Guaranteed Payment (GP) to partner

[David760]

I have a partnership with 3 partners. All of the partners have historically taken draws (distributions) throughout the year.

One of the partners tried to get financing for a new home but because he did not receive a W-2 the finance company said he would not qualify for a loan.

The section about GP's in TTB sounds like the solution.

1. Can I reclassify the distributions as GP's and issue W-2's to the partner(s)?
2. If yes, since partners should not be treated as an employee and is not subject to employee withholdings for FICA, FUTA or FIT would I issue a W-2 with no withholdings? 3. Would this be reported on form 941? There doesn't seem to be a line to explain why Wages, tips and other compensation (which I think would include the GP) differs from the Taxable SS and Medicare wages.

Thanks in advance.

[Gretel]

David, welcome to the board.

A partner doesn't get a W-2, he gets a K-1 once the partnership tax return is filed. Yes, he should receive GP for services performed and these GP are the same as W-2 wages for employees but they not wages.

They will be recorded on the partner's K-1 along with other distributions partner receives. GP also should be included in partnership papers like the operating agreement or minutes.

I am curious why the bank didn't accept the financial statements of the partnership. I just went through the same process as a partner and didn't have any problems.

[Bees Knees]

There is a difference between distributions and guaranteed payments. My experience with bank loans is that they will accept guaranteed payments reported on the K-1 as income that will qualify for the loan. No need for (nor should there be) a W-2.

[BOB W]

Word of caution>>>> If you choose to have only one partner/member gets GP the net profits will get become unbalanced. If one get GP they all need GP. They should all get GP anyway as required by IRS.

[outwest]

I don't think this is like a S Corp...

in that distributions don't have to be equal as long as there is some substantial economic reason for the allocation.

Example: It seems to be fairly common that one partner will be the worker and one the money man. To compensate the worker for time and effort, he gets guaranteed payments. After that, the remaining profits are split based on the partnership agreement.

[BOB W]

in that distributions don't have to be equal as long as there is some substantial economic reason for the allocation.

Example: It seems to be fairly common that one partner will be the worker and one the money man. To compensate the worker for time and effort, he gets guaranteed payments. After that, the remaining profits are split based on the partnership agreement.

I thought only LLCs were allowed to use the "Economic Reality" test. This is a General Partnership and is limited to ownership %.

[David760]

Thank you for the responses

I will recommend to my client that we reclass the distributions as GP. All of the partners have taken distributions (in different amounts) so it makes sense they are being compensated for their individual efforts.

I did not get the details as to why he was declined. Hopefully, when we reclass the distributions as GP, the lender will reconsider the partners compensation.

Again, thank you all for your responses. It's so great to have this forum to get clarification and advise.

[outwest]

keep in mind..

I thought only LLCs were allowed to use the "Economic Reality" test. This is a General Partnership and is limited to ownership %.

that there is no LLC tax section in the code. The LLC defaults to partnership taxation and that's where substantial economic effect rules are.

Per page SB 4-5 in TTB:

Special allocations. A partnership agreement can allocate partnership
items in percentages other than according to the partners’
ownership interests. However, an allocation will be disregarded
if it does not have “substantial economic effect.”