Originally Posted by StinkyTaxLaw
So is A reporting the income from X LLC as nonpassive because he participates, or passive because income is indirectly passed through to him from other partnerships that his X LLC invests in?
If you are actively involved in running a partnership, in addition to income taxes, the IRS requires you to pay "self-employment" taxes on all partnership profits allocated to you. ALSO partners who are not employees of the partnership are considered self-employed and must pay self-employment tax on net earnings in lieu of employment tax. A partner is not an EE of the partnership. The partner's distributive share of ordinary income from a partnership is generally included in figuring net earnings from self-employment. However, a limited partner generally does not include his /her distributive share of income or loss in computing net earnings from self-employment. This exclusion does not apply to guaranteed payments made to a limited partner for services actually rendered to or on behalf of a partnership engaged in a trade or business. Because any general partner can act on behalf of the entire business without the knowledge or permission of the other partners, being a general partner offers poor asset protection.
note;just for reference,When you receive guaranteed payments, it's part of your ordinary income; the Partnership treats that as an expense while the Partner receiving the guaranteed payment is treating it as part of Ordinary Income. Guaranteed Payments have no affect on the Partner's basis. Let's say a partner receives $20k of GP. That $20k will not increase nor decrease the basis. It will reduce the Ordinary Income of the partnership, thus reducing your share of the Ordinary Income. Therefore, your basis won't increase as much as it would have had you not had a GP. So I guess GP doesn't directly affect your basis. Partners earn income/get taxed on it even if they don't withdraw it. HOwEVER, technically, Guaranteed payments are deducted by partnerships to get to ordinary income. The ordinary income which includes the GP deduction is then distributed to each partner, which we know actually affects their basis.