Guaranteed Payment

Partnership A is owned by two partnerships (Partnerships B and C). The partnership purpose of A is to provide design services for specific types of buildings for a fee for use by unrelated parties. Partnership B was paid a fee for their piece of design services by Partnership A on a design project, it did not go far enough to get C involved. Partnership B provided these design services in their capacity as a partner, however they also provide these types of services to outside third parties on a regular basis. PaThere were no profit distributions to either B or C for the year. It was the type of building involved which put it in the Partnership A arena. Is this a guaranteed payment to B or an ordinary deduction with possibly some 1099 obligation to B. The tiered apsect is throwing me off and reporting a guaranteed payment to a partnership seems odd and incorrect but I keep chasing my tail and I want to get it right going forward. Thank you.

payment to a partnership seems odd and incorrect but I keep chasing my tail and I want to get it right going forward.

Take your pick, but the guaranteed payment route is fine and (more) proper. And it’s fine with a tiered structure. Upper tier will debit cash and credit income…you’d just show it (whether 1099 or gtd pmt) on Line 1 of the upper-tier’s F1065. The idea of a guaranteed payment doesn’t change “just because” a particular recipient partner might itself be a partnership. And note that guaranteed payments do not represent QBI income.

Thank you.

You’re quite welcome.

Thank you.

So to carry this a bit further. If Part B is going to call it a guaranteed payment, then as it flows out of Part B to the owners of Part B, it can be special allocated to a particular partner? Part B is made of 3 individuals.

Yes it can be allocated any way the partnership agreement provides. See section 704. But it's not Partnership B that's calling it a GP. It's Partnership A.

Jggermain said

Is this a guaranteed payment to B or an ordinary deduction with possibly some 1099 obligation to B.

and Jeff-Ohio said

Take your pick, but the guaranteed payment route is fine and (more) proper. And it’s fine with a tiered structure.

All I can find is information that these should be guaranteed payments. Is there any information in the code that supports issuing a 1099-NEC?

And also, I may be off base here but if treated as guaranteed payments, these will not be eligible for the QBI deduction but the 1099-NEC income would be eligible for the QBI deduction? If so then Partner B is going to want a 1099-NEC but is that correct?

As an alternative approach, which Len alludes to, is to specially allocate the first amount of profit in the amount discussed. This would allow for the income to maintain QBI eligibility.

Thanks for the response CaptCook. Not sure how that would work.

Thanks for the response CaptCook. Not sure how that would work.

Partners are free to allocate profit in any manner they all agree upon with a few guidelines. Any method not outlined in their OA must be in writing and signed by all partners. As long as this agreement is made prior to the original filing deadline (3/15 for calendar year filing), it may apply to the return for the prior year.
I've done this many times for folks since QBI came on the scene.

Any method not outlined in their OA must be in writing and signed by all partners. . I was not aware of the "in writing" and "signed by" rules. Is that unique to MMLLCs? Is it recent?

Any method not outlined in their OA must be in writing and signed by all partners. . I was not aware of the "in writing" and "signed by" rules. Is that unique to MMLLCs? Is it recent?

This has always been my understanding. Allocations of profit must be agreed upon by all partners. If it's in their OA, then all partners agreed to the OA and the allocation shown there. If there is a provision for a GP to be paid, there is usually a statement in an OA outlining how that payment is determined and approved. Any allocation different than what's in the OA needs to rise to the same level of agreement as the OA because that is the valid allocation until a different one is explicitly agreed upon.
How else would you determine and document an explicit agreement if not in writing?

The general rule (704 and its regs.) is you follow the partnership agreement, with, as you said, some "guidelines" or rules.

According to the 761 regs., the partnership agreement

includes the original agreement and any modifications thereof agreed to by all the partners or adopted in any other manner provided by the partnership agreement. Such agreement or modifications can be oral or written. A partnership agreement may be modified with respect to a particular taxable year subsequent to the close of such taxable year, but not later than the date (not including any extension of time) prescribed by law for the filing of the partnership return. As to any matter on which the partnership agreement, or any modification thereof, is silent, the provisions of local law shall be considered to constitute a part of the agreement.

Well, I learned something today at the hands of Len's crack research team. Thank you!

I'll still make it my practice to have such modifications in writing, but know that it isn't required to be in writing.

Thanks for remembering that I had the CRT. (Technically it's my crack research department but why get technical. I have not used them a lot lately, but still have them on call. On this one, I knew the rule way back when I did real work.

CaptCook,

I understand from Nilodop's post that the agreement can be oral or written but in my case I'm thinking having it in writing wouldn't be a bad idea. Do you have an attorney write up the annual modified allocation agreement that the partners sign or?

I usually have them draft it and I review it.
I don't usually have an attorney involved unless it is rather complicated.

CaptCook,

Would you be willing to share an example of the terminology you use?

Unfortunately, with my change of employers in April, I don't have any sample language readily available.

It is usually something to the effect of:
The partners agree that the first $100K of ordinary income will be allocated to Partner A. Profit in excess of this amount will be split among ownership percentages as noted in the OA.
Items of loss, deduction, or gain are not affected by this allocation.

Thanks CaptCook.

Was wondering about the other comment I made in the post I made above, #6.

Jggermain said

Is this a guaranteed payment to B or an ordinary deduction with possibly some 1099 obligation to B.

and Jeff-Ohio said

Take your pick, but the guaranteed payment route is fine and (more) proper. And it’s fine with a tiered structure.

If they are performing the services as partners it would either be guaranteed payments or ordinary income. From what I read in code section 707 they would not be able to have a 1099 issued to them. Is there any information in the code that supports issuing a 1099-NEC to the partners when a partner engages in a transaction with a partnership that IS in his/her capacity as a member of the partnership?