Transactions Between Partnership and Partners

For certain transactions between a partner and their partnership, the partner is treated as not being a member of the partnership. These transactions include the following.

1. Performing services for or transferring property to a partnership if:

a. There is a related allocation and distribution to a

partner; and

b. The entire transaction, when viewed together, is

properly characterized as occurring between the partnership and a partner not acting in the capacity of a partner.

2. Transferring money or other property to a partnership if:

a. There is a related transfer of money or other prop erty by the partnership to the contributing partner or another partner, and

b. The transfers together are properly characterized

as a sale or exchange of property.

Payments by accrual basis partnership to cash basis partner. A partnership that uses an accrual method of accounting cannot deduct any business expense owed to a cash basis partner until the amount is paid. However, this rule doesn’t apply to guaranteed payments made to a partner, which are generally deductible when accrued.