Issuing a 1099 for services to a partner

[OldCPA]

Have a client in a partnership.  Tax preparer of the partnership wants to issue 1099s to each partner for their share of services performed.  I say they have to either modify their income split, which per the 761 regulation they can do or treat payments as guaranteed payments.  Guaranteed payments (GPs) are not optimal anymore with the QBI calculation saying that GPs are not included in the QBI calculation.  My suggestion is to modify the partnership income split per the 761 regulation. 

Per Code section 707(a), the way I read it is that a partner can only be issued a 1099 when they are performing services as a non partner, i.e. they are NOT performing services that are part of their operating agreement.  Example would be a partner of an engineering entity having a side gig of accounting service paid to the partnership.  That is partner is working in a capacity OTHER than a partner based on what I read in the code.

I have not been able to find any support for issuing a 1099. Is there any information in the code or regulations that supports issuing a 1099-NEC to the partners when a partner engages in a transaction of the partnership (engineering services) that IS in his/her capacity as a member of the partnership?

[qbteachmt]

Your own entity doesn't issue a 1099-NEC to you. You did not provide it with goods or services. You are "doing the work" of the entity you are party to.

Issuing 1099 has nothing to do with shares, splits, pay, payments. It's the Reporting, not the mechanism.

You didn't explain what their goal or reason is, for coming up with this concept.

[qbteachmt]

Oh: "Tax preparer of the partnership wants to issue 1099s to each partner for their share of services performed."

Time to shop for a new preparer.

[OldCPA]

I don't know what their goal is either and I can't understand why the other tax preparer thinks this is an acceptable method of allocating income.  My understanding is that if you have a 50/50 partnership but want to pay out more to on partner than another you have to either pay out as guaranteed payments (which are not eligible as QBI income) or modify the partnership agreement to show what you want the percentage to be for each partner.  So if partner A did 65% of the work they'd get 65% of the ordinary income.

The tax preparer says they will write checks to the partners and issue 1099s.  

I don't believe there is anything in the code or regulations to support that and I can't find anything in either of those or any instructions that does.

[OldCPA]

I agree.  That is the issue and I've been telling my client (one of the partners) that this is not an acceptable way to prepare the K-1s for the partnership.  I'm concerned also in an audit the auditor could say those 1099 payments should really be guaranteed payments....

I've been pushing instead for them to either modify the partnership agreement or to plan, according to the 761 regulations, to annually agree to a payout that they can either memorialize or at least verbally agree on.

The other tax preparer has said since the other partner is an S corps there won't be a need a 1099 for them, the preparer will just treat payments as consulting expense.  But I can't find anything that supports treating as consulting/contractor expense.  I don't think it matters whether or not the partner is incorporated or not.  I can't find anything that supports treating that way.

[BobKamman]

There's a word for what your client is asking you to be. 

"Accomplice"

[OldCPA]

That is why I told my client it wasn't an accepted method of reporting and if it was done that way I would be bowing out and would not prepare their return. But I just wanted to make sure I was correct in my thought process.

[qbteachmt]

"The other tax preparer has said since the other partner is an S corps there won't be a need a 1099 for them, the preparer will just treat payments as consulting expense."

Wow. Why don't these people incorporate as an S Corp, and set payroll accordingly to their desired split?

It's likely time for you to explain to your client why you can't do their tax return any longer, under these conditions.

[OldCPA]

Even if both partners are S corporations the other tax preparer wants to issue the payments to them as consulting expense, which according section 707(a) I don't believe will fly.  I believe the payments for services to the partners needs to be reported on line 1 of the K-1 as ordinary income, not as expenses of the partnership.

Yes once it feeds into an S corp there will be salaries and other expenses but my concern is how that income feeds into the individual return, or S corp if we incorporated my client.

When a partnership has the flexibility to modify their income allocation based on the 761 regulation why would there be consulting expense paid to the partners....that is what I can't find support for.  Whether or not a 1099 is issued, I don't see that using consulting expense is an acceptable method of reporting income to the partners.

[qbteachmt]

"why would there be consulting expense paid to the partners....that is what I can't find support for."

There isn't, under this scenario, and it's wrong.

Until you know what they want to accomplish, there is no possible guidance. And if you are not the business entity tax preparer, and they want to stick with a person doing it wrong, well, that is up to them.