Discussion:Partner Guaranteed Payment and zero basis
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Discussion Forum Index --> Tax Questions --> Partner Guaranteed Payment and zero basis
| 6 August 2009 | |
| I have a client that received a guaranteed payment @$90,000. The partnership had a loss for the year because of the payment. My client's share of the loss is @ $30,000.
However, his basis is less than zero. i am findling conflicting answers in my research, so I want to see if anyone has had this situation and how they dealt with it. The way my software is calculting the taxable is amount is by reducing the $90,000 by the $30,000, give a taxable amount of $60,000. i have found a revenue ruling, 56-675, 1956-2 CB, IRC Sec(s). 707 / and it supports this method. but when I read Pub 541, it states that they can only use the loss up to their basis, and the basis cannot go below zero. Any help would be greatly appreciated! Thanks, | |
Harry Boscoe (talk|edits) said: | 6 August 2009 |
| The partner's deduction of the $30,000 share of the partnership's loss *requires* that the partner have enough basis to deduct the loss. It is "...subject to the limitations of Code Sec. 704(d)" is how my resource described it.
Sounds like the Rev Rul might not be considering the basis limitations when it concludes that the partner's guaranteed payment and share of partnership loss will offset each other. Has your software been *told* that the client/partner/taxpayer doesn't have any basis to allow a deduction of the $30,000 loss? If the software *has* been told that the partner can't deduct the loss, and deducts it anyway, then get better software. On the other hand... On the other hand, I'll be in the kitchen deplenishing the inventory in the fridge. PBR for one and all; the firetrucks just left... p.s. Maybe we could say that your client's capital account in the partnership is negative rather than "his basis is less than zero." Whaddya think? | |
| 6 August 2009 | |
| maybe outside basis is positive? like Harry wrote, cap accounts can be negative. | |
| 6 August 2009 | |
| Ok,If i understand what you are saying correctly -- Even though it is the Guaranteed Payment that caused the loss, if the partner has a less than zero basis, he cannot reduce the taxable amount by his portion of the loss. And, thus his taxable amount is the full $90,000.
I did "tell" the software that the client had zero basis on the 6198, maybe i need to enter the info somewhere else in the software. I will call support. Thanks for your help. | |
| 6 August 2009 | |
| Maybe i need to look up the instructions for calculating basis again, becasue i am not following you guys.
The way this partnership worked is that my client did "sweat equity" to become a partner, and the next 3 years the partnership has had a loss. The way i calculated the basis was: Beginning Equity, $20,000 year 1 loss (10,000) year 2 loss (10,000) year 3 loss (30,000) Caused by Guaranteed Payment end basis $(30,000) / please let me know what i am missing or should have done differently. Thanks so much for the help | |
| 6 August 2009 | |
| Is the guaranteed payment showing up on line 3 of form 6198...."other income from activity" | |
| 6 August 2009 | |
| Yes. But it is the program that is putting it there. Is this my problem and the program should not be puting the payment on line 3?
Thanks! | |
| 6 August 2009 | |
| The partner does not have any tax basis in his sweat equity unless he considered the FMV of that sweat equity as ordinary compensation. Sounds like he never had any tax basis in the partnership and therefore should not have been allowed any deductions on his personal tax return related to the pass through losses unless he put some cash or other property in. | |
Michaelstar (talk|edits) said: | 6 August 2009 |
| Shipkel - reread what Harry is pointing out. Basis can not go below ZERO. The capital account can be negative but not basis. So in "the way you calculated the basis" above is technically incorrect. This partner can not have an "end basis of ($30,000)". It would appear from your info above that basis equaled ZERO at the end of year 2.
One way a partner can receive additional basis is via debt allocation which would be reflected on the K-1 if this applies. | |
| 6 August 2009 | |
| sounds like he must have invested some cash and/or loan. Not sure of the method of accounting/timing issues but how can make guaranteed payment (assuming actually paid) of $90,000 with $60,000 of income for the $30,000 loss. Hard to tell without looking at accounts, etc. | |
| 6 August 2009 | |
| The capital account may be less than zero, but basis cannot be less than zero. RR 56-675 does not really apply here since that Revenue Ruling made no mention of a basis limitation. | |
Harry Boscoe (talk|edits) said: | 6 August 2009 |
| Taxteck: Did you find a copy of the rev rul via the TaxAnalyst resources/website/links whatever? | |
| 6 August 2009 | |
| Michaelstar / Thanks, that makes sense.
