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

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 paid to a partner outside the scope of his capacity as a member of the partnership, such as when a partner provides services to the partnership. These payments are determined without regard to 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. Taken together, these changes effectively end the usefulness of guaranteed payments as a means of compensating partners beyond 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 serious 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.

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 his role as a partner
5. Using lower-tier partnerships to pay W-2 wages to partner instead of guaranteed payments

The panel will discuss these and other important issues:

• How Section 199A regulations make guaranteed payments no longer 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 to apply those payments to the upper tier partnership’s QBI W-2 wage limitation calculations

Learning Objectives

After completing this course, you will be able to:

• Identify how Section 199A has disfavored the treatment of guaranteed payments  

• Recognize the changes the new law has made to Section 707 payments for services

• Establish strategies to maximize qualified business income benefits by restructuring Section 707 payments to partners

• Determine whether priority allocations are an alternative to guaranteed payments

• Decide whether priority allocations will pass the “substantial economic effect” test

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  Ascertain the IRS positions to date related to using partnership owned disregarded entities or lower-tier partnerships for qualified business income W-2 wage limitation calculations

• Field of Study: Taxes
• Level of Knowledge: Intermediate
• Advance Preparation: None
• Teaching Method: Seminar/Lecture
• Delivery Method: Group-Internet (via computer)
• Attendance Monitoring Method: Attendance is monitored electronically via a participant's PIN and through a series of attendance verification prompts displayed throughout the program
• Prerequisite:

  Three years+ business or public firm experience at mid-level within the organization handling complex partnership and disregarded entity tax issues. Specific knowledge and understanding of qualified business income, guaranteed payments for services to a partner under Section 707, W-2 wage limitations for qualified business income calculations, and special and priority allocations; familiarity with new Section 199A, lower-tier and upper-tier partnerships and the doctrine of substantial economic effect.

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IRS Approved Provider

Strafford is an IRS-approved continuing education provider offering certified courses for Enrolled Agents (EA) and Tax Return Preparers (RTRP).