9-18-07 Section_707GP

# 9-18-07 Section_707GP - a What is T’s ordinary income...

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Section 707 – Guaranteed Payments 1. T’s only contribution to the partnership is services. What if the agreement is that T will receive \$50,000 per year but will not share in the profits or loss? 2. T was enticed to leave his job and become a partner in a start-up company. T needed a source of income. Therefore, T bargained to receive a salary of \$80,000 plus ¼ of the annual profits. Should his share of the profits be computed before, or after, his salary? (Assume the partnership’s income is \$200,000 before his salary and do the numbers.) a. ( ¼) * (200 - 80) + 80 = 110 3. T works full time for the partnership. The partnership has ordinary income of \$60,000 before T’s guaranteed payment. The agreement is that T will received \$100,000 salary plus ¼ of the partnership profits, computed after deducting T’s salary.
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Unformatted text preview: a. What is T’s ordinary income from the partnership for the year? i. (¼)(60-100) + 100 = 90 b. Is T, in effect, paying ¼ of his salary? Not really – the loss would be the same if they hired a non-partner. The work would still need to be performed. c. What would be T’s income for the year if the partnership was short of cash and paid T only \$80,000 during the year? Accrued expense See RR 69-180, page 85 RR 69-180 F is to receive the greater of \$100 or 30% of profits Lower limit \$ 100 30% of profit \$ 60 Guaranteed payment \$ 40 Ordinary Capital Total Income Gain Total taxable income \$ 200 \$ 120 \$ 80 F's guaranteed payment \$ (40) \$ (40) \$ 160 \$ 80 \$ 80 F's share of the profits \$ (60) '60/160 \$ (30) \$ (30) G's share \$ 100 \$ 50 \$ 50...
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## This note was uploaded on 03/18/2008 for the course ACIS 5324 taught by Professor Weseago during the Fall '07 term at Virginia Tech.

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