1065 draw

[JenMO]

2 partners - both take a draw this year, otherwise money has always been left in. is that a guaranteed payment? would it be on the front page of the 1065 as an expense? operating agreement does not mandate a draw or guaranteed payment.

[ATSMAN]

2 partners - both take a draw this year, otherwise money has always been left in. is that a guaranteed payment? would it be on the front page of the 1065 as an expense? operating agreement does not mandate a draw or guaranteed payment.

How did they figure out how much to draw for each partner? Was it based on any profit?

If not linked to profit then it is guaranteed payment whether the agreement says or not.

Reference Pub 541. The payment is a reduction of the ordinary income and the amount of the guaranteed payment is reported to the partner on Schedule K-1. and is includable by the partner as part of his distributive share of ordinary income on Schedule E.

[kathyc2]

2 partners - both take a draw this year, otherwise money has always been left in. is that a guaranteed payment? would it be on the front page of the 1065 as an expense? operating agreement does not mandate a draw or guaranteed payment.

If the information you received from company indicated that it was a draw, I wouldn't change it to guaranteed payment. However, if the treatment of draw vs guaranteed payment results in different taxable income to partners, you may want to run the numbers by them before finalizing.

[JenMO]

Worked the same (except a couple of dollars) so, i guess it really doesnt' matter.

[kathyc2]

Worked the same (except a couple of dollars) so, i guess it really doesnt' matter.

As long as draw was in relation to profit percentage, it shouldn't make a difference.

[ATSMAN]

The partners need to amend their agreement to get this issue put in black and white. I have seen agreements that do not even specify how the profits/losses will be split and leave it hanging out there to be decided each year.

[jsamans]

The partners need to amend their agreement to get this issue put in black and white. I have seen agreements that do not even specify how the profits/losses will be split and leave it hanging out there to be decided each year.

The difference in treatment comes down to the capital accounts and basis: a distribution reduces the partner's capital account balance and basis (but not below zero), whereas a guaranteed payment doesn't. To the extent that there is adequate basis to provide for the distribution, there should be no impact from a tax perspective. If there is not adequate basis, the difference needs to be treated as a capital gain.

But I agree with ATSMAN that this shouldn't be decided on the fly. The partnership agreement should make clear how things are done regarding profits and losses, and any guaranteed payments really should also be stipulated (or at least based on something that is stipulated, such as services rendered).