I have a client who is a partner in a partnership that would like to compensate an outside independent contractor with ownership in the entity. Would it be possible to treat the ownership interest as guaranteed payments?
It is possible to compensate an outside contractor with a partnership interest. Please note that there are several different ways to structure such a transaction. That being said, the interest being issued for services rendered as described in the fact pattern detailed above, would be reported as a guaranteed payment. If you review IRS Notice 2005-43, it will detail various ways to minimize the tax impact by making it a profit-only interest transaction, which may be more beneficial.
References: IRS Notice 2005-43
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