Guaranteed Payments Under IRC 199A Regulations: Year-End Strategies to Maximize QBI Benefits

Description

One of the most significant changes the new Section 199A QBI deduction made to partnership operations is its disfavored treatment of guaranteed payments. Advisers to partnerships using guaranteed payments should include steps to mitigate the harsh impact of 199A on these compensation structures as part of their year-end planning.

Section 707 guaranteed payments are amounts distributed to a partner outside the scope of their capacity as a member of the partnership, such as when a partner provides services to the partnership. These payments are outside the partnership's net income. Under Section 199A and its proposed regs, guaranteed 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. Together, these changes effectively end the usefulness of guaranteed payments as a means of compensating partners beyond the allocation of net income.

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 negative 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.