Guaranteed pymts vs draw. Anyone want to discuss

[schirallicpa]

I took over a partnership this year.  The previous accountant had always made monthly draws "distributions."  The partnership makes enough money that basis is not an issue.  

I want to move distributions entirely to guaranteed payments.  However, they are actually taking each a monthly draw - say $1000.  And then on top of that they are being paid for any extra loads they take on.  (It's a trucking company).  So absolutely I think the loads that they are paid for are guarantee payments.  But I also think their monthly draws are guaranteed payments.  

Now I'm hesitant that in the big picture they will/may get hit harder with personal tax and if thats the reason the previous accountant was calling the draws "distribution."  

The partnership agreement really doesn't address particulars except to say that distributions of capital would be voted on by partners.  

[Lee B]

Their SE and taxable income is based on their share of the PTS Annual Income.

Their monthly draws( distributions ) don't determine their taxable income.

[Abby Normal]

Seems like guaranteed payments would be the way to go since the concept is to pay them more if they work for the partnership more. But you will need to explain to them the new dynamic. The one who earns less is currently paying tax on income that is going to the one who works more, so they will definitely want to switch from draws to GP.

[DANRVAN]

14 minutes ago, Abby Normal said:

they will definitely want to switch from draws to GP.

Agree, GP is more equitable.

[Terry D EA]

4 hours ago, cbslee said:

Their SE and taxable income is based on their share of the PTS Annual Income.

Their monthly draws( distributions ) don't determine their taxable income.

Because a partnership is a pass thru entity, aren't guaranteed payments subject to SE tax? Distributions, would seem to be a distribution of capital as the OP states?? The extra loads would definitely be guaranteed payments. It sounds like what the OP said the distribution title was used to avoid the SE tax. Too bad the agreement isn't more specific.

[Gail in Virginia]

But if all the income is treated as subject to SE tax on a partnership, then treating payments of like amounts between partners as distribution is equitable.  I don't see any way around treating unlike payments as guaranteed payments, particularly when they are based on work done by the partner. 

[schirallicpa]

15 hours ago, Terry D said:

Too bad the agreement isn't more specific.

Honest to God have you ever seen a specific in any one's partnership agreement.  Lawyers tend to have pages and pages of bunk, but very little specifics.