Do guaranteed payments from a partnership for services qualify for the 20% qualified business income deduction?

Forum|Forum|6 years ago
December 6, 2019
2 replies
30 views

partner owns no capital of the partnership and is only paid for personal services. pays self employment taxes on net income after deducting unreimbursed expenses.

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Best answer by itonewbie

No, guaranteed payments are specifically excluded.

itonewbieAnswer

Level 15

No, guaranteed payments are specifically excluded.

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Accountant-Man

Level 13

But he pays income tax and SE tax on line 1 ordinary income plus guaranteed payment, less expenses?

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Nick MacDonald

Level 3

I read an article suggesting partnerships should revisit and revise the partnership agreements to remove references to guaranteed payments.

By treating them as deductible guaranteed payments, you are increasing your expenses and reducing the benefit of the QBI deduction. The strategy would be to treat all partner transactions as distributions as opposed to guaranteed payments.

Of course, partners would need to focus on quarterly payments after making this change.

itonewbie

Level 15

Maybe but tax is just a part of the puzzle.

Guaranteed payments are payable without regard to the partnership's income. The definition is codified under §707; you can't simply "treat" what is actually guaranteed payment in substance as a "distribution".

If there is a change to the arrangement in fact, the partnership agreement would have to be amended. Would the partners be comfortable with not getting a certain sum if there is a drop in the partnership's income/profitability in the future? How would that affect each of the partners? How would the cash flow work out with the partnership and the partners? Those are just some of the considerations.

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