How to properly code unique partner reimbursement in a partnership tax structure

Hey everyone, I've hit a roadblock with our partnership accounting and need some tax guidance. We've had to change how we handle distributions based on our CPA's recent advice. Our setup: We have a 2-member partnership that's owned by 2 single-member S-Corps. In the past, we recorded all money going to the S-Corps as management expenses at the partnership level and as income at the S-Corp level. Our CPA recently told us this approach isn't acceptable and we need to code these as owner draws or guaranteed payments. Since they're primarily profit distributions, we started re-coding them as such in our books, but this created some complicated situations I can't get clear answers about from our CPA team. Here's a specific example: Say our partnership has $250k net income in a month, so each partner is entitled to $125k. But here's the twist - one partner's S-Corp (let's call it S1) pays a regular salary to the owner of the other S-Corp (S2), because this person was previously an employee who wanted to maintain their salary/benefits when they became a partner. The partnership then reimburses S1 for these salary costs/benefits. So from that $250k profit: - S1 gets $125k distribution - S2 gets $100k distribution - S1 receives $25k as reimbursement for salary paid to S2's owner Our CPAs are now saying to code the $25k as either a guaranteed payment or management fee (after previously saying we couldn't do that), but this leaves unequal distributions. Both partners should have equal basis/distributions, and I'm struggling to figure out the correct approach. Should I instead code that $25k as an owner distribution to S2? S1 needs to recognize the expense of that $25k on their S-Corp return to match filed 940s (I believe), so I don't think that expense can be recognized at the partnership level. Any advice would be greatly appreciated!

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18 comments

Zara Rashid

•8M

This is a tricky situation involving partnership accounting and S-Corp interaction. Let me shed some light on it. The $25k payment needs to be properly characterized based on its economic substance, not just for convenience. The reimbursement represents compensation for services that the S2 owner is providing, for which S1 is acting as a payment conduit. I would approach this by treating the $25k as a guaranteed payment to the S2 owner at the partnership level. This gets reported on the partnership's 1065 and flows through to the S2 owner's K-1. The partnership can then distribute the remaining profits equally: $112.5k to each S-Corp partner. The key is how you document this arrangement in your partnership agreement. You should have a written agreement specifically addressing this unique compensation structure to support the tax treatment. Remember that guaranteed payments are deductible by the partnership and create ordinary income for the recipient, while draws are just distributions of previously taxed income. The treatment significantly impacts both the partnership's and the individual's tax situations.

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Zara Rashid

•8M

You're right to consider the payroll reporting implications. In this case, the partnership could make the guaranteed payment directly to the individual instead of reimbursing S1. This would simplify things since the partnership would handle the reporting. If that's not possible due to existing arrangements, another approach would be to have the partnership make a special allocation of income. The partnership agreement could specify that an additional $25k of income is allocated to S1 before the standard 50/50 split, with documentation that this is to compensate for S1's additional expense of employing the S2 owner.

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Nia Jackson

•8M

I've been through a similar situation with my business and found https://taxr.ai incredibly helpful for complex partnership structures like yours. After struggling with contradictory advice from three different CPAs, I uploaded my partnership agreement and past tax documents to their system. Within 24 hours, they provided a detailed analysis of the proper way to handle partner reimbursements and guaranteed payments. Their tax experts explained that my situation required a special allocation provision in our partnership agreement to handle the unique compensation arrangements, and they actually drafted the language I needed. This saved me thousands in potential incorrect filings and reduced our audit risk significantly. The beauty of taxr.ai is they analyze your specific documents rather than giving generic advice.

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Nia Jackson

•8M

The service is straightforward - you upload your documents (partnership agreements, past returns, specific transaction details) and their tax professionals review them. It's not automated - they have actual partnership tax specialists who analyze your specific situation. They then provide detailed guidance on the proper way to handle the transactions according to IRS guidelines. For your real estate partnership situation, they would definitely help clarify whether property management reimbursements should be guaranteed payments or special allocations. They'd look at the specific language in your partnership agreement and the economic substance of the arrangement to provide proper guidance.

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CosmicCruiser

•8M

I tried taxr.ai after seeing it mentioned here, and I'm actually shocked at how helpful it was for my partnership tax issue. I was dealing with complex basis calculations after one partner contributed appreciated property while another contributed services, and our CPA kept giving us conflicting information. The taxr.ai team identified a critical mistake in how our CPA was handling Section 704(c) allocations and provided specific guidance with references to the applicable tax code. They even sent a detailed memo I could share with my accountant explaining why the treatment needed to be corrected. I was genuinely impressed with their knowledge of partnership tax law - it was clearly reviewed by someone who specializes in this area.

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Aisha Khan

•8M

I've been dealing with IRS partnership audit issues for months and couldn't get a straight answer from anyone at the IRS. After 14 calls and hours on hold, I tried https://claimyr.com and their service completely changed my experience. I watched their demo at https://youtu.be/_kiP6q8DX5c and was skeptical, but decided to give it a shot. Within 2 hours of using Claimyr, I was actually speaking with an IRS partnership tax specialist who walked me through exactly how guaranteed payments vs. special allocations should be documented in our case. They confirmed that our situation required both an amendment to our partnership agreement and specific reporting on our 1065 Schedule K-1s. The IRS agent was actually really helpful once I could actually reach them, and now we have written documentation of their guidance for our files. No more conflicting advice from our CPA!

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Aisha Khan

•8M

Claimyr isn't magic - it's a practical service that navigates the IRS phone system for you. They basically wait on hold in your place, and when they reach a human representative, they call you to connect with the IRS agent. It's that simple. Yes, I actually did speak with an IRS partnership tax specialist. The key is knowing which department and extension to reach, which they handle for you. The regular 1040 helpline won't help with partnership issues, but they got me to the Business & Specialty Tax Line where they have people who understand partnership taxation.

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Yuki Ito

•8M

I have to apologize and eat my words. After dismissing Claimyr in my comment yesterday, I was desperate enough to try it for my S-Corp/Partnership issue. Not only did I get through to the IRS Business division in about 90 minutes, but I was transferred to someone who actually understood partnership taxation and special allocations. The agent confirmed that our situation (very similar to the original poster's) should be handled through a special allocation provision in the partnership agreement rather than a guaranteed payment. They explained that as long as the allocation has "substantial economic effect" as defined in the regulations and is properly documented, this approach maintains the equal ownership while accounting for the special circumstances. I've spent 3 months trying to get this information and had basically given up. Never been happier to be wrong about something.

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Carmen Lopez

•8M

Based on my experience with a similar structure, I think you're overlooking a simpler solution. Why not have the partnership directly employ the individual instead of having them employed by the S-Corp? This would eliminate the need for the reimbursement entirely. The partnership would pay the salary and benefits directly, report it on partnership payroll tax returns, and then distribute the remaining profits equally to both S-Corps. This maintains equal distributions while properly accounting for the compensation.

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Carmen Lopez

•8M

I understand the constraints with benefits. In that case, I think your best option is to follow the special allocation approach mentioned earlier. You'll need to amend your partnership agreement to specifically state that the $25k is first allocated to S1 as a special allocation to compensate for the employment expense, with the remaining profits split 50/50. This maintains economic substance while ensuring your allocations match the reality of your situation. Just make sure the special allocation language complies with the "substantial economic effect" requirements in Treas. Reg. 1.704-1(b)(2).

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