Owner's draw or draw payment is a colloquial term rather than an IRS term, defined as a distribution of cash or property an owner or partner takes out of a pass-through entity such as a sole proprietorship, partnership, or S corporation for their personal use. It is not a business expense.
For a partner in a partnership, a distribution has no impact on the partner's individual tax return to the extent that the distribution does not exceed the adjusted basis of their interest in the partnership.
Similarly, for a shareholder in an S corporation, a distribution has no impact on the shareholder's individual tax return to the extent that the distribution does not exceed their stock basis.
Where an owner's draw appears in the tax return:
- For a sole proprietorship, an owner's draw isn't entered anywhere in the tax return and thus has no impact on the tax return.
- In a partnership, an owner's draw reduces the partner's capital account and is represented on the partner's Schedule K-1 on Line L "Partner's Capital Account Analysis" under "Withdrawals & Distributions". It is also represented on Schedule K-1 Line 19 with code A.
In the partnership return in TaxSlayer Pro, unless all the partners received equal distributions, turn off automatic distribution of Schedule K information, then ensure the distribution is entered in four places:
- In the Schedule K menu under the Other menu, "Distributions of Money".
- In the partner's Schedule K-1, under the Other menu, "Distributions of Money".
- In the partner's Schedule K-1, under the Analysis of Partner's Capital Account menu, "Withdrawals and Distributions".
- In the partner's Schedule K-1, under the Partner's Adjusted Basis Worksheet, "Cash Distributions to the Partner during the year"
- In an S corporation, an owner's draw reduces the owner's equity in the business and is represented on the Shareholder's Basis Statement as a nondividend distribution and also on Schedule K-1 Line 16 with code D.
In the S corporation return in TaxSlayer Pro, this is entered in the Schedule K menu as a Property Distribution under "Items affecting Shareholder Basis".
A Guaranteed Payment is a payment made by a partnership to a partner without regard to the partnership's income. Guaranteed payments are always specified in the partnership agreement. In the partnership return, guaranteed payments fall into two categories: payments for services and payments for use of capital.
From the partnership's perspective, a guaranteed payment is an expense and is reported on Form 1065, Page 1, Line 10 and also on Schedule K Line 4.
From the partner's perspective, a guaranteed payment is income, indicated on the partner's Schedule K-1 on Lines 4a and 4b. Guaranteed Payments are also included on the partner's Schedule K-1 as Self-Employment Income in Box 14 with code A if they are a general partner or for limited partners if the payment was for services.
Where a guaranteed payment appears in the partnership return of income (Form 1065):
- In Form 1065, Page 1, Line 10. In TaxSlayer Pro, these payments are entered in the Deductions menu under "Guaranteed Payments to Partners". When entering the payment, be sure to correctly characterize it as either a payment for services or for capital.
- Schedule K Line 4. In TaxSlayer Pro, enter the payments in the Income menu under "Guaranteed Payments" as either for services or for capital.
Note: This is a general discussion of terminology and not intended as tax advice.