Illinois Administrative Code › Title 86 - REVENUE › Part 100 - INCOME TAX › Subpart I - BASE INCOME OF PARTNERSHIPS › Section 100.2850 - Subtraction Modification for Personal Service Income or Reasonable Allowance for Compensation to Partners (IITA Section 203(d)(2)(H))

Current through Register Vol. 48, No. 28, July 12, 2024
a) In General. A
				partnership is allowed to subtract from taxable income
any income of
				the partnership
that
constitutes personal service income as
				defined in
				26 USC
				1348(b)(1) (as in effect
				December 31, 1981) or a reasonable allowance for compensation paid or accrued
				for services rendered by partners to the partnership, whichever is
				greater
. (IITA Section 203(d)(2)(H)) Therefore, pursuant to this
				Section, a partnership is allowed a subtraction modification in an amount equal
				to the greater of the amount computed under subsection (b) or the amount
				computed under subsection (c).
1) Purpose.
				Under the IRC and federal income tax law, a partner is not an employee of the
				partnership. Consequently, a partnership generally may not deduct in computing
				the taxable income of the partnership amounts paid to a partner for services
				rendered to the partnership. (Estate of Tilton, 8 BTA 914 (1927)) Instead,
				these amounts are considered distributive shares of partnership income (Revenue
				Ruling 55-30, 1955-1 C.B. 430). In contrast, a shareholder of a corporation may
				also be employed by the corporation. Amounts paid by the corporation to the
				shareholder that constitute compensation for services rendered as an employee
				may be deducted by the corporation in computing its taxable income under
				26 USC
				162(a)(1). The purpose of
				the subtraction modification under IITA Section 203(d)(2)(H) and this Section
				is to allow partnerships, for purposes of computing their liability for the tax
				imposed under IITA Section 201(c) and (d) (replacement tax), a deduction for
				compensation paid to partners for services rendered to the partnership similar
				to the deduction allowed to a corporation for compensation paid a
				shareholder-employee for services rendered to the corporation.
2) Amounts that Qualify for Subtraction.
A) The amounts computed under subsections (b)
				and (c) are comprised of the distributive shares of the partners in the income
				of the partnership. Under
				26 USC
				707(c) to the extent
				determined without regard to the income of the partnership, payments to a
				partner for services or the use of capital are considered as made to a person
				who is not a partner, but only for the purposes of
				26 USC
				61(a) (relating to gross
				income) and, subject to
				26 USC 263,
				for purposes of IRC section 162(a) (relating to trade or business expenses).
				26 CFR
				1.707-1(c) states that, for
				the other purposes of the IRC, a guaranteed payment is regarded as a
				distributive share of the ordinary income of the partnership. Accordingly, a
				guaranteed payment to a partner may be included in the computation of the
				amounts computed under subsections (b) and (c).
B) Under
				26 USC
				707(a), if a partner engages
				in a transaction with the partnership other than in his or her capacity as a
				partner, the transaction is generally considered as occurring between the
				partnership and one who is not a partner. When a partnership pays or accrues an
				amount to a non-partner for services rendered, the partnership is allowed a
				deduction in the computation of its taxable income (see, e.g.,
				26 USC
				162 ). Therefore, a payment to a partner
				subject to
				26 USC
				707(a) may not be included
				in the amounts computed under subsections (b) and (c) (see IITA Section 203(g)
				and subsection (a)(5) of this Section). A distribution by the partnership
				subject to
				26 USC
				731 is treated as a return of capital and/or
				gain from the sale or exchange of the partnership interest of the distributee
				partner and, therefore, in no event may a distribution be included in the
				amounts computed under subsections (b) and (c). However, an allocation of
				partnership income to a partner may be considered compensation for services for
				purposes of this Section, whether or not accompanied by a corresponding
				distribution under
				26 USC
				731.
3) Double Deductions Prohibited. IITA Section
				203(g) states that
nothing in that Section shall permit the same item
				to be deducted more than once
.
A)
				Under IITA Section 203(d)(2)(I), a subtraction modification is allowed to the
				partnership for income distributable to an entity subject to replacement tax or
				to organizations exempt from federal income tax by reason of IRC section
				501(a). Therefore, neither a guaranteed payment nor a distributive share of net
				income or gain of a partner subject to replacement tax or exempt from federal
				income tax under IRC section 501(a) may be included in the subtraction
				modification allowed under this Section.
B) In addition, when a partnership pays or
				accrues an amount to a non-partner for services rendered, the partnership is
				allowed a deduction in the computation of its taxable income. Therefore, a
				payment to a partner subject to
				26 USC
				707(a) because the partner
				is not acting in his or her capacity as a partner, whether or not the payment
				is currently deducted by the partnership or capitalized, may not be subtracted
				under this Section. Similarly, when a person receives a partnership interest
				for the provision of services, the partnership's deduction is determined under
				26
				USC 83(h). Therefore, no
				amount may be deducted by the partnership under this Section for the transfer
				of a partnership interest in connection with the performance of
				services.