The greatest care should be taken in the case of guaranteed payments for the use of capital. Presumably, a guaranteed payment for the use of capital is a genuine guaranteed payment and not a disguised sale. The presumption is upheld as long as the amount is reasonable and the relevant facts and circumstances clearly indicate that there was no disguised sale. The guaranteed payment should, of course, be based on the written provisions of the partnership agreement and have a reasonable amount for the use of capital. What is a reasonable amount? The guaranteed payment should not exceed the initial or average capital proceeds of the partner for the year, multiplied by 150% of the highest federal rate under CRI art. 1274 (D). The retired partner must not have a financial interest in the partnership at the end of the year, with the exception of the right to pension. Some local tax jurisdictions apply a tax on companies that do not have legal personality and operate in their legal systems. An example is the New York Trade Tax (UBT).
This tax will be imposed on all businesses that do not have legal personality in New York City and, as it is not capped, it can be quite expensive. The tax is levied on both individual companies and partnerships. However, the net proceeds from property ownership and leasing are excluded from tax. This is a typical situation in which a real estate partnership must seriously consider the tax consequences if a partner`s services are rewarded with guaranteed payments. Suppose the Q partner in the QXR partnership has a balance of capital balance of $60,000 and his pension contract provides that he will receive 5% of the gross rents for the rest of his life. Let`s also assume that his capital account is paid in four equal instalments. Distributions of 5% are subject to self-employment tax until the capital account is fully paid out. This can be considerable money and can be avoided by paying your capital account earlier. If the problem is not enough, it is probably better to borrow in the short term rather than pay the steep rate of tax on the self-employed.