount for that year and therefore, there is no business deduction that is passed onto the partners for their 1040 return.
One type of guaranteed payment is health insurance premiums paid by the partnership on behalf of the partner(s). As I worked through the data entry with Turbo Tax, it seems that these health insurance premiums paid by the partnership have remained classified as guaranteed payments and the business expense deduction has remained (as reported on the K1 form) even though the distributive share of partnership income is well above the guaranteed payment. I had expected that Turbo Tax would have found this to be the case and would have disallowed the health insurance premium as a guaranteed payment and business deduction.
So, my question is this. Do health insurance premiums paid by the partnership as a guaranteed payment enjoy some special status in that category that is exempt from what I have underlined above? In my opinion, this can be a significant factor in ones taxable income and tax due.
