A pair of business partners have a business account and respective personal accounts. One business partner gives the other business partner a monthly stipend contingent on the generation of ideas that may one day produce profit for the business. Expenses and distributions are determined on a monthly basis and transferred into a personal account rather than the business account. Neither partner reports this transfer of funds as income. A tax professional in the local community believes these distributions are taxable income. The tax professional said the deposits could be considered non-taxable distributions only if the deposits came from the business account. ====>I think that the stipend is a sort of guaranteed payment for the recipient partner; Guaranteed payments to partners are payments that are guaranteed to be made to a partner irrespective of whether the partnership makes a profit or not. Guaranteed payments to partners are made to ensure that partners are compensated for specific contributions they make to a partnership, whether in the form of goods or services. A guaranteed draw, or guarantee payment, is used as the LLC equivalent of salary to managing members. This type of payment has certain tax benefits. The IRS treats guaranteed draws G.P, as wages and requires members to pay self-employment taxes and make estimated tax payments. The managing member must pay the full amount of the employment tax and your llc can claim on 1065,
The partners could then refer to the monies as shareholder distributions/loans that are not taxable.====>you neeed to check the operating agreement of the llc;as Members of a LLC , you don?t own shares of stock in the business. Instead, you obtain ownership interests in the LLC that entitle you to a certain percentage of business profits, which in most cases is in proportion to the amount of your capital contribution to the firm. The initial members of a LLC draft an operating agreement that dictates how and when the company will make profit distributions to members. States don?t impose any limitations on what the operating agreement can include, provided it doesn?t violate state law. As a result, there is never a guarantee that members will receive a distribution each year. However, despite that members are subject to the terms of the operating agreement and have no authority to require a profit distribution, they always retain a legal claim on their proportionate shares of profits that the LLC fails to distribute. still the members must pay tax on the stipend even if it is treated as destruction.if it is a loan then, An operating agreement neds to exist between two or more partners of a company.. It outlines the amount of money, if any, each partner puts up for the formation of the business
The business tax statements would need to reflect each distribution/loan from Partner A via the business account in order for tax to be exempt. However, the money is taxable since it is transferred into the personal account of Partner B for the exchange of ideas and investment. Technically, Partner A should be giving Partner B a 1099 at the end of the year to reflect each distribution and Partner B should be reporting this income to the IRS (similar to an advanced royalty). Can you offer your thoughts and professional opinion on this issue?======>>>>>>>>>>>>>
Guaranteed payments are reported on the partners Schedule K-1 in block 4 not on 1099.