Easy Questions  
Free Legal Documents

Pros and Cons of Taxation as a Partnership in Alta, CA

Pros and Cons of Taxation as a Partnership in Alta, CA


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 CA Partnership Download this Document
Page 1
Page 2
Page 3
Page 4
Page 5
Page 6
Page 7
Related Legal Services near Alta, CA
A & D Immigration Svc
1412 17th St # 256
Bakersfield, CA 93301
(661) 323-9999
Immigration Law Attorneys, Attorneys, Immigration & Naturalization Consultants
Kim & Mira Attorney's At Law
3022 International Blvd Ste 406
Oakland, CA 94601
(510) 437-9998
Attorneys, General Practice Attorneys, Legal Service Plans
Karen C Smith
1567 Yuba St
Redding, CA 96001
(530) 244-9998
Family Law Attorneys,  Attorneys,  Divorce Assistance,  Child Custody Attorneys,  Divorce Attorneys,
Paralegal Services Annick Haddad
14416 Victory Blvd Suite 201
Van Nuys, CA 91401
(818) 445-9992
Paralegals, Legal Document Assistance
Crary Bruce P
1484 E Main St # 2
Ventura, CA 93001
(805) 641-9992
Labor & Employment Law Attorneys, Attorneys
Strauss Law Group
121 N Fir St # F
Ventura, CA 93001
(805) 641-9992
Civil Litigation & Trial Law Attorneys, Attorneys, Labor & Employment Law Attorneys, Business Law At
The Lawyers Group Inc.
902 N Grand Ave
Santa Ana, CA 92701
(714) 558-9990
Personal Injury Law Attorneys,  Attorneys,  Legal Service Plans,  General Practice Attorneys
Easy Solutions Paralegal Svc
6277 Van Nuys Blvd
Van Nuys, CA 91401
(818) 442-9982
Paralegals
Addison, Kandy Paralegal Svs
4505 Allstate Drive, # 217
Riverside, CA 92501
(951) 680-9980
Paralegals, Attorneys
Murchison & Cummings
200 W Santa Ana Blvd # 801
Santa Ana, CA 92701
(714) 972-9977
Attorneys, General Practice Attorneys, Labor & Employment Law Attorneys, Product Liability Law Attor
Akopyan Law Group Pasadena Civil Litigation
300 N Lake Ave
Pasadena, CA 91101
(818) 509-9975
Corporation & Partnership Law Attorneys,  Personal Injury Law Attorneys,  Attorneys,  Labor & Employ
Solucions Hispanas
2117 Lake Ave
Altadena, CA 91001
(626) 794-9974
Immigration Law Attorneys, Attorneys, Immigration & Naturalization Consultants
Chin, Geoffrey D
221 E Walnut St
Pasadena, CA 91101
(626) 229-9971
Probate Law Attorneys, Business Law Attorneys, Elder Law Attorneys, Wills, Trusts & Estate Planning
California Attorneys Group
1314 7th St
Santa Monica, CA 90401
(310) 395-9954
General Practice Attorneys, Attorneys, Legal Service Plans
James C. Stevens
402 West Broadway, Suite 400
San Diego, CA 92101
(619) 934-9946
Real Estate Attorneys
Thomas G Roche
1850 5th Ave
San Diego, CA 92101
(619) 239-9945
Attorneys, Legal Service Plans
Kalikas Anthony
2305 India St
San Diego, CA 92101
(858) 452-9937
General Practice Attorneys, Attorneys
Universal Law Group
430 S Garfield Ave Ste 300
Alhambra, CA 91801
(626) 308-9936
Attorneys, Legal Service Plans, Criminal Law Attorneys, Immigration Law Attorneys, Litigation & Tort
Albelais Alfonso
3730 12th St
Riverside, CA 92501
(951) 682-9933
Attorneys Referral & Information Service, Attorneys
Parker & Sander
755 Santa Rosa St
San Luis Obispo, CA 93401
(805) 541-9930
General Practice Attorneys, Attorneys
Orlando Megan G
1541 Ocean Ave # 200
Santa Monica, CA 90401
(310) 451-9928
General Practice Attorneys, Attorneys
Linda A Jazo
1901 1st Ave
San Diego, CA 92101
(619) 235-9925
Business Law Attorneys,  Attorneys,  Accident & Property Damage Attorneys,  Corporation & Partnershi
Stuart J. Zander
707 Broadway, Suite 700
San Diego, CA 92101
(619) 798-9925
Family Law Attorneys, General Practice Attorneys, Traffic Law Attorneys, Attorneys
Zampi Determan & Erickson LLP
225 Broadway Suite 1450
San Diego, CA 92101
(619) 231-9920
Attorneys,  Legal Service Plans,  Personal Injury Law Attorneys,  Schools & Education Law Attorneys,
12Law.com   |  NASHVILLE, TN USA   |  CONTACT US