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 San Diego, CA

Pros and Cons of Taxation as a Partnership in San Diego, CA


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 CA Partnership Create This Document
Page 1
Page 2
Page 3
Page 4
Page 5
Page 6
Page 7
Related Legal Services near San Diego, CA
Sunnen John W
12625 High Bluff Dr
San Diego, CA 92130
(858) 793-9999
Bankruptcy Law Attorneys,  Attorneys,  Taxes-Consultants & Representatives,  Bankruptcy Services,  D
Zierden Richard L
9845 Erma Rd Ste 316
San Diego, CA 92131
(858) 530-9984
Attorneys,  Legal Service Plans,  Family Law Attorneys,  Divorce Attorneys,  Personal Injury Law Att
Zierden Richard L
9845 Erma Rd
San Diego, CA 92131
(858) 530-9984
Attorneys, Legal Service Plans, Family Law Attorneys, Divorce Attorneys, Personal Injury Law Attorne
Hegeler Barton H
4660 La Jolla Village Dr Suite 670
San Diego, CA 92122
(858) 597-9975
Attorneys, Criminal Law Attorneys, Labor & Employment Law Attorneys, Business Law Attorneys, Litigat
James D. Scott Certified Family Law Specialist
4669 Murphy Canyon Rd Suite 211
San Diego, CA 92123
(858) 429-9974
Family Law Attorneys
Adelson Testan Brundo & Popalardo
7676 Hazard Center Dr
San Diego, CA 92108
(619) 543-9960
Attorneys, General Practice Attorneys
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
Brucker & Walker LLP
4550 Kearny Villa Rd Ste 209
San Diego, CA 92123
(858) 939-9940
Construction Law Attorneys,  Attorneys,  Business Law Attorneys,  Real Estate Attorneys
Kalikas Anthony
2305 India St
San Diego, CA 92101
(858) 452-9937
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,
Accutech Legal Support Services
3935 1st Ave
San Diego, CA 92103
(619) 232-9905
Attorneys Support & Service Bureaus, Attorneys, General Practice Attorneys
Andy Cook
1901 1st Ave Second Floor
San Diego, CA 92101
(619) 515-9900
Attorneys, Divorce Attorneys, General Practice Attorneys, Legal Service Plans
Attorney Gerald Linkon
401 W A St
San Diego, CA 92101
(619) 338-9898
Immigration Law Attorneys,  Immigration & Naturalization Consultants,  Administrative & Governmental
Scott Jeffrey G Law Offices
16935 W Bernardo Dr # 170
San Diego, CA 92127
(858) 675-9896
General Practice Attorneys, Attorneys, Legal Service Plans
Medina Law Group
4025 Camino Del Rio S
San Diego, CA 92108
(619) 798-9893
Attorneys, Legal Service Plans
Kobernick Todd E
2448 Historic Decatur Rd
San Diego, CA 92106
(619) 224-9889
Attorneys, Legal Service Plans
Ha Breana A
9353 Activity Rd
San Diego, CA 92126
(858) 536-9879
Attorneys, Legal Service Plans
Patrick B. Long
PO Box 16058
San Diego, CA 92176
(619) 573-9865
Family Law Attorneys, Attorneys, Civil Litigation & Trial Law Attorneys
Hannah's House
4002 Park Blvd # C
San Diego, CA 92103
(619) 294-9852
Family Law Attorneys, Divorce Assistance, Attorneys
Cohen Robert H
101 W Broadway #1150
San Diego, CA 92101
(619) 231-9842
Attorneys,  Business Law Attorneys,  Real Estate Attorneys,  Wills, Trusts & Estate Planning Attorn
Steve Winker Divorce Document Preparation Service
1551 3rd Ave
San Diego, CA 92101
(619) 544-9828
Paralegals,  Legal Forms,  Legal Document Assistance,  Divorce Assistance,  Attorneys Referral & Inf
12Law.com   |  NASHVILLE, TN USA   |  CONTACT US