Easy Questions  
Free Legal Documents

Pros and Cons of Taxation as a Partnership in Allamuchy, NJ

Pros and Cons of Taxation as a Partnership in Allamuchy, NJ


If we are together nothing is impossible. If we are divided all will fail.
 
- Winston Churchill


Many small businesses struggle when trying to understand the basics of the income tax rules and regulations. It may require mastering the double entry bookkeeping and the withholding rules for employees, while ferreting out every possible business deductions. In a partnership it may mean figuring out a lot of difficult terms like "distributive share", "special allocation", and "substantial economic effect".

How Partnership Income is Taxed

The IRS does not consider partnership to be separate from the owners when it comes to tax purposes, rather, they are considered "pass through" tax entities. All profits and losses "pass through" to the partners who pay taxes on their share of the profits through their individual income tax return. This sharing of profits is usually set out in a written partnership agreement.

Filing Tax Returns

A partnership does not pay income tax but they do need to file Form 1065 with the IRS. This form is reviewed by the IRS to check whether the reported income is correct. A Schedule K-1 that breaks down the share of the business profits and losses for each partner to be applied to the Form 1040 (income tax return) with an attached Schedule E should be provided by each partner to IRS.

Estimating and Paying Taxes

Each partner should be responsible to set aside enough money to cover the taxes due from the annual share of profits. The partners should approximate the amount of tax they owe for the year to be paid to the IRS or other appropriate state tax agency in the months of April, July, October, and January.

Profits are Taxed whether Partners Receive them or Not

"Distributed share" is the portion of the profits stated upon in the partnership agreement in which each partner is entitled to have. The IRS requires that these profits be taxed. The distributed share given allocated to the partner in a given year is treated by the IRS as income regardless of how much money was actually withdraw from the business (vs. retained for reinvestment). This will mean that each partners rightful share of revenue minus expenses will be the amount to include in the income tax return, regardless of cash disbursements.

How Distributed Share is Established

The state law allocates the profits and losses to the partners according to their ownership interest in the business. This is usually followed unless there is written partnership agreement. If one partner has a 40 percent share in the partnership and the other has 60 percent, each of them will be entitled to the corresponding percentage of both profits and losses.

Estimated Tax Payments and Self-Employment Taxes

There is no tax withholding on distributions to partners, so they need to estimate the amount they will owe. The IRS also demands that estimated tax payments be made quarterly, using either the regular installment method or the annualized income installment method. The regular installment method works by dividing your total amount of estimated payments for the year by four, which is the simplest approach to use.

If you are an active participant in running the partnership business, aside from the income taxes, you are required by the IRS to pay "self-employment taxes" on the profits allocated to you. This self-employment tax covers your share of the Social Security contributions and Medicare programs.

The self-employment taxes differ between non-owner employees and partners. Employees only pay half, the other half is paid by the employer. Partners have to pay twice as much as regular employees because they have to pay both the employee and employer share of the taxes. Partners, however can deduct half of the self-employment contribution from their taxable income to help lower their taxes. This self-employment tax will be reported using a Schedule SE which is attached to their annual income tax return.

Expenses and Deductions

With all the taxes that have to be paid by partners you might wonder how to make the economics work. You and your partners can deduct legitimate business expenses from your business income. This can help reduce the profits that you will report to the IRS. These deductions include operating expenses, start-up costs, and product advertising expenditure. You may be able to deduct portions of your car and home that are used for business purposes.

Incorporating Your Business May Cut Your Tax Bill

A corporation pays its own taxes on all the corporate profits left in the business, unlike the partnership. The corporate owners pay only taxes on the money they receive as dividends or as compensation for the services they have rendered on the company that includes the salaries and bonuses. Incorporating your business can offer certain tax advantages over the partnerships' "pass through" taxation.

Keeping the profits or retained earnings the business can lower the corporate tax rates. If you decide to retain a certain amount of profit in the business at the end of the year, this retained profit will only be taxed 15 percent corporate rate as compared to individual tax rates of 25 percent. Incorporating can make a difference in reducing taxes.

