And since I haven't a clue as to what that
means I suggest that your friend hire a tax
pro to do his taxes for him.
Well, Jack, I give you credit for trying to help. However, what you posted is not on point for the poster's question.
I'll explain what you posted, though, since you are not sure what it means.
For federal income tax, the tax code recognizes only 3 kinds of business entities: sole proprietors, partnerships, C-corporations, and S-corporations. (Estates and trusts are not business entities and thus are outside of this discussion.) All business entities must fall into one of these catagories regardless of how they are organized under state law.
The classification of corporations under state law is easy. They are C-corporations unless they qualify for and make the S-corporation election.
The classification of a sole proprietorship is also easy.
The problem is classifying other business entities under state law, e.g. LLCs, general partnerships, LPs, LLPs, LLLPs, etc. For these entities, the Treasury regulations say that if the entity has just a single owner, it is by default treated as a sole proprietorship of the owner (i.e. the entity is "disregarded" and the owner of the entity is treated as though he or she operated the business directly). If the entity has two or more owners, it is by default treated as a partnership. In both cases, the entity may elect to instead be treated as a corporation for federal tax purposes. And once the election is made to be a corporation, it may also elect to be treated as a S-corporation if it meets the requirements for it. These rules are for entities created or organized in the U.S. The rules for classifying foreign entities is different.
In the case of sole proprietors, partnerships, and S-corporations, the owners include the income on their return and pay the tax. Only in the case of C-corporations does the business entity itself pay tax on the business income.
In the poster's case, it was a LLC with two owners. That is by default a partnership for federal income tax. The issue the poster raised is one unique to partnership taxation. In general, partners in a partnership agree to share the profits and losses of the business enterprise. But in some cases, they will agree that one or more partners may receive a payment from the partnership that must be paid regardless of the income or loss of the partnership. This often occurs when one partner is contributing something more than the others, i.e. more capital or more work done for the partnership. This is known as a guaranteed payment. So, in this case, Partner X got $100,000 guaranteed payment from the partnership even though it lost $200,000 (before the guaranteed payment is accounted for). The partnership gets to deduct that payment, bringing the loss to $300,000. Partner X has $100,000 of income from the guaranteed payment and $150,000 share of the $300,000 loss.
The issue then is whether Partner X must pay self-employment tax (Social Security and Medicare taxes) on the $100,000 even though he overall still had a $50,000 loss for the year on the partnership. As I said in my reply to the original poster, the basic answer to that question is no. Under Rev. Rul. 56-675, you net the guaranteed payment with the partner's share of the ordinary loss to determine what amount, if any, will be subject to self-employment tax.