Is this a "guaranteed payment?"

[garybeck1]

Hello,

I have a 2-person LLP partnership.

I am using TurboTax Business for the first time.  Last year we had an accountant.

The way we distribute money to the partners (profit that we pay personal taxes on with K-1), is that after each job, we split the profit.

I looked at last years K-1 form and I can see that the accountant registered these distributions as guaranteed payments.

Now I am filling out the Turbotax form for this year and it says that guaranteed payments are "Guaranteed payments are payments made to partners that are not based on the partner's share of the business's income."

Well these distributions ARE based on our share of business income.   our share is 50-50 and at the end of every job we split the profit 50-50.

so was my accountant incorrect to label these as guaranteed payments?

and if so, what should they be labeled as instead?

It looks like in Turbotax that once I input them as guaranteed payments, the profit for the business goes down (becomes negative for the year).    but this is profit that we split 50-50.

if anyone has advice on this I'd appreciate it.

thanks

gary in vermont

[Rick19744 · Accepted solution]

I agree that based on your facts, the payments are NOT guaranteed payments; for exactly the reason stated by TT.

Having said that, the end result should be the same.

I would just record all income and expense and then split it 50/50 as you indicate that is how it should be handled.  Then the program will allocated everything 50/50 onto the K-1 box 1.

Guaranteed payments are reflected as an expense on page 1 of the 1065 and then reported on the respective partner's K-1.  This is then reported as SE income along with anything else in box 1 (less any applicable deductions that are separately stated).  So as you can see, in the end, it all works out the same.

The piece I believe you are missing, is the netting process that happens on the K-1.  Your box 1 and box 4 get netted for purposes of your 1040 for both income tax and SE Tax purposes.

The payments to each partner then become a distribution reported on the K-1 line 19 code A

A quick example:

$100,000 in income and $40,000 in business expenses

Scenario 1

Show the $100,000 as guaranteed payments 50/50.  $50,000 each.  Page 1 of the 1065 will show $40,000 as the net loss (because the two $100,000 amounts offset).  Each K-1 will show the $50,000 in guaranteed payment in box 4 and a $20,000 loss in box 1.  This nets to $30,000 each.

Scenario 2

No guaranteed payment.  Page 1 of the 1065 shows net income of $60,000 which is then split 50/50.  Each K-1 box 1 shows $30,000 income.  This is the same result as scenario 1.

Having said that, once again, I don't believe you have any guaranteed payments.

[garybeck1]

thank you.  to clarify, the scenario is like this

we are basically an electrical contractor (solar) business and both of us have other regular jobs with tax witholdings.  so this LLP is for supplemental income.

let's say we do 3 jobs a year.  each job could be like this:

sell a system for $20,000
cost for materials, labor, everything on the system is $14,000
there is $6,000 leftover
we each take $3,000 out of the account and put it in our pockets

repeat for 2 more jobs in the year.  that's it

so at the end of the year, we each took $9,000 out of the account which is income and must get reported.

it sounds like, you are saying:

1) that $9,000 is not guaranteed payments, it is profit of the business, that we split 50-50.

2)The fact that we took $9,000 out is irrelevant.  It could sit in the business account, or we could take it out.  we pay taxes on 50% of the business profit either way.

if I enter everything in correction to Turbotax Business (put 0 for guaranteed payments) then it will issue K-1s for us properly.  

i really appreciate it

gary in vermont

[Rick19744]

I agree with your summary of understanding.
The only thing I want to clarify is that when preparing the K-1's, if you do in fact take out $$, then those $$ must be reflected as distributions to each partner on the K-1.
The other item I want to make sure you do, is each partner needs to maintain a basis schedule of their investment in the LLP.  This is critical as eventually you will close the LLP and in order to determine your overall gain or loss in the investment you will need your basis.
Attached is a copy of the K-1 instructions and a discussion of basis is on page 3:
<a rel="nofollow" target="_blank" href="https://www.irs.gov/pub/irs-prior/i1065sk1--2018.pdf#page=3">https://www.irs.gov/pub/irs-prior/i1065...>