Question

Virginia - guaranteed payments on K1 AKA VK1

Forum|Forum|6 years ago
March 16, 2020
1 reply
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2 member LLC, one gets guaranteed payments for services provided. TurboTax Fed return separates the GP on K1 and then divides the profits between the 2 members based on their ownership percentage. However, it doesn't flow over to Virginia state K1 (VK1). It takes the total amount and divides it between the two without consideration for the guaranteed payment to of them. How do I fix this?

I

Irene2805

This is the way Virginia calculates the income distributed to the partners--they, in effect, don't recognize the guaranteed payment to the partner. The guaranteed payment(s) are added back into the income and then the income is distributed to the partners.

L

Learn101Author

This is what it shows on the state website - so I'm not sure if the answer above is accurate. Can you you elaborate?

Guaranteed Payments

Virginia Code § 58.1-301 provides that terminology and references used in Title 58.1 of the Virginia Code will have the same meaning as provided in the Internal Revenue Code (IRC) unless a different meaning is clearly required. Virginia “conforms” to federal law because it starts the computation of Virginia taxable income with federal adjusted gross income (FAGI).

Under Internal Revenue Code (IRC) § 707, guaranteed payments are payments made by a partnership to a partner without regard to partnership income for the use of capital (interest payments) or for services rendered (fixed salaries or minimum payments). The payments are treated as if made to someone who is not a partner when determining gross income under IRC § 61 (a) and deductions permitted under IRC § 162 (a) and 263. This “outsider treatment” allows the partnership to deduct certain business expenses as deductions to the partnership and income to the partner. For other purposes within the IRC, guaranteed payments are treated as a partner's distributive share of ordinary income.

In Public Document (P.D.) 05-38 (3/16/2005), the Department ruled that guaranteed payments made to nonresident partners are treated as ordinary income (i.e., payments made to a partner for services or the use of capital) when such payments are made without regard to the profitability of the partnership. Likewise, for Virginia income tax purposes, such guaranteed payments would be treated more similarly to compensation and not income from the partnership's trade or business.