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

Restructuring Section 707 Payments to Partners Through Priority Allocations, Using Lower Tier Partnerships

Recording of a 110-minute CPE webinar with Q&A

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Conducted on Tuesday, November 26, 2019

Recorded event now available

This course will provide partnership tax advisers with a practical exploration of the impact of the Section 199A qualified business income (QBI) deduction on the tax treatment of guaranteed payments to partners for services. The panel will discuss the default treatment of payments for services to a partner under Section 707, and how the W-2 wage limitation for QBI calculations can make a guaranteed payment disadvantageous to the partnership as well as the receiving partner. The webinar will also provide concrete strategies for structuring payments to service provider partners so that the payments can fit into the QBI calculations.

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.

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Outline

  1. Structure of Section 707 payments
    1. 707(a) provisions
    2. 707(c) payments for services provided outside the scope of the role as a member
    3. Tax treatment before enactment of 707(a)
  2. QBI W-2 wage limitations under Section 199A
  3. Proposed regulations and IRS position on the treatment of guaranteed payments for QBI calculation purposes
  4. Using priority allocations to compensate partners for capital or services outside the scope of the role as a partner
  5. Using lower-tier partnerships to pay W-2 wages to partner instead of guaranteed payments

Benefits

The panel will discuss these and other important issues:

  • How Section 199A regulations no longer make guaranteed payments a viable compensation strategy for partnerships
  • Implications to partnerships, recipient partners, and remaining partners of using priority allocations instead of guaranteed payments
  • How to structure a lower-tier partnership to pay W-2 wages to service-provider partners and to apply those payments to the upper-tier partnership's QBI W-2 wage limitation calculations

Faculty

Longman, Robb
Robb A. Longman
Managing Member
Longman & Van Grack

Mr. Longman represents his clients in business matters, tax planning and litigation, as well as estate planning. He...  |  Read More

Resner, Chad
Chad J. Resner, CPA, JD
Tax Director
Baker Tilly Virchow Krause

Mr. Resner, Firm Director with Baker Tilly Virchow Krause, LLP, joined the firm in 2016 and is a member of the...  |  Read More