ExpertMedium1 markMultiple Choice
CPA · Question 34 · Area II: Entity Tax Compliance
A partnership makes a guaranteed payment of $50,000 to a partner for services. The partnership has $100,000 of ordinary income before the guaranteed payment. What is the partnership's ordinary income after the payment and the partner's total income inclusion (assuming 50% share of profits)?
A partnership makes a guaranteed payment of $50,000 to a partner for services. The partnership has $100,000 of ordinary income before the guaranteed payment. What is the partnership's ordinary income after the payment and the partner's total income inclusion (assuming 50% share of profits)?
Answer options:
A.
Partnership Income: $100,000; Partner Income: $100,000
B.
Partnership Income: $50,000; Partner Income: $75,000
C.
Partnership Income: $50,000; Partner Income: $50,000
D.
Partnership Income: $100,000; Partner Income: $50,000
How to approach this question
1. Deduct Guaranteed Payment from Partnership Income. 2. Allocate remaining income to partners. 3. Partner Income = Guaranteed Payment + Share of Remaining Income.
Full Answer
B.Partnership Income: $50,000; Partner Income: $75,000✓ Correct
B
IRC §707(c). Guaranteed payments are deductible by the partnership. Net Income = $100k - $50k = $50k. Partner's Share = $50k (GP) + 50% * $50k (Distributive Share) = $75,000.
Common mistakes
Forgetting to deduct the GP at partnership level; forgetting to add the distributive share to the GP for the partner.
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