Difficulty following guaranteed payments made to an S-Corp

[comm. banker]

Hi everyone I am a commercial underwriter for small business loans. I am currently underwriting a loan and am trying to work through a rather confusing (at least confusing to me) situation I have not encountered before. I am hoping someone can help answer some questions regarding how to account for guaranteed payments made from one entity to an S-Corp. 

Background

There are two entities that file tax returns. First is an S-Corp. which is a holding company. The S-Corp also has 100% ownership in several operating entities (which do not file tax returns). Income / expenses from those entities are reported through the the S-Corp's tax return.

The S-Corp also has 61% ownership in an operating entity (files separate tax return), which made guaranteed payments to the S-Corp in 2017 & 2018. I am told that the guaranteed payments eventually flow to the individual owner of the S-Corp., however I cannot trace them back to him personally. I am not completely sure if I should be able to trace the guaranteed payments to him individually or not.

Questions

- Would the S-Corp be required to report the guaranteed payments as income on its tax return? I would think that the guaranteed payments would have been reported under Other Income on the S-Corps tax return, but I guess it could have been lumped into top line gross revenues as well.

- I noticed that the S- Corp holding company deducts a "Management Expense" on its tax returns in the same amount as the Guaranteed Payment it received, which makes me think that this expense is used to net out the guaranteed payment reported as income on the S-Corps tax return. Am I correct? If I am correct, is the guaranteed payment netted out because the funds flow through the S-Corp holding company to the owner individually? I understand that the owner would not have to report the guaranteed payment on his personal tax return, but still expected to be able to trace it back to him through the holding company's K1.

Thanks!

[Abby Normal]

Guaranteed payments are taxed to the partner, in this case, the S corp. I've never had a 1065 K1 input in an S corp so I can't say where the guaranteed payments would end up, but it doesn't really matter which line as long as it's part of taxable income.

The management expense sounds a bit bogus. If it's being paid to the shareholder, it should be 1099'd in the shareholders name, but if it was just left in taxable income in box 1 of the K1, the income would flow to the shareholder that way. And the money coming out would just be distributions.

[Lion EA]

An S-corporation would report all worldwide income on its Form 1120-S. (Tax-exempt income, such as a forgiven PPP loan, might appear as Other Income-Nontaxable and would appear as an M-2 adjustment.)

If you need to know what a "Management Expense" deduction is, you can ask the corporation's tax representative or look at their management contract or invoices. The S-corporation owner(s) should be receiving reasonable compensation via payroll/Forms W-2. In addition, the owner(s) would receive Form K-1. And, they might be taking distributions.