Form 541 - Partnerships - Department Of Treasury Internal Revenue Service

contributing partner or another partner,

payment since her share, without regard to the

If the sale or exchange is between two part-

and

guarantee, would have been greater than the

nerships in which the same persons directly or

guarantee.

indirectly own more than 50% of the capital or

b. The transfers together are properly

profits interests in each partnership, no deduc-

characterized as a sale or exchange of

Self-employed health insurance premiums.

tion of a loss is allowed.

property.

Premiums for health insurance paid by a part-

The basis of each partner’s interest in the

nership on behalf of a partner, for services as a

partnership is decreased (but not below zero) by

partner, are treated as guaranteed payments.

the partner’s share of the disallowed loss.

Payments by accrual basis partnership to

The partnership can deduct the payments as a

cash basis partner. A partnership that uses

If the purchaser later sells the property, only

business expense, and the partner must include

an accrual method of accounting cannot deduct

the gain realized that is greater than the loss not

them in gross income. However, if the partner-

any business expense owed to a cash basis

allowed will be taxable. If any gain from the sale

ship accounts for insurance paid for a partner as

partner until the amount is paid. However, this

of the property is not recognized because of this

a reduction in distributions to the partner, the

rule does not apply to guaranteed payments

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

partnership cannot deduct the premiums.

made to a partner, which are generally deducti-

partnership is increased by the partner’s share

A partner who qualifies can deduct 100% of

ble when accrued.

of that gain.

the health insurance premiums paid by the part-

nership on his or her behalf as an adjustment to

Guaranteed Payments

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,

indirectly between a person and a partnership,

Guaranteed payments are those made by a

in which the partner is eligible to participate in

or between two partnerships, if both of the fol-

partnership to a partner that are determined

any subsidized health plan maintained by any

lowing tests are met.

without regard to the partnership’s income. A

employer of the partner or the partner’s spouse.

partnership treats guaranteed payments for

•

For more information on the self-employed

More than 50% of the capital or profits

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

health insurance deduction, see chapter 6 in

interest in the partnership(s) is directly or

made to a person who is not a partner. This

Publication 535.

indirectly owned by the same person(s).

treatment is for purposes of determining gross

•

income and deductible business expenses only.

The property in the hands of the trans-

Including payments in partner’s income.

For other tax purposes, guaranteed payments

feree immediately after the transfer is not

Guaranteed payments are included in income in

are treated as a partner’s distributive share of

a capital asset. Property that is not a capi-

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

ordinary income. Guaranteed payments are not

tal asset includes accounts receivable, in-

tax year ends.

subject to income tax withholding.

ventory, stock-in-trade, and depreciable or

The partnership generally deducts guaran-

real property used in a trade or business.

Example 1. Under the terms of a partner-

teed payments on line 10 of Form 1065 as a

ship agreement, Erica is entitled to a fixed an-

business expense. They are also listed on

nual payment of $10,000 without regard to the

More than 50% ownership. To determine if

Schedules K and K-1 of the partnership return.

income of the partnership. Her distributive share

there is more than 50% ownership in partnership

The individual partner reports guaranteed pay-

of the partnership income is 10%. The partner-

capital or profits, the following rules apply.

ments on Schedule E (Form 1040) as ordinary

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

income, along with his or her distributive share

ducting the guaranteed payment. She must

1. An interest directly or indirectly owned by,

of the partnership’s other ordinary income.

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

or for, a corporation, partnership, estate, or

Guaranteed payments made to partners for

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

trust is considered to be owned proportion-

organizing the partnership or syndicating inter-

distributive share) on her individual income tax

ately by, or for, its shareholders, partners,

ests in the partnership are capital expenses.

return for her tax year in which the partnership’s

or beneficiaries.

Generally, organizational and syndication ex-

tax year ends.

2. An individual is considered to own the in-

penses are not deductible by the partnership.

terest directly or indirectly owned by, or for,

However, a partnership can elect to deduct a

Example 2. Lamont is a calendar year tax-

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

portion of its organizational expenses and amor-

payer who is a partner in a partnership. The

ily” includes only brothers, sisters,

tize the remaining expenses (see Business

partnership uses a fiscal year that ended Janu-

half-brothers, half-sisters, spouses, ances-

start-up and organizational costs in the instruc-

ary 31, 2007. Lamont received guaranteed pay-

tors, and lineal descendants.

tions for Form 1065). Organizational expenses

ments from the partnership from February 1,

(if the election is not made) and syndication

2006, until December 31, 2006. He must include

3. If a person is considered to own an interest

expenses paid to partners must be reported on

these guaranteed payments in income for 2007

using rule (1), that person (the “construc-

the partners’ Schedule K-1 as guaranteed pay-

and report them on his 2007 income tax return.

tive owner”) is treated as if actually owning

ments.

that interest when rules (1) and (2) are

Payments resulting in loss. If guaranteed

applied. However, if a person is consid-

payments to a partner result in a partnership

Minimum payment. If a partner is to receive a

ered to own an interest using rule (2), that

loss in which the partner shares, the partner

minimum payment from the partnership, the

person is not treated as actually owning

must report the full amount of the guaranteed

guaranteed payment is the amount by which the

that interest in reapplying rule (2) to make

payments as ordinary income. The partner sep-

minimum payment is more than the partner’s

another person the constructive owner.

arately takes into account his or her distributive

distributive share of the partnership income

share of the partnership loss, to the extent of the

before taking into account the guaranteed pay-

adjusted basis of the partner’s partnership inter-

ment.

Example. Individuals A and B and Trust T

est.

are equal partners in Partnership ABT. A’s hus-

Example. Under a partnership agreement,

band, AH, is the sole beneficiary of Trust T.

Sale or Exchange

Divya is to receive 30% of the partnership in-

Trust T’s partnership interest will be attributed to

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

of Property

AH only for the purpose of further attributing the

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

interest to A. As a result, A is a more-than-50%

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

partner. This means that any deduction for

Special rules apply to a sale or exchange of

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

losses on transactions between her and ABT will

property between a partnership and certain per-

can be deducted by the partnership is $2,000

not be allowed, and gain from property that in

sons.

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

the hands of the transferee is not a capital asset

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

Losses. Losses will not be allowed from a sale

is treated as ordinary, rather than capital, gain.

partnership income will be reported by the other

or exchange of property (other than an interest

partners in proportion to their shares under the

in the partnership) directly or indirectly between

More information. For more information on

partnership agreement.

a partnership and a person whose direct or indi-

these special rules, see Sales and Exchanges

If the partnership net income had been

rect interest in the capital or profits of the part-

Between Related Persons in chapter 2 of Publi-

$30,000, there would have been no guaranteed

nership is more than 50%.

cation 544.

Publication 541 (April 2008)

Page 7

Form 541 - Partnerships - Department Of Treasury Internal Revenue Service - 2008 Page 7

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