Say you have three partners in a business, one of them is retiring and the business wants to buy out his good will over a period of time. However, the goal is to have the retiring partner responsible for the taxes on the payments. How do you structure this so it passes muster with the irs. Basically, how can you characterize payments to the retiring partner over a period of time so that they are income to the partner, and not taxable to the partnership.
One thought is to have the retiring partner work for a few years till age 65, have disability insurance on the income. After that though the partner wont work but we want to continue the income payments for several years after.
Thanks
2006-11-02 05:55:43 · 4 answers · asked by Owenmax 1 in Business & Finance ➔ Taxes ➔ United States
A covenant not to compete would probably work - it would be ordinary income to the recipient, but wouldn't be subject to self-employment taxes (wages or consulting fees would be). The partnership would amortize these payments over a 15-year period.
Another way would be for the remaining partners to buy out the other partner. The partnership could loan the remaining partners the money, and the payments could be made over a number of years using an installment sale. All of the gain would be considered capital gain to the recipient. The payments wouldn't be deductible by the partnership or the partners, but their basis in their partnership interests would increase, thereby reducing their potential capital gain when they would sell their interests.
2006-11-02 06:34:32 · answer #1 · answered by jinenglish68 5 · 0⤊ 0⤋
The Code (section 736) makes specific provision for payments to retiring partners, under which payments can be considered either a guaranteed payment (income to the partner, deductible by the partnership) or as a share of partnership profits. This can include payments for goodwill (but not for other partnership assets) in some cases. Consult a tax advisor who will be able to tell you how these rules apply in your case.
2006-11-02 16:20:13 · answer #2 · answered by TaxGuru 4 · 0⤊ 0⤋
Don't pay for goodwill it is deductible over 15 years. Pay him for a non-complete arrangement, that is deductible as paid.
2006-11-02 15:57:20 · answer #3 · answered by waggy_33 6 · 0⤊ 0⤋
Talk to your accountant - he'll be able to tell you what you should do.
2006-11-02 13:58:23 · answer #4 · answered by Kathleen M 4 · 0⤊ 0⤋