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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 video webinar with Q&A

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Conducted on Tuesday, January 24, 2023

Recorded event now available

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This CLE/CPE webinar will provide tax counsel with 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 panelist will discuss the default treatment of payments for services to a partner under Section 707 and the impact of Section 199A. The panelist will also provide practical strategies for structuring payments to service provider partners for QBI calculations and maximizing the QBI deduction.


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
    1. Using special or priority allocations
    2. 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


Mandarino, Joseph
Joseph C. Mandarino

Smith Gambrell & Russell

Mandarino is a Partner in the Tax Practice of Smith, Gambrell & Russell, LLP.  His practice focuses on...  |  Read More

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