Easy Questions  
Free Legal Documents

Pros and Cons of Taxation as a Partnership in Altamont, KS

Pros and Cons of Taxation as a Partnership in Altamont, KS


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 KS Partnership Download this Document
Page 1
Page 2
Page 3
Page 4
Page 5
Page 6
Page 7
Related Legal Services near Altamont, KS
Haynes Charles R
1910 18th St
Great Bend, KS 67530
(620) 792-8855
Attorneys, Legal Service Plans
Kaufman & Horner Chtd
1910 18th St
Great Bend, KS 67530
(620) 793-8476
Attorneys, Legal Service Plans
McVay James M
1321 Main St
Great Bend, KS 67530
(620) 792-8231
Attorneys, General Practice Attorneys
Rondeau Mark A
1321 Main St # 300
Great Bend, KS 67530
(620) 792-8231
Attorneys, General Practice Attorneys
Rondeau, Mark A - Watkins Calcara
1321 Main St # 300
Great Bend, KS 67530
(620) 792-8231
Attorneys,  General Practice Attorneys,  Probate Law Attorneys,  Accident & Property Damage Attorney
Shepard Christopher J
1321 Main St
Great Bend, KS 67530
(620) 792-8231
Attorneys, Legal Service Plans
Friedeman Richard L
1321 Main St # 300
Great Bend, KS 67530
(620) 792-8231
Attorneys, General Practice Attorneys
Glendenning, Allen G - Watkins Calcara
1321 Main St # 300
Great Bend, KS 67530
(620) 792-8231
Attorneys,  Labor & Employment Law Attorneys,  Civil Litigation & Trial Law Attorneys,  Discriminati
Horner John
1910 18th St
Great Bend, KS 67530
(620) 793-7874
Attorneys, Legal Service Plans
Carpenter M
1007 Williams St
Great Bend, KS 67530
(620) 793-7817
Attorneys
Keenan Law Firm PA
2200 Lakin Ave # B
Great Bend, KS 67530
(620) 793-7811
Attorneys,  Criminal Law Attorneys,  Wills, Trusts & Estate Planning Attorneys,  DUI & DWI Attorney
Berscheidt Thomas J
2107 Forest Ave
Great Bend, KS 67530
(620) 792-7777
Attorneys, Legal Service Plans
Keenan Martin J Atty
3600 23rd St
Great Bend, KS 67530
(620) 793-7612
Attorneys, Legal Service Plans
Vega Law Offices LLC
510 W Main Street, Suite A
Gardner, KS 66030
(913) 856-7596
Family Law Attorneys, Tax Attorneys, Divorce Attorneys, Probate Law Attorneys, Estate Planning Attor
Jackson Joel B
2018 Forest Ave
Great Bend, KS 67530
(620) 792-7452
General Practice Attorneys, Attorneys
Johnson Steven E
1310 Kansas Ave
Great Bend, KS 67530
(620) 793-7239
Attorneys
Bauer Greg L
1310 Kansas Ave
Great Bend, KS 67530
(620) 793-7239
Attorneys, General Practice Attorneys, Legal Service Plans
Pike Charles R
1310 Kansas Ave
Great Bend, KS 67530
(620) 793-7239
Attorneys, Legal Service Plans
Mark D Lewis
212 E Main St
Gardner, KS 66030
(913) 856-6600
General Practice Attorneys, Attorneys
Huelskamp Terrance
550 N 159th St E # 104
Wichita, KS 67230
(316) 733-6446
Attorneys, Legal Service Plans
Berkley Deborah
1314 Kansas Ave
Great Bend, KS 67530
(620) 603-6314
Attorneys
Angelo Law Office
550 N 159th St E # 205
Wichita, KS 67230
(316) 239-6005
Attorneys, Corporation & Partnership Law Attorneys, Legal Service Plans
Glenn Opie Law Offices
2015 Forest Ave # 102
Great Bend, KS 67530
(620) 793-5455
Attorneys, General Practice Attorneys, Legal Service Plans
Brown, Isern & Carpenter
1909 Lakin Ave
Great Bend, KS 67530
(620) 792-5388
Probate Law Attorneys,  Attorneys,  Criminal Law Attorneys,  Family Law Attorneys,  Bankruptcy Law A
12Law.com   |  NASHVILLE, TN USA   |  CONTACT US