Video: Retirement Payments

In this lesson, Nick Palazzolo, CPA, breaks down the intricacies of retirement payments within a partnership context, emphasizing their tax implications and deductibility. By exploring various payment structures such as lump sums and installment methods, Nick clarifies how these options affect the retirement income reported on a partner's individual tax return. The discussion includes an example with a logical step-by-step explanation, distinctly showing how the partnership deducts these payments and how the retiring partner calculates the taxable and non-taxable portions of the income received. Nick instills a sense of confidence, assuring you that understanding these retirement payment concepts is completely manageable with the help of his clear and practical examples.

"Examprep.ai helped me pass all 4 CPA exams on the first try. I highly recommend. I especially like the feedback and ratings the software provides so I know where to focus my time."

Daniel H., CPA

"I can't recommend ExamPrep.ai enough. Nick's lessons turned concepts I struggled with into strengths. I was able to pass FAR right before other exams expired!"

Andrew K, CPA

"I just want to say thank you for the great lesson videos. I couldn't stay awake through lectures of another course. After watching all your FAR lessons I was finally able to pass!"

Alyssa M., CPA Candidate

Video Transcript

Instructor: Nick Palazzolo

Nick Palazzolo is head instructor of ExamPrep.ai CPA Review. Nick's teaching style is engaging & upbeat, combining practical Big 4 tax & assurance expertise with years of 1-on-1 coaching. His lessons are concise and emphasize what you need to know to pass. Whether you're a recent grad or working full-time, we’re confident you can conquer your CPA exams with Nick’s review.

Cite this lesson

Link to this page

[[ citeExample ]]

Copy to clipboard

Copy URL to clipboard

Copy HTML to clipboard

Now we're diving further into retirement payments. These are going to be within a partnership, payments made to a retiring partner for their past services or for their use of capital. Retirement payments can be structured as a lump sum or as a series of payments over a specified period. These payments have a tax implications for both the partnership and the retiring partner, which makes sense. Now, what are the deductions to the partnership? Retirement payments made by the partnership, get out of here, retire, we'll pay you to retire. These are generally deductible business expenses. They reduce the partnership's taxable income, which in turn will reduce the remaining partner's share of the partnership's net income that will be subject to tax. It's important to note that the deductibility of retirement payments may be subject to certain limitations, such as the requirement that the payments be reasonable and based on a written agreement. Generally speaking, a good rule, whether it's retirement payments, whether it's anything in financial or the reg exam or anything like that, is that these payments are reasonable. You can't pay yourself an unreasonable salary. That's going to have different tax implications. You can't have unrealistic amounts again on the financial statements, estimates, anything like that. So that is just something to keep in mind. And then what about the income to the partner? Well, the retiring partner must report the retirement payments as income on their individual return. Sounds good to me. The tax treatment of these payments depends on the specific structure of the retirement agreement and the partner's basis in the partnership. Let's talk about lump sum payments. If the retirement payments are made in a lump sum, the retiring partner generally recognizes capital gain or loss on the difference between the amount

Unlock the full video transcript and subtitles support with a free account!

Get more from this lesson

Create an account 7-day free trial. No credit card required.

Partnerships

Module: 3 Concepts, 42 Videos

Partnerships: Formation Overview

2:59

Introduction to Partnerships: Formation

4:13

Partnership Stages

10:30

Types of Partners