Management Fees paid to partener

[sami]

Client owns a rental property in LLC in a 50/50 partnership and file 1065 . One of the partners does some handyman work (repairs) on the rental units and gets paid from the LLC as management fees.

Here is were I need to confirm my thinking:

The management fees that one partner receives are considered guaranteed payments subject to self employment tax reported on line 14A of schedule K. But that does the management fees are also shown on form 8825 as an expense to the LLC? Or M2?

Thank you

[BOB W]

Report only in one area, guaranteed payments. It will end up as an expense against LLC profits.

[kathyc2]

The guaranteed payments should reduce the amount on line 2. Software may handle it differently, but I'd say the norm is you also need to enter it as an expense on 8825 rather than just on K1 4a.

[BOB W]

Kathy, sounds like double dipping???????

If it only goes on 8825 then a 1099 needs to be issued. Why not pick it up as guaranteed payment to the partner.

[kathyc2]

Kathy, sounds like double dipping???????

If it only goes on 8825 then a 1099 needs to be issued. Why not pick it up as guaranteed payment to the partner.

OP said it was being treated as a guaranteed payment. Putting it on K1 4a is basically the same as a 1099. That amount is taxable plus SE tax to the person receiving it. If it's not counted as an expense it's being taxed twice.

[BOB W]

You're missing my point. You said put it in both locations (I called it double dipping). If you chose one location (as an expense on 8825) you would be required to issue a 1099nec.

[kathyc2]

You're missing my point. You said put it in both locations (I called it double dipping). If you chose one location (as an expense on 8825) you would be required to issue a 1099nec.

Not at all.

Say profit was 20,000 totally disregarding payment to partner. Each K1 would have 10,000 income.

Partner A gets 5,000 for work he does on property treated as a guaranteed payment. The 5,000 is an expense taking profit to 15,000. Partner A will have 7,500 rental income plus 5,000 guaranteed payment for a total of 12,500. Partner B will have rental income of 7,500. The total of the two will still be 20,000.

No double dipping involved. K1 4a makes it taxable to A, expense makes a deduction to the partnership.