Guaranteed partner payments

[LouD]

Client has S-Corp holding company that owns a 50% interest in several LLCs. For the first time this year, one of the LLCs allocated guaranteed partner payments of $45k to the S-Corp on the 2008 K-1 for some additional work that the S-Corp owner did for the LLC during the year.

On the S-Corp return, this guaranteed payment is being routed by ATX to Box 10E (Other Income) of the K-1. Two questions:

How do I treat this $45k of income on his personal return (the other income box does not route anywhere on the personal return). Secondly, is it subject to SE tax - it's coming thru an S-Corp so I wouldn't think it would be subject, but guaranteed partner payments are normally SE tax, so I'm not sure which answer is correct.

thanks for the help!

[TAXBILLY]

The partner who received the guaranteed payment is the S-Corp, not the client.

taxbilly

[samingeorgia]

Please be aware that IRS is looking at S Corps which show profit and zero officer compensation. They want to be sure that compensation is subject to Social Security and Medicare taxes; even though from an income tax standpoint, it's a wash.

This is a real "facts and circumstances" issue - does the shareholder of the S corp. perform services through the corp. which cause the LLC to pay this money? If so, I think you may want to add most if not all of the $ 45K to the shareholder's salary.

At one of our meetings, some people who I trust said that you would be OK with about 50% salary and 50% S Corp. profits. So if the total profit was $ 60K, they want to see about $ 30K as officer salary and $ 30K as S Corp. profit. Of course, once again, this presumes that the corp. profits come from labor and capital; I think you could rebut this if the owner does little or no work. If you find a deal like that, let me know how it's done. :lol:

[LouD]

The partner who received the guaranteed payment is the S-Corp, not the client.

taxbilly

The next question is how to I report that income on the personal return since it's coming thru on the S-Corp K-1 as "Other Income" in Box 10E? Should I just add a new line item on the Schedule E pg 2 and call it "Other Income" for that S-Corp EIN?

[TAXBILLY]

How exactly is the number getting to the other income line if it is only entered on line 1a of 1120-S?

taxbilly

[LouD]

How exactly is the number getting to the other income line if it is only entered on line 1a of 1120-S?

taxbilly

It's coming to the S-Corp via the 1065 K-1 in Box 4 for Guaranteed Payments

[TAXBILLY]

I see what you mean. It flows directly from the 1065 K-1 to the 1120-S K-1.

The directions don't shed any light on it so I would agree that it should show up on the client's Schedule E. I do not believe it would be subject to SE tax since the partner is the S-Corp and not the client. Weird!

taxbilly

[LouD]

I see what you mean. It flows directly from the 1065 K-1 to the 1120-S K-1.

The directions don't shed any light on it so I would agree that it should show up on the client's Schedule E. I do not believe it would be subject to SE tax since the partner is the S-Corp and not the client. Weird!

taxbilly

thanks taxbilly - much appreciated for the help!!

[kcjenkins]

I'd still want to be darned sure that the S corp salary was at least a significant portion of that payment, unless I had some really really solid reason why it was a payment related to use of assets and not to personal service. Given that this is a true 'target' area for the IRS right now.