Partnership To Partner
I sold a property and gave some cash to my partnership which are both being payed back to me by installments on a single promissory note. (I gave additional cash through the note to keep the partnership at 50/50). What is the best way to treat this for tax purposes? Should I consider the installments to be guaranteed payments to myself?
What does your CPA tell you?
Don't have a personal CPA. I'm a do-it-yourselfer. I actually didn't think anything of this until a CPA told me that he would treat this as a guaranteed payment. I'm trying to get feel of what others think/would do.
<Insertion of disclaimer that I'm not an accountant>
I think it probably would be considered a guaranteed payment since it would be for the use of capital rather than strictly due to the income/loss of the RE business.
You'll want to investigate this more but I think the issue with guaranteed payments is that they would be considered ordinary income (since, like in this case, it'd be like earning interest on the capital you've contributed) while if the RE investment (depending on what type of investing you're doing) might generate a passive loss. And, ordinary income cannot be offset by passive losses.
This small article below from http://www.1065accountant.com also mentions that the guaranteed payments are generally subject to SE tax.
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Partnership Guaranteed Payments
Guaranteed payments are payments to individual partners for services rendered or for use of capital, and are not based on the partner’s share of partnership income. Guaranteed payments to partners are deducted from partnership income before determining partnership profit or loss. Guaranteed payments are generally subject to self-employment tax on the recipient’s individual return.
If the partnership agreement states a partner is to receive a minimum payment, the guaranteed payment is the amount by which the minimum payment is more than the partner’s distributive share of income, before taking into account the minimum payment.
Guaranteed payments can cause a partnership loss. The partner(s) that receives the guaranteed payment reports the full amount as ordinary income. The partner also reports his/her distributive share of the partnership loss.
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Hope this gets you started down the right path. Let us know what you find out b/c I may need to do the same thing with a partnership I'm in.
Thanks for input!