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 Torrance, CA

Pros and Cons of Taxation as a Partnership in Torrance, 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 Torrance, CA
Mandel Bruce A
3812 Sepulveda Blvd # 400
Torrance, CA 90505
(310) 791-9949
Attorneys, Family Law Attorneys, Probate Law Attorneys, General Practice Attorneys, Legal Service Pl
Conover & Grebe
3424 W Carson St
Torrance, CA 90503
(310) 542-9888
Attorneys, General Practice Attorneys
Kirk J Retz APC
21535 Hawthorne Blvd Ste 200
Torrance, CA 90503
(310) 540-9800
General Practice Attorneys, Attorneys, Legal Service Plans
LEE HARWELL, JR.
3424 Carson Street, # 320
Torrance, CA 90503
(310) 542-9710
Attorneys,  Immigration Law Attorneys,  Contract Law Attorneys,  Personal Injury Law Attorneys,  Lit
Decision Quest
21535 Hawthorne Blvd # 310
Torrance, CA 90503
(310) 618-9600
Attorneys Support & Service Bureaus, Attorneys, General Practice Attorneys
Stearns Kim & Stearns An Association of Professional Law Corporations
3424 W Carson St Ste 670
Torrance, CA 90503
(310) 793-9570
Family Law Attorneys, Attorneys, Legal Service Plans
Earl M Hyman
1991 W 190th St Ste 100
Torrance, CA 90504
(310) 530-9555
Corporation & Partnership Law Attorneys, Attorneys, Legal Service Plans, Employee Benefits & Worker
Tamashiro Law Office
21515 Hawthorne Blvd # 650
Torrance, CA 90503
(310) 316-9400
Attorneys, Corporation & Partnership Law Attorneys, Business Law Attorneys, General Practice Attorne
Attorney Donahue Kevin D
3848 W Carson St
Torrance, CA 90503
(310) 316-9399
General Practice Attorneys, Attorneys
Mikelson Larry D
21515 Hawthorne Blvd # 840
Torrance, CA 90503
(310) 543-9379
General Practice Attorneys, Attorneys, Legal Service Plans
Csengeri Stephen
24445 Hawthorne Blvd # 200
Torrance, CA 90505
(310) 373-9330
General Practice Attorneys, Attorneys
Michael S. Braun
3820 Del Amo Blvd,Ste 201
Torrance, CA 90503
(424) 286-9296
Attorneys,  Accident & Property Damage Attorneys,  Personal Injury Law Attorneys,  Wrongful Death At
Total Attorneys - Criminal Defense
PO Box 273726
Torrance, CA 90508
(424) 228-9296
Criminal Law Attorneys, Attorneys, Legal Service Plans
Price Law Group
21250 Hawthorne Blvd Suite 500
Torrance, CA 90503
(818) 986-9266
Attorneys,  Attorneys Referral & Information Service,  Bankruptcy Services,  Bankruptcy Law Attorney
Total Attorneys - Bankruptcy
PO Box 271741
Torrance, CA 90508
(424) 228-9209
Bankruptcy Law Attorneys,  Attorneys,  Banking & Mortgage Law Attorneys,  Bankruptcy Services,  Lega
Advanced Legal Document Center
3655 Torrance Blvd
Torrance, CA 90503
(310) 944-9188
Divorce Assistance,  Bankruptcy Services,  Legal Document Assistance,  Paralegals,  Immigration & Na
Derrick W Smalls
22750 Hawthorne Blvd #209
Torrance, CA 90505
(310) 856-9108
Divorce Attorneys, Attorneys, Criminal Law Attorneys, Family Law Attorneys
Karla Law Firm
23720 Arlington Ave #5
Torrance, CA 90501
(310) 325-9012
Bankruptcy Law Attorneys, Immigration Law Attorneys
Rohn C. Barrow
3480 Torrance Blvd., Suite 212
Torrance, CA 90503
(310) 294-9012
Criminal Law Attorneys, Domestic Violence Attorneys, Drug Charges Attorneys, DUI & DWI Attorneys, Se
Chiang Max
3465 Torrance Blvd # M
Torrance, CA 90503
(310) 316-8989
General Practice Attorneys, Attorneys
Bruers Stuart E
2367 Torrance Blvd
Torrance, CA 90501
(310) 516-8963
Attorneys, Family Law Attorneys, General Practice Attorneys, Legal Service Plans
Moore Christopher
21515 Hawthorne Blvd # 490
Torrance, CA 90503
(310) 540-8855
Wills, Trusts & Estate Planning Attorneys, Attorneys, Family Law Attorneys, Legal Service Plans
Funada A T
3812 Sepulveda Blvd
Torrance, CA 90505
(310) 373-8633
Bankruptcy Law Attorneys, Attorneys, Bankruptcy Services
Law Offiices of Schuchman & Funada
3812 Sepulveda Blvd
Torrance, CA 90505
(310) 373-8633
Attorneys,  Bankruptcy Services,  Bankruptcy Law Attorneys,  Corporation & Partnership Law Attorneys
12Law.com   |  NASHVILLE, TN USA   |  CONTACT US