Easy Questions  
Free Legal Documents

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

Pros and Cons of Taxation as a Partnership in Attica, 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 Attica, KS
Colgan Law Firm
11006 Parallel Pkwy Ste 202
Kansas City, KS 66109
(913) 721-9999
Divorce Attorneys, Attorneys
Consumer Law Center PA
3706 SW Topeka Blvd
Topeka, KS 66609
(785) 266-9920
Divorce Attorneys,  Attorneys,  Family Law Attorneys,  General Practice Attorneys
Tonkin Jeffrey B Atty
11904 Mohawk Ln
Leawood, KS 66209
(913) 491-9410
Attorneys
Gaughan Cundiff Herman & Connealy
6731 W 121st St Ste 210
Leawood, KS 66209
(913) 498-9146
Accident & Property Damage Attorneys,  Attorneys,  Real Estate Attorneys,  Personal Injury Law Attor
Colgan Law Firm LLC
11006 Parallel Pkwy Ste 202
Kansas City, KS 66109
(913) 730-9082
Attorneys,  Personal Injury Law Attorneys,  Criminal Law Attorneys,  DUI & DWI Attorneys,  Family La
Robert R Laing Jr
2100 Hutton Rd
Kansas City, KS 66109
913-284-0186
Attorneys,  Criminal Law Attorneys,  Divorce Attorneys,  General Practice Attorneys,  Insurance,  Le
Michael J Studtmann P.A.
6235 W Kellogg Dr
Wichita, KS 67209
(316) 942-8400
Personal Injury Law Attorneys, Attorneys, Criminal Law Attorneys
Robert R Laing Jr
2100 Hutton Rdste 102
Kansas City, KS 66109
(913) 815-8347
Attorneys, Criminal Law Attorneys, Family Law Attorneys, Divorce Attorneys, General Practice Attorne
Minihan Shawn E
3706 SW Topeka Blvd # 300
Topeka, KS 66609
(785) 267-6444
Attorneys, General Practice Attorneys
Kathleen A Harvey
7011 W 121st St Ste 102
Leawood, KS 66209
(913) 491-6331
Attorneys
Harvey Law Firm
7011 W 121st. Ste. 102 , Overland Park
Leawood, KS 66209
(913) 491-6331
Immigration Law Attorneys
Wendy Marvin Law Office
6731 W 121st St
Leawood, KS 66209
(913) 312-5660
Attorneys, General Practice Attorneys, Legal Service Plans
Uzo L. Ohaebosim
6235 W. Kellogg
Wichita, KS 67209
(316) 261-5400
Consumer Law Attorneys,  Accident & Property Damage Attorneys,  Civil Litigation & Trial Law Attorne
Williamson Law Firm, LLC
6235 W. Kellogg
Wichita, KS 67209
(316) 261-5400
Accident & Property Damage Attorneys,  Civil Litigation & Trial Law Attorneys,  Personal Injury Law
John F Michaels Chartered
4252 W 124th Ter
Leawood, KS 66209
(913) 663-4455
Attorneys, Legal Service Plans
Carroll Michele I
4252 W 124th Ter
Leawood, KS 66209
(913) 663-4455
Attorneys
Harvey & Caldwell, PA
7011 W 121st St Ste. 201
Leawood, KS 66209
(913) 451-4400
Accountants-Certified Public,  Tax Return Preparation,  Accounting Services,  Tax Return Preparation
Smith Ronald D
3706 SW Topeka Blvd
Topeka, KS 66609
(785) 266-4220
Attorneys
Kreamer Karen
12616 Juniper Cir
Leawood, KS 66209
(913) 469-4066
Attorneys
Snyder Law Firm
13401 Mission Rd Ste 207
Leawood, KS 66209
(913) 685-3900
Attorneys, General Practice Attorneys, Legal Service Plans
Shalton Solutions
12008 Overbrook Rd
Leawood, KS 66209
(913) 663-3318
Attorneys
Elkins Marc E
13020 El Monte St
Leawood, KS 66209
(913) 897-2857
Attorneys
Fowler Law Firm
6740 W 121st St # 300
Leawood, KS 66209
(913) 498-2800
Attorneys, General Practice Attorneys, Legal Service Plans
Mccauley James
10673 166th Rd
Mayetta, KS 66509
(785) 966-2341
Attorneys
12Law.com   |  NASHVILLE, TN USA   |  CONTACT US