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start-up and organizational costs in the instruc-

partnership uses a fiscal year that ended Janu-

Transactions Between

tions for Form 1065). Organizational expenses

ary 31, 2010. Lamont received guaranteed pay-

(if the election is not made) and syndication

ments from the partnership from February 1,

Partnership and

expenses paid to partners must be reported on

2009, until December 31, 2009. He must include

the partners’ Schedule K-1 as guaranteed pay-

these guaranteed payments in income for 2010

Partners

ments.

and report them on his 2010 income tax return.

Payments resulting in loss. If guaranteed

Minimum payment. If a partner is to receive a

For certain transactions between a partner and

payments to a partner result in a partnership

minimum payment from the partnership, the

his or her partnership, the partner is treated as

loss in which the partner shares, the partner

guaranteed payment is the amount by which the

not being a member of the partnership. These

must report the full amount of the guaranteed

minimum payment is more than the partner’s

transactions include the following.

payments as ordinary income. The partner sep-

distributive share of the partnership income

arately takes into account his or her distributive

before taking into account the guaranteed pay-

1. Performing services for, or transferring

share of the partnership loss, to the extent of the

ment.

property to, a partnership if:

adjusted basis of the partner’s partnership inter-

est.

a. There is a related allocation and distri-

Example. Under a partnership agreement,

bution to a partner, and

Divya is to receive 30% of the partnership in-

Sale or Exchange

come, but not less than $8,000. The partnership

b. The entire transaction, when viewed to-

of Property

has net income of $20,000. Divya’s share, with-

gether, is properly characterized as oc-

out regard to the minimum guarantee, is $6,000

curring between the partnership and a

(30% × $20,000). The guaranteed payment that

Special rules apply to a sale or exchange of

partner not acting in the capacity of a

can be deducted by the partnership is $2,000

property between a partnership and certain per-

partner.

($8,000 − $6,000). Divya’s income from the part-

sons.

nership is $8,000, and the remaining $12,000 of

2. Transferring money or other property to a

Losses. Losses will not be allowed from a sale

partnership income will be reported by the other

partnership if:

or exchange of property (other than an interest

partners in proportion to their shares under the

in the partnership) directly or indirectly between

partnership agreement.

a. There is a related transfer of money or

a partnership and a person whose direct or indi-

If the partnership net income had been

other property by the partnership to the

rect interest in the capital or profits of the part-

$30,000, there would have been no guaranteed

contributing partner or another partner,

nership is more than 50%.

payment since her share, without regard to the

and

If the sale or exchange is between two part-

guarantee, would have been greater than the

b. The transfers together are properly

nerships in which the same persons directly or

guarantee.

characterized as a sale or exchange of

indirectly own more than 50% of the capital or

Self-employed health insurance premiums.

property.

profits interests in each partnership, no deduc-

Premiums for health insurance paid by a part-

tion of a loss is allowed.

nership on behalf of a partner, for services as a

The basis of each partner’s interest in the

partner, are treated as guaranteed payments.

Payments by accrual basis partnership to

partnership is decreased (but not below zero) by

The partnership can deduct the payments as a

cash basis partner. A partnership that uses

the partner’s share of the disallowed loss.

business expense, and the partner must include

an accrual method of accounting cannot deduct

If the purchaser later sells the property, only

them in gross income. However, if the partner-

the gain realized that is greater than the loss not

any business expense owed to a cash basis

ship accounts for insurance paid for a partner as

allowed will be taxable. If any gain from the sale

partner until the amount is paid. However, this

a reduction in distributions to the partner, the

of the property is not recognized because of this

rule does not apply to guaranteed payments

partnership cannot deduct the premiums.

rule, the basis of each partner’s interest in the

made to a partner, which are generally deducti-

A partner who qualifies can deduct 100% of

ble when accrued.

partnership is increased by the partner’s share

the health insurance premiums paid by the part-

of that gain.

Guaranteed Payments

nership on his or her behalf as an adjustment to

Gains. Gains are treated as ordinary income

income. The partner cannot deduct the premi-

in a sale or exchange of property directly or

ums for any calendar month, or part of a month,

Guaranteed payments are those made by a

indirectly between a person and a partnership,

in which the partner is eligible to participate in

partnership to a partner that are determined

or between two partnerships, if both of the fol-

any subsidized health plan maintained by any

without regard to the partnership’s income. A

lowing tests are met.

employer of the partner, the partner’s spouse,

partnership treats guaranteed payments for

the partner’s dependents, or any children under

•

services, or for the use of capital, as if they were

More than 50% of the capital or profits

age 27 who are not dependents. For more infor-

made to a person who is not a partner. This

interest in the partnership(s) is directly or

mation on the self-employed health insurance

treatment is for purposes of determining gross

indirectly owned by the same person(s).

deduction, see chapter 6 in Publication 535.

income and deductible business expenses only.

•

The property in the hands of the trans-

For other tax purposes, guaranteed payments

Including payments in partner’s income.

feree immediately after the transfer is not

are treated as a partner’s distributive share of

Guaranteed payments are included in income in

a capital asset. Property that is not a capi-

ordinary income. Guaranteed payments are not

the partner’s tax year in which the partnership’s

tal asset includes accounts receivable, in-

subject to income tax withholding.

tax year ends.

ventory, stock-in-trade, and depreciable or

The partnership generally deducts guaran-

real property used in a trade or business.

teed payments on line 10 of Form 1065 as a

Example 1. Under the terms of a partner-

business expense. They are also listed on

ship agreement, Erica is entitled to a fixed an-

More than 50% ownership. To determine if

Schedules K and K-1 of the partnership return.

nual payment of $10,000 without regard to the

there is more than 50% ownership in partnership

The individual partner reports guaranteed pay-

income of the partnership. Her distributive share

capital or profits, the following rules apply.

ments on Schedule E (Form 1040) as ordinary

of the partnership income is 10%. The partner-

income, along with his or her distributive share

ship has $50,000 of ordinary income after de-

1. An interest directly or indirectly owned by,

of the partnership’s other ordinary income.

ducting the guaranteed payment. She must

or for, a corporation, partnership, estate, or

Guaranteed payments made to partners for

include ordinary income of $15,000 ($10,000

trust is considered to be owned proportion-

organizing the partnership or syndicating inter-

guaranteed payment + $5,000 ($50,000 × 10%)

ately by, or for, its shareholders, partners,

ests in the partnership are capital expenses.

distributive share) on her individual income tax

or beneficiaries.

Generally, organizational and syndication ex-

return for her tax year in which the partnership’s

penses are not deductible by the partnership.

2. An individual is considered to own the in-

tax year ends.

However, a partnership can elect to deduct a

terest directly or indirectly owned by, or for,

portion of its organizational expenses and amor-

Example 2. Lamont is a calendar year tax-

the individual’s family. For this rule, “fam-

tize the remaining expenses (see Business

payer who is a partner in a partnership. The

ily” includes only brothers, sisters,

Publication 541 (December 2010)

Page 7

Form 541 - Partnerships - Department Of The Treasury - Internal Revenue Service - 2010 Page 7

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