Partner-partnership, partner-partner, and partner-external party transactions have their unique tax implications. Partner-partnership transactions are whereby the partner is treated as a member of the partnership. In other words, this is a general partnership case. The partners are completely accountable to the partnership’s liabilities and taxation requirements. General partners are required to pay self-employment tax for their share of the partnership’s profits. The higher the share of profits, then the higher the tax liability.
Partner-partner transactions are almost the same as partner-partnership transactions. All partners who receive part of the partnership income are required to pay their estimated income taxes on a quarterly basis. Similarly, the tax liability increases with increase with an increase in the income. In the case of partner-external party transactions, these are treated as limited partners. As such, their liability to taxation is limited by their contribution to the partnership (Spaulding, 2017).
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Schedule K-1 is an informational form that is sent by partnerships and S-Corporations to each partner and the IRS. The form shows each partner’s share of deductions, income or loss, credits, and any other items allocated from the partnership. The basic partnership agreement discussed is quite complex when it comes to allocating income and the terms involving the distribution of funds on overall. There are many issues that pose a challenge in the distribution of income in the partnership.
These issues have to do with the risks that come with a partnership. For instance, a partner could still be having a deficit in his contributions to the partnership, yet still liable to earning income. In such cases, the process of calculating how much income the partner should receive is complicated. Also, some partners may opt out of the partnership before four months are over, which is the minimum period before the partners can start receiving their quarterly provisions. These are issues that make the process of allocating income in a basic partnership agreement difficult.
Reference
Spaulding, W. (2017). Taxation of Partnerships . Thismatter.com . Retrieved 8 March 2017, from http://thismatter.com/money/tax/partnerships.htm
