Partnerships - 2021 | Best Guide - CPA Clinics
A partnership is the relationship existing between two or more persons who join together to carry on a trade or business. Each person contributes money, property, labor, or skill and expects to share in the profits and losses of the business.
A partnership must file an annual information return to report the income, deductions, gains, or losses from its operations, but it does not pay income tax. Instead, it passes through any profits or losses to its partners. Each partner includes his or her share of the partnership’s income or loss on his or her tax return.
Partners are not employees and should not be issued a Form W-2 (nor a Form 1099). The partnership must furnish copies of Schedule K-1 (Form 1065) to the partners by the date Form 1065 is required to be filed, including extensions.
A partnership or individual partner may find the following information helpful to determine some of the forms which may be required to be filed.
Every partnership that engages in a trade or business, or has gross income, must file an information return on Form 1065 showing its income, deductions, and other required information.
A partnership is not considered to engage in a trade or business and is not required to file a Form 1065 for any tax year in which it neither receives income nor pays or incurs any expenses treated as deductions or credits for federal income tax purposes. However, a partnership not currently engaged in a trade or business may want to file Form 1065, even though not technically required to do so, in order to avoid unnecessary correspondence from the IRS.
The partnership may have to file information returns if, in the course of its trade or business, it makes payments of rents, commissions, or other fixed or determinable income totaling $600 or more to any one person during the calendar year. Generally, Form 1099-MISC, Miscellaneous Income, or Form 1099-NEC, Non employee Compensation, is used.
Excise taxes are taxes paid when purchases are made on a specific good, such as gasoline. There are also excise taxes on activities, such as on wagering or on highway usage by trucks. Sales taxes are imposed by states on sales of particular merchandise or services. The partnership needs to be aware of when these taxes may need to be collected and/or remitted to the proper authorities.
Schedule E (Form 1040) is used by the partner to report income or loss from the partnership as provided to the partner on Schedule K-1. Losses from partnerships are limited to the partner’s basis. Other separately stated items from Schedule K-1 are reported on various forms and schedules of the partner’s Form 1040.
Unreimbursed business expenses paid by a partner are deductible if the expenses were required to be paid under the partnership agreement.
A partner’s distributive share of partnership income is included in calculating his or her net earnings from self-employment.
Estimated tax is the method used to pay tax on income that is not subject to withholding, such as partnership income.
