Tax Treatment of Guaranteed Payments to Partners: Impact of IRC 199A, Section 707 Payments, Priority Allocations

The Section 199A QBI deduction provides tax planning opportunities for owners of pass-through entities, with some limitations. Tax counsel must recognize fundamental mechanisms in structuring partnership income and distribution allocations between partners to maximize the benefits of the Section 199A deduction in light of its treatment of guaranteed payments.

QBI is the net amount of qualified items of income, gain, deduction, and loss from any qualified trade or business. However, it excludes amounts received as guaranteed payments from a partnership and payments received by a partner for services under Section 707. Under Section 199A and its regulations, these payments are not considered QBI to the recipient partner and are thus not eligible for the pass-through deduction.

Further, the payments are not W-2 wages when calculating the partnership's wage-based limits as required by 199A. These changes effectively end the usefulness of guaranteed payments as a means of compensating partners beyond the allocation of net income.

Owners of partnership interests must consider alternative allocation methods for the partnership and its impact on the characterization of income for purposes of the 199A deduction. Among the available options are using special or priority allocations to impacted partners instead of guaranteed payments or setting up a lower-tier partnership and structuring the payment as W-2 wages to the indirect partner. Each of these structures can have severe consequences for both the recipient and the remaining partners, so advisers need to know the implications of these strategies.

Listen as Joseph C. Mandarino, Partner at Smith Gambrell & Russell, provides practical guidance on mitigating the impact of Section 199A on partnerships with guaranteed payment structures.

1. Ramifications of excluding guaranteed payments under Section 199A
2. Section 707 provisions and treatment of payments
3. QBI W-2 limitations under Section 199A
4. Latest IRS guidance and regulations on guaranteed payments in calculating QBI and treatment
5. Alternative compensation strategies for partners
   • Using special or priority allocations
   • Entity structuring techniques to pay W-2 wages

The panelist will discuss these and other key issues:

• Section 199A treatment of guaranteed payments and the impact on partnerships
• Potential benefits and implications of using special and priority allocations
• Entity structuring methods to pay W-2 wages to service provider partners

Learning Objectives

After completing this course, you will be able to:

• Discern the impact of the Section 199A proposed regulations on partnerships using guaranteed payment structures
• Identify adverse tax consequences of partnerships due to partners' compensation schemes
• Recognize the effects on the recipient partner, other partners, and the partnership itself of using priority allocations to replace a guaranteed payment
• Ascertain viable strategies to pay partners W-2 wages instead of guaranteed payments for purposes of QBI calculations

• Field of Study: Taxes
• Level of Knowledge: Intermediate
• Advance Preparation: None
• Teaching Method: Seminar/Lecture
• Delivery Method: Group-Internet (via computer)
• Attendance Monitoring Method: Attendance is monitored electronically via a participant's PIN and through a series of attendance verification prompts displayed throughout the program
• Prerequisite: Three years+ business or firm experience at mid-level within the organization, preparing complex tax forms and schedules or supervising other preparers/accountants. Specific knowledge and understanding of pass-through entity taxation, business income deductions, qualified business income, guaranteed payment rules under Section 707.

Strafford Publications, Inc. is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of Accountancy have final authority on the acceptance of individual courses for CPE Credits. Complaints regarding registered sponsons may be submitted to NASBA through its website: www.nasbaregistry.org.

IRS Approved Provider

Strafford is an IRS-approved continuing education provider offering certified courses for Enrolled Agents (EA) and Tax Return Preparers (RTRP).