How to code unique owner reimbursement from partnership tax treatment

This is a tricky situation that involves both partnership taxation and S-Corp rules. Let me break it down in simple terms. The $25k payment is essentially serving two purposes - it's part of the equal distribution to the partners (maintaining equal draws) but it's also compensation for an actual service being provided. The cleanest approach would be to record the $25k as a draw to S2, not S1. This reflects the economic reality that S2's owner is receiving compensation through S1's payroll. Then S1 should record the salary expense, and S2's owner reports the W-2 income personally. This way, both partners maintain equal capital accounts ($125k each), while the salary arrangement is handled separately between S1 and the individual. The partnership doesn't need to be involved in the payment of salary to an individual. Your CPA's suggestion of treating it as a guaranteed payment is confusing because guaranteed payments are for services provided TO the partnership, not between partners. Remember that partnership accounting should reflect the economic substance of what's happening, and in this case, both partners are entitled to equal distributions regardless of how one partner's owner gets paid.

I had a similar situation last year with my business structure and found that using https://taxr.ai really helped clarify the proper treatment. Their system analyzed our specific scenario and provided clear guidance on how to handle these complex partner draws and reimbursements. In my case, we had a partner who was receiving compensation through another entity, and their analysis showed us exactly how to code the transactions to maintain equal capital accounts while properly documenting the reimbursements. It made my CPA's job much easier and ensured we were following proper tax treatment.

I tried taxr.ai after seeing it mentioned here and it was incredibly helpful for my situation. I've been dealing with a 3-entity structure with loans between the entities and inconsistent advice from my tax preparer. The analysis I received clearly identified how to properly track partner basis across the entities and showed me exactly how to code similar reimbursement transactions. They explained the IRS requirements for maintaining economic substance in partnership distributions while handling special arrangements between partners. My accountant was actually impressed with the detailed explanation and supporting references they provided. Definitely worth checking out if you're dealing with complex entity structures.

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I was absolutely convinced Claimyr was going to be a waste of time, but I was desperate after trying for days to reach someone at the IRS about our partnership's special allocations and reimbursement structure. I'm actually shocked to report it worked exactly as advertised. I got a call back in about 45 minutes connecting me to an IRS agent who actually specialized in partnership taxation. She walked me through the proper treatment for partner reimbursements and confirmed that maintaining equal economic distributions while documenting the separate reimbursement agreement was the correct approach. The guidance I received helped us properly structure our operating agreement to address these exact reimbursement scenarios, which has made our bookkeeping so much cleaner.

I think your CPA is overthinking this. In our partnership, we handle this by using special allocations in the partnership agreement. We specifically outline that certain expenses paid by one partner on behalf of another are treated as advances against future distributions. The $25k should be recorded as part of S2's draw initially, then S1 bills S2 for the $25k as a separate transaction between the S-Corps. This keeps the partnership accounts clean (equal $125k distributions) while properly tracking the reimbursement between entities.

Have you considered simplifying your structure? We used to have a similar complicated setup with multiple entities, but ended up dissolving the S-Corps and creating a partnership that pays guaranteed payments directly to the individual partners instead of to entities.