when such payments meet this definition they are considered made to a non partner for tax purposes for both the partnership payer and the recipient payee guaranteed payments to partners are always treated as ordinary income for the partner for the partnership such payment is deductible under irc section 162 as ordinary or necessary business expenses or capitalized under irc section 263 341
the concept of guaranteed payments to partners may seem pretty simple but the details can make them complicated payments that have not been structured properly can lead to unexpected and expensive tax issues for both the partner receiving payment and the other partners tax issues for guaranteed payments to partnerswith regard to a partnership it might have an agreement that a partner is to receive 20 of partnership income before any guaranteed payments happen with a stipulation that they must receive at least 13 000 if partnership income is 100 000 the partner would get 20 000 none of which would be a guaranteed payment so it could not be deducted by the partnership however if the partnership earned 30 000 then the partner would only get 6 000 as their share as they are due a minimum of 13 000 the remaining 7 000 would be made in the form of a guaranteed payment and thus eligible for tax deduction by the partnership 1with regard to a partner an ill timed payment could increase their tax burden consider the timing issues under a scenario that has the partner using the calendar year as their fiscal year while the partnership s fiscal year ends on sept 30 if a partner were to receive a guaranteed payment after sept 30 but before jan 1 that income would have to be included in the partner s following tax year even though it occurred in the current year 1there are also special considerations that must be taken into account with guaranteed payments to partners and real estate as local governments sometimes levy a tax on unincorporated businesses for example new york city which functions under a complicated new york state business tax code has its own unincorporated business tax ubt that applies to partnerships as well as sole proprietorships while the tax burden can be significant exempted from it is net income from renting and ownership of the rental real estate 5 therefore real estate partnerships should consider the tax implications of any guaranteed payment to a partner these can include when a real estate partnership makes a guaranteed payment as a retirement payment it is classified as ordinary income for services rendered to the partner making it earned income as such it is subject to self employment tax which can be expensive however if it were characterized as a distributive share it would not be subject to self employment tax thanks to the above mentioned exemption 1