Beauty Salons

[SAS, LLC]

My client owns a beauty salon and is in a partnership with someone else. Their income comes from renting stations to other independent contractors, retail, and from their haircuts and hair services. How should the services from both partners be reported on the K-1 when one of them earned way more than the other one?

[spanel]

Guaranteed partner payments

Chris

[Lion]

What does their partnership agreement say?

[SAS, LLC]

The agreement says that they should split all of the income that is coming from rentals and retail, and that they get to keep 100% of whatever each one makes from haircuts and hair services (since each one has their own clients).

[Lion]

Then that's what you do.

[SAS, LLC]

Then that's what you do.

Could you explain?

[SAS, LLC]

So are those payments for services part of Gross Receipts and then deducted as Guaranteed Payments?

[Lion]

The hair services provided by one partner are income to her; the hair services provided by the other are income to the other. The remaining income (chair rental and retail, are split. That's what you said earlier. Discussing with the partners, if the agreement is not more specific, I'd probably suggest guaranteed payments. However, are the payments for hair services required to be made to each partner, even if the partnership is in a loss situation? 100% gross or after overhead? After direct expenses?

Who's doing the bookkeeping? You? Or, did you train the bookkeeper? Or, is the bookkeeper working under the direction of the partners who agree on the interpretation of how income is to be divided per their agreement? With the input of the original tax preparer and maybe lawyer? Why did the partnership change tax preparers? Have you discussed your questions with the partners to make sure you understand how they understand their agreement? Is your question about how the bookkeeper is reporting income and reporting disbursements? Are you preparing the partnership return that was due 15 September?

[ATSMAN]

I have a mother-daughter partnership taxed as LLC in the same line of work. In this situation everything is split 50/50 including chair rental income so it is relatively easy to prepare the K1s. If your client has a different split you need to find that how and hope they just don't wing it on the fly with different types of income.

I don't deal with multi-member LLC or Partnership where the split is not clearly defined and I can't calculate that in my software.

[Twin Turbo Z]

Being in "Partnership" with someone does not mean a 1065 Partnership was formed. Is this a 1065 situation ?

[Rapid Robert]

Being in "Partnership" with someone does not mean a 1065 Partnership was formed.

Really? Please do tell us more.

You might want to consider the IRS position on what constitutes a partnership, which seems to fit this situation.

"An unincorporated organization with two or more members is generally classified as a partnership for federal tax purposes if its members carry on a trade, business, financial operation, or venture and divide its profits. However, a joint undertaking merely to share expenses is not a partnership. For example, co-ownership of property maintained and rented or leased is not a partnership unless the co-owners provide services to the tenants."