 
Personalize & Print a Free NJ Partnership Download this Document
Page 1
Page 2
Page 3
Page 4
Page 5
Page 6
Page 7
Related Legal Services near Allamuchy, NJ
Cunningham Lisa K
170 Mount Airy Rd
Basking Ridge, NJ 07920
(908) 630-9900
General Practice Attorneys, Attorneys
Patel Milan C
1740 Oak Tree Rd Ste E
Edison, NJ 08820
(732) 452-9888
General Practice Attorneys, Attorneys, Legal Service Plans
Friedman Martin & Beth
25 Stockmar Dr
Basking Ridge, NJ 07920
(908) 204-9642
Attorneys, Legal Service Plans
Shulman William Z
115 River Rd Ste 201
Edgewater, NJ 07020
(201) 313-9300
Attorneys, General Practice Attorneys
Gurnani & Gurnani,
101 State Route 27
Edison, NJ 08820
(732) 494-8900
Attorneys, Labor & Employment Law Attorneys, Immigration Law Attorneys, Corporation & Partnership La
Nieschmidt Law Office
412 Monmouth St
Hightstown, NJ 08520
(609) 426-8807
Attorneys,  Criminal Law Attorneys,  Family Law Attorneys,  Tax Attorneys,  Divorce Attorneys,  Bank
Bressler Duyk Law Firm
60 State Route 27
Edison, NJ 08820
(732) 494-8555
Attorneys, Business Law Attorneys, Real Estate Attorneys, Litigation & Tort Attorneys, Estate Planni
Legband Donna
93 S Finley Ave
Basking Ridge, NJ 07920
(908) 696-7977
Attorneys, Legal Service Plans
Mavinkurve & Patel Law Offices
44 State Route 27 # D
Edison, NJ 08820
(908) 222-7966
Attorneys, Legal Clinics, Real Estate Attorneys, Divorce Attorneys
Warshaw Law Firm
403 King George Rd Ste 201
Basking Ridge, NJ 07920
(908) 350-7771
General Practice Attorneys, Attorneys
Zelley Frederick B
88 S Finley Ave # G
Basking Ridge, NJ 07920
(908) 766-6666
General Practice Attorneys, Attorneys
Speck Amy
202 2nd Ave
Bradley Beach, NJ 07720
(732) 776-6610
Attorneys
Pasricha Gary S
1794 Oak Tree Rd
Edison, NJ 08820
(732) 593-6200
Immigration Law Attorneys, Patent, Trademark & Copyright Law Attorneys, Attorneys
Hanlon William J
170 Mount Airy Rd Ste F1
Basking Ridge, NJ 07920
(908) 766-6100
Attorneys, Legal Service Plans
Ziegelbaum Joanne E A
107 Manlove Ave # Ae
Hightstown, NJ 08520
(609) 443-5950
Attorneys, Legal Service Plans
Siggelakis Gus T
162 Broad St
Hightstown, NJ 08520
(609) 443-5533
Attorneys, Legal Service Plans
Del Tufo Linda
88 S Finley Ave # D
Basking Ridge, NJ 07920
(908) 766-5200
Attorneys, General Practice Attorneys
Stephen L Klein
17 Hilliard Ave
Edgewater, NJ 07020
(201) 654-4592
Social Security & Disability Law Attorneys,  Attorneys,  Real Estate Attorneys,  Accident & Property
Richford Lisa Law Office
4327 S Broad St
Trenton, NJ 08620
(609) 581-4414
General Practice Attorneys, Attorneys, Legal Service Plans
Asma J. Warsi Chaudry
2 State Route 27 Suite 402
Edison, NJ 08820
(732) 662-4125
General Practice Attorneys, Attorneys
Bonk Family
1941 Oak Tree Rd Ste 201
Edison, NJ 08820
(732) 321-4026
Attorneys, General Practice Attorneys
Gosnell Emily At Attorney Law
614 US Highway 130
East Windsor, NJ 08520
(609) 371-3820
Attorneys, Legal Service Plans
Vallejos Law Ofc & Morales
200 Mercer St
Hightstown, NJ 08520
(609) 371-3600
General Practice Attorneys, Attorneys, Legal Service Plans
Gattoni E RN
300 Undercliff Ave
Edgewater, NJ 07020
(201) 313-3576
Attorneys
12Law.com   |  NASHVILLE, TN USA   |  CONTACT US