I know guaranteed payments DECREASE each partner's basis in the partnership based on their ownership % but is it a direct reduction or is it reduced through the deduction of partnership income since it decreases total partnership income?
Hi! Guaranteed payments do not reduce the partner's basis, but the guaranteed payments reduce the partnership's income and the partner will receive this guaranteed payment regardless of the partnership's profit or loss. So let's say the partnership had $50,000 income for the year before any guaranteed payments. Partner A is a 50% partner and gets a $10,000 guaranteed payment, while partner B is also a 50% partner, but does not receive any guaranteed payments. So you would take the $50,000 income – $10,000 guaranteed payment = $40,000 income / 2 partners = $20,000 that increases partner A's basis and $20,000 increases partner B's basis. I hope that makes sense!
I used UWorldRoger CPA review for REG and Roger does a great job explaining this. You'll want to master this concept, I just took the REG exam and there was A LOT of partnership questions, good luck to you!