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

Maximizing QBI Benefits and Structuring Payments to Service Providing Partners Under New Tax Law

Recording of a 90-minute premium CLE/CPE webinar with Q&A


Conducted on Thursday, July 25, 2019

Recorded event now available

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Program Materials

This webinar will provide tax counsel a critical analysis of the impact of the Section 199A qualified business income (QBI) deduction on the tax treatment of guaranteed payments to partners. The panel will discuss the default treatment of payments for services to a partner under Section 707 and the impact of new Section 199A. The panel will also provide practical strategies for structuring payments to service provider partners for purposes of QBI calculations and maximizing the QBI deduction.

Description

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, but specifically 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 thus not eligible for the pass-through deduction.

Further, the payments are not treated as W-2 wages for the partnership's calculations of wage-based limits as required by 199A. Taken together, these changes effectively end the usefulness of guaranteed payments as a means of compensating partners beyond 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 remaining partners, so advisers need to know the implications of these strategies.

Listen as our experienced panel provides practical guidance on mitigating the impact of Section 199A on partnerships with guaranteed payment structures.

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Outline

  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
    1. Using special or priority allocations
    2. Entity structuring techniques to pay W-2 wages

Benefits

The panel will discuss these and other key issues:

  • Section 199A treatment of guaranteed payments and its 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

Faculty

Ashraf, Saba
Saba Ashraf

Partner
Ballard Spahr

Ms. Ashraf is a Practice Leader at her firm's Tax Group. She advises clients worldwide on corporate and partnership...  |  Read More

Mandarino, Joseph
Joseph C. Mandarino

Partner
Smith Gambrell & Russell

Mr. Mandarino's practice focuses on corporate, tax and finance law. He is involved with a wide variety of...  |  Read More

Other Formats
— Anytime, Anywhere

Strafford will process CLE credit for one person on each recording. All formats include program handouts. To find out which recorded format will provide the best CLE option, select your state:

CLE On-Demand Video

$347

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CPE Not Available

$347