Matt and Joel are equal partners in the MJ Partnership. For the current year ended December 31, the partnership has book income of $80,000, which includes the following deductions: (1) guaranteed payments (salaries) to partners: Matt, $35,000; and Joel, $25,000; and (2) charitable contributions, $6,000. The book income amount does not include any sales of capital assets or Sec. 1231 assets or any tax- exempt income. Based on the above information, what amount should be reported as ordinary income on the partnership return?

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Quizplus · Accepted Answer

Guaranteed payments are deductible by the partnership and are reported as ordinary income to the partner who receives them. Therefore, Matt's guaranteed payment of $35,000 and Joel's guaranteed payment of $25,000 are deducted from the $80,000 of book income to arrive at $20,000 of remaining income. The charitable contributions of $6,000 are also deductible and reduce the remaining income to $14,000. Since Matt and Joel are equal partners, they will split the remaining income equally, with each reporting $7,000 of ordinary income on their individual returns. Therefore, the partnership should report $86,000 of ordinary income on its return ($80,000 in book income minus $60,000 in deductions plus $7,000 of ordinary income for each partner).

Matt and Joel Are Equal Partners in the MJ Partnership