Question

Jane and Lizzie are equal partners in Bennet Family Enterprises. In exchange for their services to the partnership, the partnership pays health insurance premiums for both of them. Payment of premiums are not dependent upon partnership profits. How are the premiums treated on each of Jane and Lizzie's Schedules K-1?

a. As a guaranteed payment.
b. As an increase to the partner's total share of ordinary partnership income.
c. As a cash distribution.
d. As a nondeductible expense.

Answer 1

Health insurance premiums paid by a partnership for its partners, which are not dependent on partnership profits, are treated as guaranteed payments on each partner's Schedule K-1. They are reported as ordinary income to the partners and are deductible by the partnership as a business expense. Therefore correct option is A

Step-by-step explanation:

The treatment of health insurance premiums paid by a partnership for its partners depends largely on the tax laws and regulations in place. In this specific question, if Jane and Lizzie are equal partners in Bennet Family Enterprises, and the partnership pays health insurance premiums for them that are not dependent upon partnership profits, these payments are generally treated as guaranteed payments on each of their Schedules K-1.

Guaranteed payments are payments that are made by a partnership to a partner for services or the use of capital if those payments are determined without regard to the partnership's income. These payments are typically reported as ordinary income to the partners and as an expense to the partnership. They can be considered similar to a salary for tax purposes, which means they are subject to self-employment tax on the partner's individual return.

It is significant to consult a tax advisor or the IRS guidelines for partnerships, as these can provide more details according to the current tax laws.