Guaranteed Payments to Partners

[Snaggletooth]

Question: Can there be a guaranteed payment to a silent partner?

Two brothers have established a partnership with their father as a 98% non-active partner. Father is in the nursing home and partnership operations are paying a substantial part of the nursing home bills.

The two brothers are "operating" partners. If partnership is able to deduct payments to nursing home as a guaranteed payment to the father, the father's tax could be lowered.

Thanks in advance for your response.

[newbie]

Even if you can pay guaranteed payments to a silent partner it would need to be for services or use of capital assets. If father is not providing services I don't think this will fly.

[BHoffman]

Retirement income from partnership?

http://taxguide.completetax.com/text/Q15_3112.asp

I wonder if that would work for your clients.

[Snaggletooth]

Thanks

Excellent, Ms. Hoffman. You've come through for me yet again.

Not only that, but the answer is what I wanted to hear! That doesn't
happen very often.

[erchess]

Question

Is it a correct business practice to have the business pay personal expenses for a partner or owner? I try to drill into my clients to have the business give the money to the owner and have the owner pay personal expenses out of personal funds. In this case with Silent Partner Dad in a nursing home I would have wanted the sons to put Dad's money from the partnership in Dad's account and then use their POA to write a check to the nursing home drawn on Dad's account. Am I wrong to make such an issue of this?

[BHoffman]

I agree that Dad should receive his retirement income from the Partnership and pay his nursing home costs personally.

[Snaggletooth]

Good Issue

In this case with Silent Partner Dad in a nursing home I would have wanted the sons to put Dad's money from the partnership in Dad's account and then use their POA to write a check to the nursing home drawn on Dad's account. Am I wrong to make such an issue of this?

No I think this is a very relevant issue, and it occurs in many environments.

The IRS has long honored what it calls "deemed distributions." But they are situation-dependent. For example, the payment of estimated taxes for beneficiaries out of a trust is considered a "deemed distribution" and by-passes the redundant cycle that you mention above. However, I think IRS would want to make the process of estimated taxes as convenient as possible, and would do their best to accommodate payment.

I think the double-barrelled process of writing to Dad's account, and then having another check drawn on his funds is advice that can't go wrong. I don't know that the direct check to the nursing home wouldn't be honored, but it might give fodder to some bullheaded auditor.

Good point.