Partnership basis

[oceanlovin'ea]

I am working on a partnership return with 2 partners. It is a service business. Each partner contributed a small amount of money to open checking account, same amount so equal partners as far as contributions.

The profit margin on each project varies from project to project. The project manager gets a larger share of the profits from the job than the other partner after expenses are paid. There may be expenses that relate directly to that particular project and there are general expense that relate to the operation of the business.

They just started the business late in 2009 so not a lot of income and more expenses, creating a loss for the year.

My problem is figuring out how to put the information on their K-1's. I have done a spreadsheet for each project, showing income minus direct expenses minus percentage of overhead expenses. This equals the total loss for the year. This year it might be 60% for partner 1 and 40% for partner 2. Next year may be totally different percentages.

Having trouble with outside basis, inside basis and their basis on the k-1. Can anyone direct me to a guide on this? I've read what is in TTB. but this seems to be different since there is no property involved.

Thanks.

They each use their own computer equipment, etc.

[BHoffman]

Aren't partnerships fun?

I think what your clients are trying to accomplish is that the PM/partner receives more cash than the other partner, and the other partner is not taxed for that cash.

This would be a good reason for the PM/partner to take a guaranteed payment. I'd leave the partnership split at 50/50.

I would check the expenses to see if anything should be amortized as start up or organization costs.

The inside / outside basis - in general "inside basis" is the basis of the partnership's assets - including cash and receivables and not just fixed asset property. The "outside basis" is the basis of the partner's capital account and his share of the partnership's liabilities. Remember, property means more than fixed assets. An ownership percentage in a partnership is "property" to the partner. Cash and receivables and inventory are "property".

Here's a link to IRS ATG that talks about inside/outside basis with examples:

http://www.irs.gov/businesses/partnerships/article/0,,id=134691,00.html

[oceanlovin'ea]

did help

That did help me understand inside and outside basis better.

These 2 only put $150 each in the partnership plus they paid some bills themselves which would be liabilities.

One of my problems is that they are 50/50 partners in the business but on each project the profit ratio is different. If Partner A is the project manager, he gets 70 % of the profit and the other partner gets 30% and vice versa.

So I am still trying to figure out how to reconcile all of that.

Linda

[Gretel]

I agree with BHoffman that this can be solved with guaranteed payments. I think you have some time after the close of the year to make the decision how much guaranteed payments each partner is supposed to get. This should be done in writing and be part of a "meeting". Throughout the year they could get draws, of which some later will be classified as guaranteed payments.

Under no circumstances do you want to deal with special allocations.

[oceanlovin'ea]

Guaranteed payments

Do the guaranteed payments have to be a certain dollar amount every time? Or could it be worded that they get a percentage of the profit from the job at the end of each job?

LInda

[BHoffman]

Guaranteed payments can be whatever amount, whenever. Partnerships are very flexible.

[Gretel]

Guaranteed payments can be whatever amount, whenever. Partnerships are very flexible.

..or % or depending on the weather (just kidding).