[needhelpnow]

If guaranteed payments are deducted from Ordinary Income, then explain this Q please!

Gilroy, a calendar-year taxpayer, is a partner in the firm of Adams and Company which has a fiscal year ending June 30. The partnership agreement provides for Gilroy to receive 25% of the ordinary income of the partnership. Gilroy also receives a guaranteed payment of $1,000 monthly which is deductible by the partnership. The partnership reported ordinary income of $88,000 for the year ended June 30, 2006, and $132,000 for the year ended June 30, 2007. How much should Gilroy report on his 2006 return as total income from the partnership?

Correct Answer:

22,0000 (25% x 88,000)

+12,000 (12 x 1,000)

= 34,000 Total Income

I thought that 12,000 was supposed to be subtracted from 88,000 because 88K is the Ordinary Income, therefore:

88K-12K=76K x 25% + 12K….clearly this is the wrong answer, but why?! 🙁

[needhelpnow]

Is there a difference between partnership income and partnership Ordinary income? May be that is where i am confused?

[Tncincy]

The formula is % share of ordinary partnership income (loss)

+ guranteed payments

+ income

You subtracted the guaranteed payments then did the % of income. Which I did too, but realized that the % of income is first.

It begins with a 75
Been here too long as a cheerleader.....time to pass

It begins with a 75
Been here too long as a cheerleader....ready to pass

[needhelpnow]

@tncincy

Thank you! So Guaranteed payment does NOT come out of Ordinary Income?

[syoung123]

The guaranteed payments are deducted in arriving at ordinary income, but in this problem you assume they have already been deducted. From the partnerships point of view, its just treated just like paid wages as far as the deduction goes, deductible for ordinary income.

All of the problems I've seen where you need to deduct the payments have given the figure “ordinary income before guaranteed payments”. So in other words, you assume they've already been deducted from ordinary income, unless otherwise indicated in the question. At least that's how I understand it, and I've been acing the questions on this particular topic.

REG (July 2014) - Pass
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BEC - (Dec 2014) - Pass

Licensed Colorado CPA (February 2015)

DONE!!!!

[Author]

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