Form 541 - Partnerships - Department Of Treasury Internal Revenue Service

Payments by accrual basis partnership to

lowing conditions existed when the partner re-

For 2002, a partner who qualifies can deduct

cash basis partner. A partnership that uses

ceived the partnership interest.

70% of the health insurance premiums paid by

an accrual method of accounting cannot deduct

the partnership on his or her behalf as an adjust-

•

The fair market value of all partnership

any business expense owed to a cash basis

ment to income. The partner cannot deduct the

property (other than money) was more

partner until the amount is paid. However, this

premiums for any calendar month or part of a

than 110% of its adjusted basis to the

rule does not apply to guaranteed payments

month in which the partner is eligible to partici-

partnership.

made to a partner, which are generally deducti-

pate in any subsidized health plan maintained

•

ble when accrued.

If there had been a liquidation of the

by any employer of the partner or the partner’s

partner’s interest immediately after it was

spouse. For more information on the self-em-

Guaranteed Payments

acquired, an allocation of the basis of that

ployed health insurance deduction, see chapter

interest under the general rules (discussed

7 in Publication 535.

earlier under Basis divided among proper-

Guaranteed payments are those made by a

Including payments in partner’s income.

ties) would have decreased the basis of

partnership to a partner that are determined

Guaranteed payments are included in income in

property that could not be depreciated, de-

without regard to the partnership’s income. A

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

pleted, or amortized and increased the ba-

partnership treats guaranteed payments for

tax year ends.

sis of property that could be.

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

made to a person who is not a partner. This

•

The optional basis adjustment, if it had

Example 1. Under the terms of a partner-

treatment is for purposes of determining gross

been chosen by the partnership, would

ship agreement, Erica is entitled to a fixed an-

income and deductible business expenses only.

have changed the partner’s basis for the

nual payment of $10,000 without regard to the

For other tax purposes, guaranteed payments

property actually distributed.

income of the partnership. Her distributive share

are treated as a partner’s distributive share of

of the partnership income is 10%. The partner-

ordinary income. Guaranteed payments are not

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

Required statement. Generally, if a partner

subject to income tax withholding.

ducting the guaranteed payment. She must

chooses a special basis adjustment and notifies

The partnership generally deducts guaran-

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

the partnership, or if the partnership makes a

teed payments on line 10 of Form 1065 as a

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

distribution for which the special basis adjust-

business expense. They are also listed on

distributive share) on her individual income tax

ment is mandatory, the partnership must provide

Schedules K and K – 1 of the partnership return.

return for her tax year in which the partnership’s

a statement to the partner. The statement must

The individual partner reports guaranteed pay-

tax year ends.

provide information necessary for the partner to

ments on Schedule E (Form 1040) as ordinary

compute the special basis adjustment.

income, along with his or her distributive share

Example 2. Mike is a calendar year tax-

of the partnership’s other ordinary income.

payer who is a partner in a partnership. The

Marketable securities. A partner’s basis in

Guaranteed payments made to partners for

partnership uses a fiscal year that ended Janu-

marketable securities received in a partnership

organizing the partnership or syndicating inter-

ary 31, 2002. Mike received guaranteed pay-

distribution, as determined in the preceding dis-

ests in the partnership are capital expenses and

ments from the partnership from February 1,

cussions, is increased by any gain recognized

are not deductible by the partnership. (See Or-

2001, until December 31, 2001. He must include

by treating the securities as money. See Market-

ganization expenses and syndication fees under

these guaranteed payments in income for 2002

able securities treated as money under

Partnership Income or Loss, earlier). However,

and report them on his 2002 income tax return.

Partner’s Gain or Loss, earlier. The basis in-

these payments must be included in the part-

crease is allocated among the securities in pro-

Payments resulting in loss. If guaranteed

ners’ individual income tax returns.

portion to their respective amounts of unrealized

payments to a partner result in a partnership

appreciation before the basis increase.

loss in which the partner shares, the partner

Minimum payment. If a partner is to receive a

must report the full amount of the guaranteed

minimum payment from the partnership, the

payments as ordinary income. The partner sep-

guaranteed payment is the amount by which the

arately takes into account his or her distributive

minimum payment is more than the partner’s

Transactions Between

share of the partnership loss, to the extent of the

distributive share of the partnership income

adjusted basis of the partner’s partnership inter-

before taking into account the guaranteed pay-

Partnership and

est.

ment.

Partners

Sale or Exchange

Example. Under a partnership agreement,

Sandy is to receive 30% of the partnership in-

of Property

For certain transactions between a partner and

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

his or her partnership, the partner is treated as

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

Special rules apply to a sale or exchange of

not being a member of the partnership. These

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

property between a partnership and certain per-

transactions include the following.

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

sons.

can be deducted by the partnership is $2,000

1) Performing services for or transferring

($8,000 − $6,000). Sandy’s income from the

Losses. Losses will not be allowed from a sale

property to a partnership if —

or exchange of property (other than an interest

partnership is $8,000, and the remaining

in the partnership) directly or indirectly between

$12,000 of partnership income will be reported

a) There is a related allocation and distri-

a partnership and a person whose direct or indi-

by the other partners in proportion to their

bution to a partner, and

rect interest in the capital or profits of the part-

shares under the partnership agreement.

b) The entire transaction, when viewed to-

nership is more than 50%.

If the partnership net income had been

gether, is properly characterized as oc-

If the sale or exchange is between two part-

$30,000, there would have been no guaranteed

curring between the partnership and a

nerships in which the same persons directly or

payment since her share, without regard to the

partner not acting in the capacity of a

indirectly own more than 50% of the capital or

guarantee, would have been greater than the

partner.

profits interests in each partnership, no deduc-

guarantee.

tion of a loss is allowed.

2) Transferring money or other property to a

Self-employed health insurance premiums.

The basis of each partner’s interest in the

partnership if —

Premiums for health insurance paid by a part-

partnership is decreased (but not below zero) by

nership on behalf of a partner for services as a

the partner’s share of the disallowed loss.

a) There is a related transfer of money or

partner are treated as guaranteed payments.

If the purchaser later sells the property, only

other property by the partnership to the

The partnership can deduct the payments as a

the gain realized that is greater than the loss not

contributing partner or another partner,

business expense and the partner must include

allowed will be taxable. If any gain from the sale

and

them in gross income. However, if the partner-

of the property is not recognized because of this

b) The transfers together are properly

ship accounts for insurance paid for a partner as

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

characterized as a sale or exchange of

a reduction in distributions to the partner, the

partnership is increased by the partner’s share

property.

partnership cannot deduct the premiums.

of that gain.

Page 12

Form 541 - Partnerships - Department Of Treasury Internal Revenue Service - 2002 Page 12

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