While his tax basis is zero, his capital account is (30,000) Sterncpa / i know that he didn't put in any additional funds. They recieved a loan from a bank (the mother of one of the partners - not my client) is guaranteeing the loan. This let the partnership pay out the guaranteed payment. I know tht on the K1 line 14 (self-employment earnings) is noted as(A) $60,000 ($90,000 pymt - $30,000 loss). Does this make the K1 wrong? Thanks for the help everyone. | |
| 6 August 2009 | |
| Harry / i have a copy of the RR 56-675 / would you like me to fax it to you? i find it another a different research site. | |
| 6 August 2009 | |
| loss limitations for LLC are under both at-risk (form 6198) and tax basis (plus PAL). Even though 6198 is allowing the loss there is still the tax basis hurdle and guaranteed payments do not increase tax basis....not 100% sure about the at-risk limitation but it looks like the software is allowing. | |
| 6 August 2009 | |
| Link to RR 56-675
http://www.legalbitstream.com/scripts/isyswebext.dll?op=get&uri=/isysquery/irl3fee/1/doc | |
| 6 August 2009 | |
| guaranteed payments usually considered s/e...i believe there might be some regs thatif is used payments are for use of capital and limited member than no s/e but I don't think this is the case. Pretty sure the ordinary loss is s/e...does member work 500 hours in LLC, etc..there are proposed regs. | |
| 6 August 2009 | |
| Sterncpa /
he works full time at the company. But if we are going with he has a zero basis and cannot use the loss, is line 14 (a) correct? Or should it be $90,000 -- which would mean that the K1 is wrong. | |
| 6 August 2009 | |
| Under the assumption his tax basis is zero to start the year and guaranteed payments do not effect tax basis (accept to the point of reducing ordinary income)then the $30K loss would be disallowed due to basis differences. The K-1 is not wrong in the sense that tracking basis is partner's responsibility. How is the K-1 marked? tax basis, book basis, etc. Although, even if marked does not really translate to how it's actually preseneted some of the time. | |
RoyDaleOne (talk|edits) said: | 6 August 2009 |
| Did I miss something, no liabilities to allocate? | |
| 6 August 2009 | |
| I called my software support (Drake), because i could not get the program to calculate correctly -- it kept allowing the loss to be deducted.
Apparently, there is an error in the program!!! in order to get the correct amount to show on the return, i have to remove the loss amount from the K1 (which i thought you were not supposed to do), and make a note to manually track the loss that should be carryforward to next years return. I am so frustrated, this was the 3rd i called them on this and this is the only time the admited that there is a problem with the program. I have spent HOURS researching trying to figure what i missing that allowed the loss to be taken. Thanks for everyone's help. i have used this forum since the first year, but i will start using it now. | |
| 6 August 2009 | |
| RoyDaleOne / the only liabilities are Nonrecourse, and if i got this right (and at this point i don't know anymore -- I would put in a happy face but I don't know how)that it will not change the basis.
. Thanks, | |
| 6 August 2009 | |
| Shipkel if the only liability is the one guaranteed by a mother of a partner, that partner should be allocated the liability if the loan was originally nonrecourse. For this treatment to apply, that the partner whose mother gurarnteed the loan, should have more than 10% interest in the partnership. | |
| 6 August 2009 | |
| Shipkel, sorry never mind my previous post becasue for the purpose of section 752 debt allocation, believe it or not, a mother is not considered a related person. | |
Harry Boscoe (talk|edits) said: | 8 August 2009 |
| Shipkel: A free PBR and a thank you for offer of a copy of the the Rev Rul.
And Taxteck2: Thanks and a free PBR for the link to the Rev Rul at legalbitstream. I couldn't get that link to work but fussed around a bit and found the Rev Rul at www.legalbitstream.com/scripts/isyswebext.dll?op=get&uri=/isysquery/irl4993/1/doc What I was really interested in, also, is whether taxlinks, where TaxAnalysts sends us for Revenue Rulings, etc., is working for others; I get to a dead end when I try to follow the TaxAnalyst link to this Rev Rul... And two for me and one for you and three for me and one for you and four for me... urp. | |
