You Make the Call - July 27, 2023

Question: Troy, Chuck and Adam are general partners in a domestic partnership. Each quarter, they each receive a $10,000 guaranteed payment for services provided to the partnership. This quarter, they have agreed that the partnership will transfer property to Adam instead of paying cash to him for his guaranteed payment. The property being transferred has a fair market value of $10,000 and an adjusted basis of $6,000. How will this transfer of property to Adam be treated, and where on the Form 1065, U.S. Return of Partnership Income, will the transfer be reported?

Answer: Although still considered a guaranteed payment to Adam, the distribution of property to a partner as part of a guaranteed payment is considered a sale of the property at fair market value and must be reported on the partnership's Form 4797, Sales of Business Property, or Form 8949, Sales and Other Dispositions of Capital Assets/Schedule D, whichever is appropriate. Therefore, the partnership will recognize taxable gain on the property of $4,000 ($10,000 FMV less $6,000 adjusted basis). Because it is considered a guaranteed payment for services provided to the partnership, the partnership will also be able to deduct the full amount of the guaranteed payment, the $10,000 fair market value of the property transferred to Adam, on Form 1065, Line 10. The partnership will also report the guaranteed payment to Adam on his Schedule K-1 (1065), Partner’s Share of Income, Deductions, Credits, etc., Line 4a. Adam’s outside basis in the partnership will not be affected because guaranteed payments do not affect outside basis; however, he will have basis in the property distributed to him that is equal to the taxable compensation recognized by him. Therefore, his basis in the property is $10,000.