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General Partnership is when two or more people run a business and split the profits or losses. Partners contribute money (or property) to form a partnership.

Each general partner is personally responsible for all of the debts and liabilities of the business, not just his or her proportionate share. Partnership tax rules apply even when two people go into business on a handshake and never sign a formal partnership agreement.

Tax Reporting

Partnerships are pass-through entities, which means that the owners not the business pay income taxes. An active business partnership must file a tax return each year, but does not pay federal taxes.

Partnerships should fill Form 1065, U.S Partnership Return of Income, this return needs to show venture's income and expenses. California taxes partnerships even though the IRS does not, minimum taxes in California for partnerships is $800.

At Kyrish C.P.A. Inc., Sunita Jagasia is a Certified Public Accountant with many years of experience filing partnership taxes. Partnership taxes are tricky and should always be professionally prepared.

A Partnerships profit or loss passes through to the individual partners. Each partner reports his or her share on his or her individual tax returns. All partners need to pay self-employment taxes and pay estimated income tax payments on their share of the partnership income.

Withdrawals of money or assets from a partnership are first treated as a (nontaxable) return of your investment. Only after you have recovered your entire investment (meaning that your basis in your partnership interest has been reduced to zero) are withdrawals taxable to you.

Partners Profit or Loss statements (K-1)

Partners are not employees of their business. They don't receive wages and the business does not pay payroll taxes on the partners' income. Partners can also take out profits through periodic draws or distribution. At the end of the tax year each partner get a K-1.

Partnerships issue an IRS schedule K-1 to each partner annually (with a copy to the IRS). Additionally IRS cross-checks the income of individual partners to make sure it gets reported on their personal tax returns.

Other partnership income such as dividends from stock, earned interest on its bank accounts, sale of assets etc are also reported in K-1.

Important tips for Partnerships

  • Keep meticulous records of all partnership contributions and distributions. This is vital for determining the tax consequences of taking money or property out of the partnership.

  • Partners who want to contribute services but can't make financial contributions could be profit-only partner. Profit-only clause should be present in the partnership agreement. Partnership tax losses can pass through only to real partners not the profits partner.

  • If the partnership keeps profits in the business at the end of the tax year, the partners are still taxed on that money. If your business needs to retain profits consider forming a C corporation.

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