LLC WITH GUARANTEED PAYMENTS

[Lee B]

I have a 3 member LLC with multiple rentals. One of the members is doing most of the management functions so they decided

start making monthly Guaranteed Payments to this member. My question is where to enter the Guaranteed Payment as an expense.

I know how to enter the Guaranteed Payment to the members K - 1 where it belongs.

There is a place on Line 10 of Page 1 of the 1065 but that flows to the Ordinary Business Loss line on the K -1.

Do you enter the GP expense in the 8825 so that it reduces the Passive Rental Income ?

 

[BHoffman]

Partners receive guaranteed payments instead of a payroll check, so I'll vote to treat the payments as ordinary expense.  

[Terry D EA]

Partnership guaranteed payments are the partner's distributive share of income/loss. cbslee is correct to include the guaranteed payments on the 1065 line 10. My question is, does the deduction of the guaranteed payments result in a loss to the partnership. If so, I believe it would be an ordinary business loss. Here is an excerpt from Pub 541

Payments resulting in loss.   If guaranteed payments to a partner result in a partnership loss in which the partner shares, the partner must report the full amount of the guaranteed payments as ordinary income. The partner separately takes into account his or her distributive share of the partnership loss, to the extent of the adjusted basis of the partner's partnership interest.

Guaranteed payments do not go on the 8825 they must be included as ordinary income to the partner receiving the payments regardless if the payments result in a loss.

[Randall]

Or could it be treated as management fees on the 8825 and not guaranteed payment to partner?   Partner would still have to pick it up on his 1040 (Sch C and SE).

 

 

 

 

[Terry D EA]

Original OP stated this is a 3 member LLC. All income/loss pass thru to each partner from form 1065. Schedule C and SE are the wrong forms. This is rental activities that are not subject to SE tax unless they are real estate professionals. If there is a partnership agreement that specifically states the partner's guaranteed payments then no 8825.

[Pacun]

I agree with Terry D. It goes to 1065, then K1 and then to the partners 1040 by using K1 input. If it is SE taxable, then you enter the amount on line 12 or 14 ( don't remember) and the K1 will force Sch SE to come on board,  It will not go on schedule C at all.

[OldJack]

Guarantee payments in a partnership is not a partnership expense deduction.  It is not payroll.  It is just an amount that is deducted from the computation of profit to be allocated according to ownership ratio.  It is taxed to the partner the same as his share of profit.

[Lee B]

1 hour ago, OldJack said:

Guarantee payments in a partnership is not a partnership expense deduction.  It is not payroll.  It is just an amount that is deducted from the computation of profit to be allocated according to ownership ratio.  It is taxed to the partner the same as his share of profit.

Jack, are you saying that I shouldn't enter the GP on Line 10 of Page 1 of Form 1065 ?

I wondered about that entry creating an ordinary loss which would be partially allocated back to the Member who received the GP ?

[jasdlm]

I disagree (respectfully).  If you check Pub 541, Guaranteed Payments are a business expense. Often people working in a partnership (vs simply investors) receive guaranteed payments instead of W2 income because as partners, they should receive W2s.  Also, because guaranteed payments are payments for services performed, they are subject to self-employment tax.  (Just like if you hired an outside property management.)  I'm not sure whether there is away around the latter for a partner in a rental real estate business.

I'm eager to hear other thoughts (and I hope I haven't been doing this incorrectly for years).  Always learning on this board!

Guaranteed Payments

 

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.

 

Question: Are partners considered employees of a partnership or are they considered self-employed?

Answer:

Partners in a partnership (including certain members of a limited liability company (LLC)) are considered to be self-employed, not employees, when performing services for the partnership.

• If you're a general partner of a partnership (or treated as a general partner in an LLC) that carries on a trade or business, your net earnings from self-employment include your distributive share of the income or loss from that trade or business. General partners must also include guaranteed payments as net earnings from self-employment.
• If you're a limited partner of a partnership (or treated as a limited partner in an LLC) that carries on a trade or business, only guaranteed payments for services you rendered to, or on behalf of, the partnership are net earnings from self-employment. Limited partners don't pay self-employment tax on their distributive share of partnership income, but do pay self-employment tax on guaranteed payments.

[DANRVAN]

On ‎03‎/‎05‎/‎2017 at 5:19 PM, cbslee said:

I have a 3 member LLC with multiple rentals. One of the members is doing most of the management functions so they decided

start making monthly Guaranteed Payments to this member. My question is where to enter the Guaranteed Payment as an expense.

I know how to enter the Guaranteed Payment to the members K - 1 where it belongs.

There is a place on Line 10 of Page 1 of the 1065 but that flows to the Ordinary Business Loss line on the K -1.

Do you enter the GP expense in the 8825 so that it reduces the Passive Rental Income ?

 

You don't have to put the GP on line 10 unless for services performed for a trade or business. The GP is not subject to SE tax for the same reason.

I haven't ran across this situation before, but would consider making a special allocation on the K-1s.

For example, if total net from 8825 was $55,000 before GP of $15,000, then manager partner would be allocated $25,000. That is GP plus 1/3 of net less GP.

The other two partners would report $15,000 each. That would reflect the economic reality of the situation. All reported on line 2 of K-1.

I disagree with deducting GP on 8825 as that will distort the income reported on the 1065. As you noted, a line 10 entry will create an ordinary loss issue and SE income.

See instructions for line 10.

[DANRVAN]

Sorry my math was off, Example should have been $45,000 before GP of $15,000. Managers K-1 would report $25,000 and other partners $10,000, all on line 2.

[Lee B]

Thanks for the input. Now I have read Pub 451 and instructions for Forms 1065 and 8825.

So after entering the GP on Line 10 of page 1, this generates an ordinary loss on line 22 of the same amount

since all the rest of the income and expenses flow thru the 8825. Then on page 4 line 14a (Net Earning from SE)

the ATX worksheet nets the ordinary loss against the GP resulting in a $ 0 on line 14a. From there I did have to use the

special allocation features for the GP, but the remaining K - 1 allocations flowed automatically. Very Interesting.

I am not a 100 % confident, that this is the correct way to do this, but it is the best I can do. C'est La Vie !