Question

Discuss guaranteed payments within the confines of partnership operations.

Answer 1

Ans:

Guaranteed payments within the confines of partnership operations:

Guaranteed payments to partners are payments meant to compensate a partner for services or use of capital. In effect, they are the equivalent of a salary for partners or limited liability company (LLC) members. Such payments eliminate the risk of a partner making personal contributions of time or property for which they are never compensated if the partnership is not successful.

"Guaranteed" refers to the fact that such payments known as first priority distributions are made without regard to the partnership's profitability. In fact, such payments constitute a net loss for the partnership.

In addition, they can create special and unexpected tax implications if they are not handled properly. Income from a guaranteed payment to a partner may be subject to self employment tax, though that depends on the terms of payment.

Guaranteed Payments to Partners and Tax Law:

Guaranteed Payments to partners are outlined in section 707(c) of the Internal Revenue Code (IRC), which defines such payments as those made by a partnership to an individual partner for services or for providing capital and which are determined without regard to the income of the partnership.