12Law Arrow 12Law Arrow  Easy Questions  
12Law Arrow 12Law Arrow Instant Legal Documents
 
 
FINANCIAL & MARITAL

Cohabitation Agreement coming soon!
Separation Agreement coming soon!
No-Fault Divorce coming soon!
Bankruptcy coming soon!
 
 

Pros and Cons of Taxation as a Partnership in Auxier, KY

Pros and Cons of Taxation as a Partnership in Auxier, KY


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


A partnership has unique taxation issues such as "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 KY Partnership Create This Document
Page 1
Page 2
Page 3
Page 4
Page 5
Page 6
Page 7
Related Legal Services near Auxier, KY
Winters & Yonker PSC
304 W Liberty St
Louisville, KY 40202
(502) 779-9998
Attorneys,  Accident & Property Damage Attorneys,  Legal Service Plans,  Labor & Employment Law Atto
Thompson Miller & Simpson PLC
734 W Main St
Louisville, KY 40202
(502) 585-9900
Attorneys, General Practice Attorneys
Effinger Joseph
716 W Main St # 300
Louisville, KY 40202
(502) 583-9900
Attorneys
Hume Bradley R
734 W. Main Street Ste 400
Louisville, KY 40202
(502) 585-9900
Attorneys, Legal Service Plans
Mcleod Brendan
539 W Market St
Louisville, KY 40202
(502) 561-9797
Traffic Law Attorneys, Attorneys, Criminal Law Attorneys, Transportation Law Attorneys
James Taylor, Attorney
138 South Third St.
Louisville, KY 40202
(502) 777-9764
DUI & DWI Attorneys,  Family Law Attorneys,  Bankruptcy Law Attorneys,  Child Custody Attorneys,  Di
Atkins & Atkins
462 S 4th Street Suite 2160 St
Louisville, KY 40202
(502) 584-9714
Personal Injury Law Attorneys, Attorneys
Hargadon Lenihan & Herrington
713 W Main St
Louisville, KY 40202
(502) 583-9701
Accident & Property Damage Attorneys, Personal Injury Law Attorneys, Legal Service Plans
Morris Chris
713 W Main St # 2
Louisville, KY 40202
(502) 583-9701
Accident & Property Damage Attorneys, Attorneys, Legal Service Plans
Nall Gail C
713 W Main St
Louisville, KY 40202
(502) 583-9701
Accident & Property Damage Attorneys, Attorneys, Legal Service Plans
Meers Charles R
429 W Muhammad Ali Blvd Ste 1000
Louisville, KY 40202
(502) 581-9700
Bankruptcy Law Attorneys,  Attorneys,  Family Law Attorneys,  Divorce Attorneys,  Bankruptcy Service
Truman Karl Law Offices
101 N 7th St
Louisville, KY 40202
(502) 582-9695
General Practice Attorneys, Attorneys, Legal Service Plans
Ron Cook Law Office
600 W Main St
Louisville, KY 40202
(502) 585-9685
General Practice Attorneys, Attorneys
Chalmers-Thomp Michelle M
730 W Market St # 400
Louisville, KY 40202
(502) 561-9558
Attorneys
Strepey Steven B
239 S 5th St
Louisville, KY 40202
(502) 419-9538
Accident & Property Damage Attorneys, Attorneys, Criminal Law Attorneys
Medley W Leonard
807 W Market St
Louisville, KY 40202
(502) 581-9404
Attorneys
Baker Bonita K
730 W Market St
Louisville, KY 40202
(502) 581-9393
Attorneys, Divorce Attorneys, Family Law Attorneys
Trifiletti, Barry M
721 W Market St
Louisville, KY 40202
(502) 589-9333
Estate Planning, Probate, & Living Trusts,  Attorneys,  Criminal Law Attorneys,  Personal Injury L
Ryan N Pogue
150 S 3rd St
Louisville, KY 40202
(502) 589-9309
Criminal Law Attorneys, Attorneys
Louisville Disability and Bankruptcy Lawyers
150 S 3rd St
Louisville, KY 40202
(502) 589-9309
Bankruptcy Law Attorneys, Business Bankruptcy Law Attorneys, Attorneys
Heck Jon
539 W Market St
Louisville, KY 40202
(502) 581-9287
Legal Service Plans,  Attorneys,  Accident & Property Damage Attorneys,  Corporation & Partnership L
Boylan Michael L
807 W Market St
Louisville, KY 40202
(502) 581-9206
Corporation & Partnership Law Attorneys, Attorneys, Criminal Law Attorneys, Family Law Attorneys, La
Susan M. Klein
138 S 3rd St
Louisville, KY 40202
(502) 589-9193
Adoption Law Attorneys, Attorneys, Family Law Attorneys
Abell, Scott
310 W Liberty St
Louisville, KY 40202
(502) 261-9145
Attorneys
12Law.com   |  NASHVILLE, TN USA   |  CONTACT US