Guarantee Payments accrued
LLC partnership. The managing member wants to accrue the guarantee payments because he hasn't been paid yet. But what research I have done, I am convinced that the payments can be put in a liability account but have to be recognized as an expense in the year issued as a payment even if the partner is not paid. He insists that since he hasn't received the payment, it should not be an expense. If it is recorded as an expense, it shows up on the Sch K-1 as income for him which he hasn't actually received. If guaranteed payments can be accrued what is the other side of the transaction if not an expense? Please help because this effects the 2020 financial statements and tax return which is on extension.
Guaranteed payments and taxes
Guaranteed payments are taxable income. They are treated as ordinary income and self-employment income for tax purposes. For partners receiving guaranteed payments, the payments will be recorded on their Schedule K-1 and included as income on Schedule E of their form 1040. So partners pay income tax and self-employment tax on any guaranteed payments.
Guaranteed payments are always ordinary income to the receiving partner and must be included in taxable income for his or her tax year within which ends the partnership tax year in which the partnership deducted such payments as paid or accrued according to its method of accounting. This allows some tax deferral opportunities.
For example, let’s assume a partner is on a calendar year and a partnership is on a fiscal year ending September 30. If the partner receives a guaranteed payment in December 1993, it would have to be included in the partner’s income for 1994, not 1993. This is the partner’s fiscal year within which the partnership’s taxable year ends in which it deducted the payment. In effect, the payment is deemed to have been made in September 1994. Of course, it’s a two way street: If the partnership were on an accrual basis with a calendar year ending December 31, 1993, and it made a guaranteed payment to a partner in January 1994, but accrued the payment on December 30, 1993, the partner must include the payment in his or her 1993 income.