Form 541 - Partnerships - Department Of Treasury Internal Revenue Service

amortize the remaining expenses (see Busi-

Example 2. Lamont is a calendar year tax

Transactions Between

ness start-up and organizational costs in the In

payer who is a partner in a partnership. The

structions for Form 1065). Organizational ex

partnership uses a fiscal year that ended Janu

Partnership and

penses (if the election is not made) and

ary 31, 2013. Lamont received guaranteed pay

syndication expenses paid to partners must be

ments from the partnership from February 1,

Partners

reported on the partners' Schedule K1 as guar

2012, until December 31, 2012. He must in

anteed payments.

clude these guaranteed payments in income for

2013 and report them on his 2013 income tax

For certain transactions between a partner and

Minimum payment. If a partner is to receive a

return.

his or her partnership, the partner is treated as

minimum payment from the partnership, the

not being a member of the partnership. These

Payments resulting in loss. If guaranteed

guaranteed payment is the amount by which the

transactions include the following.

payments to a partner result in a partnership

minimum payment is more than the partner's

1. Performing services for, or transferring

loss in which the partner shares, the partner

distributive share of the partnership income be

property to, a partnership if:

must report the full amount of the guaranteed

fore taking into account the guaranteed pay

payments as ordinary income. The partner sep

ment.

a. There is a related allocation and distri

arately takes into account his or her distributive

bution to a partner, and

share of the partnership loss, to the extent of

Example. Under a partnership agreement,

b. The entire transaction, when viewed

the adjusted basis of the partner's partnership

Divya is to receive 30% of the partnership in

together, is properly characterized as

interest.

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

occurring between the partnership

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

and a partner not acting in the ca

Sale or Exchange

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

pacity of a partner.

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

of Property

can be deducted by the partnership is $2,000

2. Transferring money or other property to a

($8,000 − $6,000). Divya's income from the

partnership if:

Special rules apply to a sale or exchange of

partnership is $8,000, and the remaining

a. There is a related transfer of money or

property between a partnership and certain per

$12,000 of partnership income will be reported

other property by the partnership to

sons.

by the other partners in proportion to their

the contributing partner or another

shares under the partnership agreement.

partner, and

Losses. Losses will not be allowed from a sale

If the partnership net income had been

or exchange of property (other than an interest

$30,000, there would have been no guaranteed

b. The transfers together are properly

in the partnership) directly or indirectly between

payment since her share, without regard to the

characterized as a sale or exchange

a partnership and a person whose direct or indi

guarantee, would have been greater than the

of property.

rect interest in the capital or profits of the part

guarantee.

nership is more than 50%.

Payments by accrual basis partnership to

Selfemployed health insurance premiums.

If the sale or exchange is between two part

cash basis partner. A partnership that uses

Premiums for health insurance paid by a part

nerships in which the same persons directly or

an accrual method of accounting cannot deduct

nership on behalf of a partner, for services as a

indirectly own more than 50% of the capital or

any business expense owed to a cash basis

partner, are treated as guaranteed payments.

profits interests in each partnership, no deduc

partner until the amount is paid. However, this

The partnership can deduct the payments as a

tion of a loss is allowed.

rule does not apply to guaranteed payments

business expense, and the partner must include

The basis of each partner's interest in the

made to a partner, which are generally deducti

them in gross income. However, if the partner

partnership is decreased (but not below zero)

ble when accrued.

ship accounts for insurance paid for a partner

by the partner's share of the disallowed loss.

as a reduction in distributions to the partner, the

Guaranteed Payments

If the purchaser later sells the property, only

partnership cannot deduct the premiums.

the gain realized that is greater than the loss not

A partner who qualifies can deduct 100% of

allowed will be taxable. If any gain from the sale

Guaranteed payments are those made by a

the health insurance premiums paid by the part

of the property is not recognized because of

partnership to a partner that are determined

nership on his or her behalf as an adjustment to

this rule, the basis of each partner's interest in

without regard to the partnership's income. A

income. The partner cannot deduct the premi

the partnership is increased by the partner's

partnership treats guaranteed payments for

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

share of that gain.

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

in which the partner is eligible to participate in

were made to a person who is not a partner.

any subsidized health plan maintained by any

Gains. Gains are treated as ordinary income in

This treatment is for purposes of determining

employer of the partner, the partner's spouse,

a sale or exchange of property directly or indi

gross income and deductible business expen

the partner's dependents, or any children under

rectly between a person and a partnership, or

ses only. For other tax purposes, guaranteed

age 27 who are not dependents. For more infor

between two partnerships, if both of the follow

payments are treated as a partner's distributive

mation on the selfemployed health insurance

ing tests are met.

share of ordinary income. Guaranteed pay

deduction, see chapter 6 in Publication 535.

More than 50% of the capital or profits in

ments are not subject to income tax withhold

terest in the partnership(s) is directly or in

ing.

Including payments in partner's income.

directly owned by the same person(s).

Guaranteed payments are included in income in

The partnership generally deducts guaran

The property in the hands of the transferee

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

teed payments on line 10 of Form 1065 as a

immediately after the transfer is not a capi

tax year ends.

business expense. They are also listed on

tal asset. Property that is not a capital as

Schedules K and K1 of the partnership return.

set includes accounts receivable, inven

Example 1. Under the terms of a partner

The individual partner reports guaranteed pay

tory, stockintrade, and depreciable or

ship agreement, Erica is entitled to a fixed an

ments on Schedule E (Form 1040) as ordinary

real property used in a trade or business.

nual payment of $10,000 without regard to the

income, along with his or her distributive share

income of the partnership. Her distributive

of the partnership's other ordinary income.

More than 50% ownership. To determine if

share of the partnership income is 10%. The

there is more than 50% ownership in partner

Guaranteed payments made to partners for

partnership has $50,000 of ordinary income af

ship capital or profits, the following rules apply.

organizing the partnership or syndicating inter

ter deducting the guaranteed payment. She

1. An interest directly or indirectly owned by,

ests in the partnership are capital expenses.

must include ordinary income of $15,000

or for, a corporation, partnership, estate,

Generally, organizational and syndication ex

($10,000

guaranteed

payment

$5,000

or trust is considered to be owned propor

($50,000 × 10%) distributive share) on her indi

penses are not deductible by the partnership.

tionately by, or for, its shareholders, part

However, a partnership can elect to deduct a

vidual income tax return for her tax year in

ners, or beneficiaries.

portion of its organizational expenses and

which the partnership's tax year ends.

Publication 541 (December 2013)

Page 7

Form 541 - Partnerships - Department Of Treasury Internal Revenue Service - 2013 Page 7

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