My brother and his brother-in-law started a partnership in 2006. The partnership had no activity except organization costs. The partnership is set up where they are each 50/50 on all. During 2007 the Partnership received a few jobs (they do construction work) and they also built my brother a house. My brother and his wife received a construction/convertible mortgage loan to finance the construction and "hired" the partnership to be the foreman construction company of the job. Throughout the year the partnership paid what my brother is referring to "wages" to him and his brother-in-law based upon their "rates"/hours worked. Due to their experience, my brothers wage rate was higher than his brother-in laws.
As these are ultimately "costs" to complete the jobs, since they did
90% of the work themselves, is this considered guaranteed payments, i.e. deductible on the partnership tax return to reduce the net income of the Parntership? Are these technically "1099" items to my brother and his brother-in-law? Or what is the best manner in which these payments should be treated. I understand that we can record them as distributions, however that reduces the partners basis unequally and is ultimately not the intent of what my brother and his brother-in-law wanted to do.
Any advice on the treatment of these "payments" would be appreciated.
Thanks!