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 Current Tax Law

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

Conducted on Thursday, July 23, 2020

Recorded event now available

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Course Materials

This CLE/CPE course will provide tax counsel a critical analysis of the impact of 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 the 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

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 explicitly 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 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 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

Falato, Damien
Damien Falato, CPA, MST, CGMA
Tax Director
Paresky Flitt & Company

Mr. Falato has over fifteen years of public accounting experience, and is licensed as a CPA in MA & NJ. His...  |  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

Stauber, David
David Stauber
Partner
Troutman Pepper

Mr. Stauber focuses his practice on the federal income tax aspects of mergers and acquisitions, fund formation, and...  |  Read More

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