ABC partnership provides for \"salaries\" (guaranteed payments) of $70,000, $64,

Question

ABC partnership provides for "salaries" (guaranteed payments) of $70,000, $64,000, and $60,000 for partners A, B, and C, respectively. After the guaranteed payments are deducted, the partnership agreement calls for sharing of profits and losses as follows: A - 40%; B - 35%; and C - 25%. If partnership profits before the guaranteed payments are $120,000, what amount of income from the partnership should each partner report on his or her own personal income tax return? How would your answer to Part a. change if partnership profits before guaranteed payments were $220,000 (instead of $120,000)?

Explanation / Answer

A. Total Guranteed payments = $70,000 + 64,000 + 60,000 = $194,000

Partnership income before the guranteed payment = $120,000

Less guranteed payment = ($194,000)

Income after guranteed payment loss (74,000)

Income to be reported

A 40 % of 74,000 = loss 29,600 + guranteed payment 70,000 = $ 40,400

B 35% of 74,000 = loss 25,900 + guranteed payment 64,000 = $38,100

C 25% of 74,000 = loss 18,500 + guranteed payment 60,000 = $ 41,500

Part B

Total Guranteed payments = $70,000 + 64,000 + 60,000 = $194,000

Partnership income before the guranteed payment = $220,000

Less guranteed payment = ($194,000)

Income after guranteed payment profit $ 26,000

Income to be reported

A 40 % of 26,000 = profit 10,400 + guranteed payment 70,000 = $ 80,400

B 35% of 26,000 = Profit 9,100 + guranteed payment 64,000 = $73,100

C 25% of 26,000 = Profit 6,500 + guranteed payment 60,000 = $ 66,500

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