Compensation from K-1 or Sched C and IRC 179

[AlbanyConsultant]

I was at a Corbel conference just over a year ago, and I've got a hastily scribbled note that says "real net K-1 earnings are net of IRC 179 amounts and non-reimbursed expenses".

Now, not that I don't trust myself, but I can't find anything anywhere that corroborates this. Does this sound familiar to anyone out there?

Also, does this hold for Schedule C comp as well? Should I be backing line 13 out of the the net comp?

[R. Butler]

The §179 expense should be subtracted from K-1, line 14a in determining comp. for a partner. The instructions to Sch. K-1 are clear on that point.

For sole propreiters the §179 decution should have already been considered in arriving at line 31.

[AlbanyConsultant]

Perfect, R. Butler, thanks!

[AlbanyConsultant]

Uh-oh; not so perfect.

I just had an accountant tell me that the correct way to do this was to take the ordinary business income (Line 1 of the 2005 K-1), add the guaranteed payments (Line 4), and subtract the Section 179 deduction (Line 12). This comes up with a number slightly different from Line 14 - Line 12. I didn't really get a good explanation (or maybe I just didn't understand it), but he was quite sure that his way was correct.

Is anyone else doing it this way?

[R. Butler]

Guaranted payments should be taken into account when computing self-employed earnings. You didn't ask about guaranteed payments in your initial questions, you only asked about §179 deductions.

[R. Butler]

Oh, as a side note the guaranteed payments must be made for services rendered in order to be considered. I have seen partnerships where the guaranteed payments are not for services rendered.

[R. Butler]

As a side note, I don't recall ever seeing the numbers come up different although I suppose they could. I'd be curious to see a situation where it would come up different.

[Mike Preston]

As a side note.... oh, never mind.

[R. Butler]

What can I say? It was a rough afternoon.