PA Guaranteed payments

[HBurkholder]

Compensation does not include guaranteed payments to a partner even if they are for
services.

Does the above exerpt from the PA PIT guide mean what it seems to mean. It appears to me that someone who is a partner is making this income tax free. Is this correct or is the partnership taxed?

[KBTS]

From the PIT Guide Chapter 16

Guaranteed Payments.

There are differences between Federal reporting of guaranteed payments and Pennsylvania
law. The partnership characterizes guaranteed payments to partners in the following manner:

1. To the extent paid for services rendered directly in the production of income from a business, profession, or farm the guaranteed payments are gross income from that income class. The partnership may deduct these guaranteed payments when determining its net profits for Part I of its Combined Information Return.

2. To the extent paid for services rendered directly in the production of rental or royalty income, the guaranteed payments are gross income from that income class. The partnership may deduct these guaranteed payments when determining its rental and royalty income for Part III of its Combined Information Return.

3. To the extent paid for other services or for the use of capital, a guaranteed payment is:
• A withdrawal proportionately from the capital of all partners;
• A gain from the disposition of the recipient’s partnership interest and a loss from the disposition of the other partners’ partnership interests, to the extent derived from the capital of the other partners; and
• A return of capital by the recipient to the extent derived from his or her own capital.
The partnership does not receive a deduction for a guaranteed payment if there is a guaranteed payment for capital. In this instance, the deduction is added back in arriving at Pennsylvania Personal Income Tax Income.

4. A guaranteed payment is derived from sources within, and is allocable to, Pennsylvania, to the extent deductible from net profits or rental and royalty income that is derived from sources within, and allocable to, Pennsylvania.


So, guaranteed payments for services rendered are not considered compensation included on line 1, but they are income and must be included on the appropriate line of the PA-40. For example, the payment from a partnership operating a business would go on line 4; the payment from a partnership owning rental properties would go on line 5.

[HBurkholder]

Thanks. In the past I may have been putting it on the wrong line. I just couldn't imagine tax free income.