Q: What's the difference between services and capital guaranteed payments on Schedule K-1 (Form 1065) at Line 4a and 4b?
A: Guaranteed payments are a minimum amount that is “guaranteed” to be paid regardless of a partnership’s or LLC’s profitability. These payments are the equivalent of a salary – scheduled payments made to partners for their services or capital provided.
Line 4a reports the guaranteed payment for services provided by the partner or member. Line 4b reports the guaranteed payment for capital provided to the partnership or LLC by the partner or member.
In addition to these guaranteed payments, the partners or members who receive them also benefit from their share of company income and from distributions provided by the partnership or LLC. Partners and members must report their share of the company’s taxable income on Form 1040. Distributions, however, are not taxable to the recipient unless they exceed the partner’s or member’s “basis.” Therefore, they are not reported on Form 1040 for a partner or member.
Guaranteed payments are not the same as draws or distributions. Guaranteed payments are fixed obligations that must be paid. Distributions, in turn, provide cash to the partner or member for payment of income taxes on his or her share of partnership or LLC taxable income, which a partner or member must report on Form 1040. In addition, distributions serve as compensation for a partner or member in lieu of, or in addition to, guarantee payments. The amount of distributions will vary depending on a) estimates of partners’ or members’ income tax liability for the company’s taxable income, b) the existence or absence of guaranteed payments, and c) cash available to the partnership or LLC.
Course overview: Business Income Tax Returns