Question

Peters has a one-third interest in the Spano Partnership. During 20X1, Peters received a 16,000 guaranteed payment, which was deductible by the partnership, for services rendered to Spano. Spano reported a 20X1 operating loss of 70,000 before the guaranteed payment. What is(are) the net effect(s) of the guaranteed payment?

1) I only.
2) II only.
3) Both I and II.
4) Neither I nor II.

Answer 1

The net effect of the guaranteed payment on the Spano Partnership is both the deduction of the payment reducing the partnership's operating loss and an increase in Peters' taxable income.

Step-by-step explanation:

The net effect of the guaranteed payment on the Spano Partnership is item II only. Item I refers to the deduction of the guaranteed payment which reduces the partnership's operating loss. Item II refers to the increase in Peters' taxable income from the guaranteed payment.

1. I. Reduction in partnership's operating loss: Since the guaranteed payment is deductible by the partnership, it reduces the operating loss reported by Spano. This deduction helps lower the partnership's taxable income and potentially reduces the amount of tax it needs to pay.
2. II. Increase in Peters' taxable income: Peters received the guaranteed payment for services rendered to Spano. This payment is considered as taxable income for Peters. As a result, it increases his taxable income and he may have to pay additional taxes on it.

Therefore, the net effect of the guaranteed payment is both I and II.