Key legal, tax and financial decisions should be acted on by the partners and documented in the minutes. Key decisions include: admitting new partners, the purchase of real property, the approval of a long-term lease, the authorization of a significant loan amount or substantial line of credit, the adoption of a retirement plan, health plan, etc. These, and other key decisions, should also be backed by the supporting documentation.
Documentation of business decisions within your minutes helps to protect the limited liability of your business and insulate you from personal liability. If you fail to pay at least minimal attention the formalities of having a separate business entity, you may lose the limited liability protection of your partnership. A "paper trail" can be important if disputes arise. Minutes provide solid documentation in the event key decisions are questioned or reviewed later by the IRS, partners, creditors, or the courts.
Partners are allowed to treat company debt as basis in some cases. This allows a partner to deduct losses in excess of their tax capital. A partner is allocated any partnership debt for which they bear an economic risk of loss, plus their share of any debt for which none of the other partners specifically bear an economic risk of loss. However, these rules are technical and we suggest you contact us for specifics related to your situation. Please keep copies of all loan documentation, especially guarantees, so that partner basis can be accurately calculated.
It is very important that loans between the partners and the Company are evidenced by a written promissory note with terms and a stated interest rate. Without such documentation, the IRS has disallowed the use of such loans as basis for deducting losses. Please be sure to prepare notes for all new loans and old notes are cancelled when paid.
Reasonable compensation for partners and the related payroll taxes is a "hot topic" with Congress and the IRS. Because Partner's guaranteed payments are subject to FICA taxes, it is possible that Congress will try to pass legislation to force limited partners to pay more in "payroll" taxes. The IRS may try to assert that all business partnership income is taxable for self-employment taxes. Making guaranteed payments of a reasonable amount may help beat the IRS's contention. The rules on whether limited partners are subject to self-employment taxes on partnership profits (the amount of income left after guaranteed payments) are in a state of flux. The current IRS thinking is that if the limited partner performs services for the partnership for more than 500 hours per year, or is liable for partnership debts, or has authority to contract on behalf of the partnership, they are subject to self-employment taxes. Please let us know if this could apply to any of your partners and you would like some additional information regarding this issue.
Health care and group term life benefits should be included in the partner's guaranteed payments. The partnership deducts the guaranteed payments while the partner includes the amounts in income. Health care amounts are then fully deducted at the partner level on their individual return.
Contributions to an HSA account by a Partnership on behalf of a partner are to be reported as guaranteed payments to the partner or as partner draws. The partner will deduct the amount contributed to the HSA on their individual return as if they made the contribution personally.
You can deduct on your individual tax return certain expenses you pay personally conducting partnership business, such as automobile and home office expenses. The partnership agreement must indicate that the partners are required to cover these expenses. You should check your agreement and change it if necessary. This could allow you to depreciate your vehicle or take a mileage deduction and deduct certain expenses you incur maintaining a home office. If your partnership agreement does not indicate such items are required, submitting an expense report for eligible expenses allows the partnership to reimburse you the costs and take the deduction on the partnership return. If under the partnership agreement you are eligible to submit expenses for reimbursement, you are precluded from taking a deduction on your personal return for any amounts paid out of pocket. Contact us to for assistance in analyzing your situation.
The IRS and State agencies can assert general partners as being liable for various payroll, excise and other taxes and penalties. Please make sure your partnership is paying all appropriate taxes on time. Contact us or your attorney if you have questions.