Guaranteed Payments
Guaranteed payments are those made by a partnership to a partner that are determined without regard to the partnership's income. Compensation for services and capital are guaranteed payments.
A partnership treats guaranteed payments for services, or for the use of capital, as if they were made to a person who is not a partner. This treatment is for purposes of determining gross income and deductible business expenses only.
For other tax purposes, guaranteed payments are treated as a partner's distributive share of ordinary income. Guaranteed payments are not subject to income tax withholding.
The partnership generally deducts guaranteed payments on line 10 of Form 1065 as business expenses. They are also listed on Schedules K and K-1 of the partnership return.
The individual partner reports guaranteed payments on Schedule E (Form 1040) as ordinary income, along with his distributive share of the partnership's other ordinary income.
Read more about this topic: Partnership Accounting
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