Scenario: Partners in an LLC discuss guaranteed payments of $200k each at the beginning of the tax year, but don't agree to it at that point because one partner is unsure that business income will be enough to make the payments. Instead, they take distributions according to their shares as money comes in throughout the year. After the tax year is complete, the partner who would not agree now wants to agree to reclassify $200k each of their previous distributions as guaranteed payments. Can these payments from the prior year be reclassified after the fact without significant risk in case of an audit? And even if the risk of audit is low, would this be legitimate? I've looked around but not found any precedent.
I have not seen precedent on this, but ask the question:
Why didn't you set up a formula based upon income with an assignment formula including guaranteed payment at varying threshold levels.
Hint. If you do change this, its legitimacy would be bolstered by some permanence of a threshold triggered formula selection permanent policy.
What if there were a partnershiip agreement that simply stated "partners may agree on a different split (within certain boundaries) at the year's end?
I will make no opinion or comment on the ability to do this after the fact as I have not seen your partnership agreement.
Please remember to designate your question's BEST ANSWER.
Curt Harrington Patent & Tax Law Attorney Certified Tax Specialist by the California Board of Legal Specialization PATENTAX.COM This communication is general information and not legal advice, and does not create an attorney-client relationship. This communication should not be relied upon as any type of legal advice. Please note that no attorney-client relationship exists between the sender and the recipient of this message in the absence of either (1) a signed fee contract and (2) remission of an agreed-upon retainer. Absent such an agreement and retainer, I am not engaged by you as an attorney, nor is any other member of my law firm.
Years licensed, work experience, educationLegal community recognition
Peer endorsements, associations, awardsLegal thought leadership
Publications, speaking engagementsDiscipline