Find out how guaranteed payments (partnership) were impacted by the Tax Cuts & Jobs Act of 2017, and how this has affected the overall concept of reasonable compensation.

There has been substantial concern in the tax industry after the passage of the TCJA that Congress might be trying to apply the rules of reasonable compensation to partnership guaranteed payments. This concern was prompted by the fact that guaranteed payments are excluded from a partnership’s QBI for purposes of computing the Sec 199A deduction, the same as shareholders’ wages (reasonable compensation) are excluded from the QBI of an S corporation, since there was not a modifier included in Sec 199(c)(4) that limits the application of reasonable compensation to S corporations. Here is that section of the Code:

199A(c)(4) Treatment of reasonable compensation and guaranteed payments — Qualified business income shall not include —

199A(c)(4)(A) reasonable compensation paid to the taxpayer by any qualified trade or business of the taxpayer for services rendered with respect to the trade or business

199A(c)(4)(B) any guaranteed payment described in section 707(c) paid to a partner for services rendered with respect to the trade or business, and

199A(c)(4)(C) to the extent provided in regulations, any payment described in section 707(a) to a partner for services rendered with respect to the trade or business.

However at an American Bar Association Section of Taxation meeting in San Diego on February 9, 2018, Dana Trier, Treasury deputy assistant secretary for tax policy, said the lack of a modifier to reasonable compensation has raised concerns that the government may broaden reasonable compensation to other entities. “From where I sit . . . that reference to reasonable compensation is not an indication to redo the law of reasonable compensation.”

Despite those assurances, Trier noted that section 199A(c)(4) was “written as it's written,” and Treasury has the power to issue guidance expanding reasonable compensation beyond subchapter S corporations. Treasury will exercise that power “if someone above me makes that decision,” he said.