Key Takeaways
- Guaranteed payments are payments to a partner determined without regard to partnership income.
- Deductible by partnership; ordinary income to partner.
- Guaranteed payments for services are subject to SE tax.
- Guaranteed payments reduce partnership QBI.
- Reported on Line 4 of Schedule K-1.
- Timing: included in partner year that includes partnership year end.
Guaranteed Payments
Why This Matters for the Exam
Guaranteed payments are a common exam topic. The exam tests deductibility, SE tax treatment, and the QBI exclusion.
Expect at least 2-3 questions on guaranteed payments.
What Are Guaranteed Payments?
Guaranteed payments = payments to a partner determined without regard to partnership income.
| Example | Description |
|---|---|
| Salary-like payment | Partner receives $100k/year for management |
| Capital return | Partner guaranteed 10% return on capital |
Tax Treatment Comparison
| Aspect | Partnership | Partner |
|---|---|---|
| Deductibility | Yes—business expense | N/A |
| Income type | Reduces ordinary income | Ordinary income |
| QBI | Reduces partnership QBI | NOT QBI to partner |
| SE Tax | N/A | Yes (if for services) |
Partnership Treatment
| Effect | Result |
|---|---|
| Deduction | Yes, like salary expense |
| Reduces ordinary income | On Form 1065, Page 1 |
| Reduces QBI | Lowers QBI for all partners |
Partner Treatment
| Effect | Result |
|---|---|
| Income character | Ordinary income |
| Timing | Partner year including partnership year end |
| SE Tax (services) | Yes—subject to SE tax |
| SE Tax (capital) | No—not subject to SE tax |
| QBI | NOT qualified business income |
Guaranteed Payments vs. Distributive Share
| Factor | Guaranteed Payment | Distributive Share |
|---|---|---|
| Partnership income dependent? | No | Yes |
| Deductible by partnership? | Yes | No |
| QBI? | No | Yes |
| SE tax (general partner)? | Yes (services) | Yes |
K-1 Reporting
| Box | Item |
|---|---|
| Box 4c | Total guaranteed payments |
| Box 4a | Guaranteed payments for services |
| Box 4b | Guaranteed payments for capital |
QBI Impact Example
| Without Guaranteed Payment | With $50k Guaranteed Payment |
|---|---|
| Partnership net income: $200,000 | Partnership net income: $200,000 |
| QBI: $200,000 | Less: Guaranteed payment: ($50,000) |
| QBI: $150,000 | |
| Partner A (50%): $100,000 QBI | Partner A: $50,000 GP + $75,000 QBI |
| GP is NOT QBI |
Real-World Scenario
Scenario: Partner X manages the partnership and receives $60,000 guaranteed payment for services. Partnership profit is $200,000 before the payment.
- Partnership ordinary income: $200,000 - $60,000 = $140,000.
- Partner X income: $60,000 GP + share of $140,000.
- SE Tax: $60,000 guaranteed payment subject to SE tax.
- QBI: $60,000 is NOT QBI. Partner X's QBI is only their share of $140,000.
On the Exam
Expect 2-3 questions on guaranteed payments, typically:
- Deductibility Questions: "How do guaranteed payments affect partnership income?"
- SE Tax Questions: "Are guaranteed payments subject to SE tax?"
- QBI Questions: "Can guaranteed payments be included in QBI?"
The key is to remember: Guaranteed payments = deductible by partnership, ordinary income to partner, subject to SE tax (if for services), NOT QBI.
Partner X receives $60,000 guaranteed payment for services. Tax treatment?
How does a $40,000 guaranteed payment affect partnership taxable income?
Can guaranteed payments be included in QBI for §199A?