Profit allocation on 1065 K-1s

[Jim-from-Ohio]

Ok.. now I have a question if I could.  I have a new 1065 client.. say they net $ 300,000 and there are three partners.. law firm. instead of each partner getting a k-1 for 100,000 they want the allocation of the $ 300,000 to be allocated differnently based on work each bought in, etc... does anyone know how to show unequal amounts on the three K-1s?  thanks!

[dascpa · Accepted solution]

You (they) have to look at their partnership operating agreement.  If that document specifies allocation then until they amend the agreement you should not oblige.  S corporations cannot have disproportionate distributions or allocations. 50/50 owners must share profits and losses as well as distributions 50/50. Any change is done through salaries.  But LLC's can have different ownership %, sharing of profits % and sharing of losses %.  And the last two can be modified every year, again, as long as their operating agreement allows.  In the K-1 Worksheet you can change the sharing of profits % and sharing of losses %, and you can also do a special allocation by $ amount or by ratio.

[TaxGuyBill]

Aren't "Guaranteed Payments" often used for compensating partners for the amount of work they perform?

[IRonMaN]

That's a much easier route to go for something like that.

[dascpa]

Guaranteed payments can be used that way but

"...guaranteed payments are payments made by the partnership to a partner guaranteed to be paid regardless of whether the partnership generates profits or incurs losses. A partner typically receives guaranteed payments as compensation for services rendered to the partnership."

Most doctor's offices will not "guarantee" based on gross billing, but net profit after expense allocation. 

Many will say something like $100,000 guaranteed and the balance based on xyz allocation.  There we have two different items on the K-1.