Could a Florida limited liability company deduct guaranteed salary payments to owner-partners for corporate income tax purposes?

Subject

Guaranteed Salary Payments

Plain-English summary

Guaranteed payments treated as salaries could be deducted on the LLC's pro forma federal Form 1120 if the compensation was reasonable under I.R.C. section 162(a)(1). Florida required the federally partnership-taxed LLC to calculate state taxable income as if it filed a federal corporate return.

The ruling drew a line between compensation and owner distributions. Discretionary distributions of net cash flow were characterized as dividends and were not deductible.

What this means for you

Federal partnership treatment of a payment did not by itself determine the Florida result. The pro forma corporate-return treatment and reasonable-compensation standard controlled the salary deduction.

Common questions

Were all owner payments deductible? No. The conclusion allowed reasonable salary-type payments but not discretionary distributions.

How were net-cash-flow distributions treated? As nondeductible dividends.

Did the conclusion expressly decide the separately described partner-interest payments? No. Its operative conclusion addressed salary payments and discretionary distributions.

Citations and references

• Fla. Stat. §§ 220.13(2), 220.13(2)(j), and 213.22
• I.R.C. §§ 61(a), 162(a), 162(a)(1), 263, and 707(c)
• Treas. Reg. § 1.707-1(c)

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 94C1-001

Original ruling text

Feb 18, 1994

RE: TAA 94(C)1-001
Guaranteed Salary Payments under Section 220.13(2), F.S.

Dear:

Your request for a Technical Assistance Advisement has been
referred to me for a response.

FACTS PRESENTED BY TAXPAYER

XXX (the "Company"), was formed as a Florida professional
limited liability company in 1993. It is a public accounting
firm and is authorized by the Florida legislature to operate as
a limited liability company. For federal income tax purposes,
the Company is taxed as a partnership and would file a federal
partnership return.

The Company pays salaries to its owners and also pays interest
expense on owner debt. As a partnership, for federal tax
purposes, these salaries and interest payments are treated as
guaranteed payments. Section 707(c) of the Internal Revenue
Code states that payments to a partner for services or the use
of capital that is determined without regard to the income of
the partnership shall be considered as made to one who is not a
member of the partnership. These payments are deductible in
arriving at federal taxable income of the partnership.

The Company makes salary payments to its partners as a form of
compensation for services rendered. Under the Federal
Partnership Tax Rules, these salary payments are treated as
guaranteed payments to the partners and are not treated as
salary for payroll tax purposes. The Company makes interest
payments on debt owed to partners. These payments, both salary
and interest, are determined based on services rendered and the
amount of debt and are not determined with relationship to the
partnership income. Based on the above, both the salary and
interest are treated as guaranteed payments and deducted on the

Federal Partnership Tax Return in arriving at taxable income.

You request a finding that the guaranteed payments deductible
for a Limited Liability Company for Federal purposes would also
be deductible in arriving at taxable income per the Florida
Corporate Income Tax Return.

DISCUSSION OF LAW

Paragraph 220.13(2)(j), F.S., defines taxable income in the case
of a limited liability company as if such limited liability
company were required to file or had filed a federal corporate
income tax return under the Internal Revenue Code. Subsection
220.13(2), F.S. defines a taxpayer's taxable income for Florida
purposes as taxable income as defined in the Internal Revenue
Code subject to certain limitations.

Section 707(c), I.R.C. states that, to the extent determined
without regard to the income of the partnership, payments made
to a partner for services or the use of capital shall be
considered as made to one who is not a member of the
partnership, but only for the purposes of section 61(a)
(relating to gross income) and, subject to section 263, for
purposes of section 162(a) (relating to trade or business
expenses).

I.R.S. regulation 1.707-1(c) states that a partner must include
such payments as ordinary income for his taxable year.
Guaranteed payments do not constitute an interest in partnership
profits for purposes of sections 706(b)(3), 707(b), and 708(b),
I.R.C.

CONCLUSION

In preparing a pro forma federal 1120 return, the guaranteed
payments which would have been considered as salaries and
deductible in computing "taxable income", if the amounts would
be considered reasonable pursuant to s. 162(a)(1), I.R.C., will
be deductible for Florida corporate tax purposes. However, the
discretionary distributions to members of the net cash flow of
limited liability companies will be characterized as dividends

and therefore, not be deductible.

This response constitutes a technical assistance advisement
under s. 213.22, F.S., which is binding on the Department only
under the facts and circumstances described in the request for
this advice as specified in s. 213.22, F.S. Our response is
predicated on those facts and the specific situation summarized
above. You are advised that subsequent statutory or
administrative rule changes or judicial interpretations of the
statutes or rules upon which this advice is based may subject
similar future transactions to different treatment than
expressed in this response.

You are further advised that this response and your request are
public records under Chapter 119, F.S., which are subject to
disclosure to the public under the conditions of section 213.22,
F.S. Your name, address, and any other details which might lead
to identification of the taxpayer must be deleted by the
Department before disclosure. In an effort to protect
confidential information, we request you notify the undersigned
in writing within 15 days of any deletions you wish made to the
request or this response.

Sincerely,

Val Poliuto
Technical Assistant
Statutory Compliance Section