Tax Aspects of Partnerships A partnership is an unincorporated business with two or more owners. For businesses with more than one owner, the IRS will presume that your business should be taxed as a partnership unless you have incorporated under state law, or you elect to be taxed as a corporation by filing IRS Form 8832, Entity Classification Election. A partnership is not a taxable entity under federal law - there is no separate partnership income tax, as there is a corporate income tax. Instead, income from the partnership is taxed to the individual partners, at their own individual tax rates . However, the partnership is required to file a return of partnership income (Form 1065) that reports its income and loss to the IRS, and also reports each partner's share of income and loss on Schedule K-1 of the 1065. For tax purposes, all of the income of the partnership must be reported as distributed to the partners, and they will be taxed on it through their individual returns. This is true whether or not the partners actually received their shares of the income, and even if the partnership agreement requires that the money be retained in the business as partnership capital.  | Did You Know? Under the Small Business and Work Opportunity Tax Act of 2007, a married couple who jointly operates an unincorporated business and who files a joint return can elect not to be treated as a partnership for federal tax purposes. This treatment is available for tax years beginning after 2006. Each spouse would take into account his or her share of income, gain, loss, and other items as a sole proprietor. They would not have to file a partnership return (Form 1065) and report two Schedule K-1s. Instead, couples would each report their share of income on Form 1040, Schedule C. The husband and wife can be the only members of the joint venture. If there are other individuals in the enterprise, the provision does not apply. Additionally, both spouses must materially participate in the business. Married couples who in the past attributed all of the income from a joint venture to one spouse need to carefully consider this new provision, especially as it impacts Social Security benefits. The new law aims to ensure that when a married couple jointly own and participate in a small business they both get credit for paying Social Security and Medicare taxes. | | Partnerships are generally the most flexible form of business for tax purposes, since the income and losses distributed to each of the partners can vary (e.g., one partner can receive 40 percent of any profits but 60 percent of any losses), as long as a business purpose other than tax avoidance can be shown for the split. In the early years of most businesses, the company generates losses rather than profits, and the partnership form allows the partners to use these losses to offset other income they may have from investments or another job. One caveat: the partners may not deduct losses tha... |
