Partnership Info Needed

[Guest Don N]

Just recently assumed admin. for limited partnership but feel uneasy about info coming from CPA; CPA claims partners have $0 in line 15a of K-1 & receive W-2's for services rendered to the partnership; since I'm not an accountant, what info should I request so that a trained eye would be able to figure out what is going on here; things that come to mind would be the Form 1065, 1st page of each Form 1040, Schedules K & K-1, etc. - Is there more info I should ask for ?

[BeckyMiller]

In this case, I would ask for the "Plan Administrator" to confirm for you the covered compensation for each partner and common-law employee. It is possible to pay a partner and report the payment on a W-2, but it is by no means common. More commonly, the "wages" paid to a partner for services rendered would be reported on their Schedule K-1 as a guaranteed payment and then reported as net earnings from self-employment.

You don't want to be responsible for interpreting this matter, so I would just send them a worksheet or diskette to fill in and have them sign off on the numbers. (That signature would be critical in my opinion.)

The client may want to argue that this is what you get paid for, but I doubt if your engagement letter covers determining the amount of compensation.

Good luck!

[Guest Don N]

Thanks for the feedback! the plan defines compensation as "earned income" for "self-employeds" & essentially W-2 for "employees"; and my understanding is that the IRC defines "earned income" as net earnings from self-employment with certain adjustments (i.e. 1/2 SECA, etc.); however, the accountant issues both W-2's & K-1's to the partners claiming they are both employees and self-employeds; what I'm hoping to find out is under what circumstances is it appropriate to classify partners as both employees & self-employeds for determining pension plan benefits ( and thereby maybe correct to combine these two types of income); also, does the accountant's choice to issue W-2's rather than reflect the income as guaranteed payments automatically mean that the incomes should be combined for pension calculations?

[BeckyMiller]

One never knows when one has stepped over the line and needs to send a bill for services rendered. But, I am "feeling your pain" here.

Technical rules - See Revenue Rulings 70-411 and 69-184 which interpret IRC Section 707. The CCH discussion on this matter is quite comprehensive.

Except for unusual circumstances, such as a former partner still collecting receivables, who returns to work as a common-law employees, a partner should NEVER receive a Form W-2 for services rendered to the partnership. To the extent that the partner's payment for such services is based upon a pre-determined agreement, it is reflected on the Schedule K-1 as a "guaranteed payment." As such, it is deductible by the partnership in arriving at partnership income that is subject to the agreement's general allocation rules. (Note, I am assuming such payment is otherwise deductible and need not be capitalized in inventory, fixed assets, etc.)

So - I still think you need to go back to the client and get them to tell you what they think income is supposed to be. For example, if reporting on the W-2 is wrong and the partnership paid the employer half of the FICA, does the partner's earned income need to be grossed up for this and then recalculated under the rules for determining "net earnings for self-employment." What if amounts were excluded from W-2 earnings under a cafeteria plan (where partners can't participate), will this need to be added back.

This is not going to be easy stuff. You are going to be bumping up against their CPA. (P.S. I am a CPA, so I know what is going to happen.)

Before sending this message, I double checked these conclusions with our partnership folks. Those old rulings are still current.

[Guest Don N]

Thanks again for the Rev.Ruling cites and the additional info; for whatever reasons this plan was administered as a corporate entity since roughly 1993; the prior pension administrator sent out a census request update form each year asking for W-2 and the client/accountant complied;I feel the client needs some pension guidance at this point & given the above history I don't want to ask them to take "the call" at what they think the income should be for pension purposes;they are relying on my firm to ask them to provide what is appropiate for their situation for pension calculation purposes;I don't want the accountant to change the accounting conventions that are being used for IRS reporting but everything I've read in the Code for pensions defines "compensation" for self-employeds as "earned income" which in turn is defined as "net earnings from self-employment" with certain adjustments and I don't see where W-2 income is one of the adjustments;if a partner is considered a "self-employed" person then I don't mind asking the accountant to recast the numbers for pension purposes & I know it won't be easy since at this point in time with 4/15 around the corner additional work will have to be done; but what is correct ?? Thanks Again !

[Guest Don N]

I just read the cited Rev. Rulings and I think 70-411 addresses many of the issues for my situation- Thanks again for your time Becky!