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Frequently Asked Tax Questions And Answers
Keyword: Partnership
9.1 Estimated Tax: Businesses
How do partnerships file and pay quarterly estimated tax payments.
Partnerships file Form 1065 (PDF), U.S. Partnership
Return of Income, to report income and expenses. The partnership passes the information
to the individual partners on Schedule K-1, Form 1065. The partners report the information
and pay any taxes due on Form 1040. Because partners are not employees of the partnership,
no withholding is taken out of their distributions to pay the income and self-employment
taxes on their Forms 1040. The partners may need to pay Estimated Tax Payments using
Form 1040-ES.
Refer to
Instructions for Form 1065, U.S. Partnership Return
of Income and Publication 505, Tax Withholding and Estimated Tax for
additional information.
References:
12.1 Small Business/Self-Employed/Other Business : Entities: Sole Proprietor, Partnership, Limited Liability Company/Partnership (LLC/LLP), Corporation, Subchapter S Corporation
Can a husband and wife run a business as a sole proprietor or do
they need to be a partnership?
It is possible for either the husband or the wife to be the owner of the
sole proprietor business. The other person could work in the business as an
employee. If the spouses intend to carry on the business together and share
in the profits and losses, then they have formed a partnership. See Rev. Proc.
2002-69 for Special Rules for Spouses in Community States.
References:
Are partners considered employees of a partnership or are they self-employed?
Partners are considered to be self-employed. If you are a member of a partnership
that carries on a trade or business, your distributive share of its income
or loss from that trade or business is net earnings from self-employment.
Limited partners are subject to self-employment tax only on guaranteed payments,
such as salary and professional fees for services rendered.
References:
As a Domestic LLC (limited liability company), what forms do I use
to file a return?
The form you use will depend on what kind of entity your business is for
Federal tax purposes. Following are some general guidelines and the forms
which go with each entity:
If your business has only one owner, it will automatically be considered
to be a sole proprietorship (referred to as an entity to be disregarded as
separate from its owner) unless an election is made to be treated as a corporation.
A sole proprietorship files Form 1040 (PDF), U.S.
Individual Income Tax Return and will include Form 1040, Schedule C (PDF), Profit or Loss from Business, or Form 1040, Schedule C-EZ (PDF) and Form 1040, Schedule SE (PDF) , if net income $400.00. If an election is made to
be treated as a corporation, Form 1120 (PDF), U.S.
Corporation Income Tax Return, is filed.
If your business has two or more owners, it will automatically be considered
to be a partnership unless an election is made to be treated as a corporation.
A partnership files Form 1065 (PDF), U.S.
Partnership Return of Income. If an election is made to be treated as
a corporation, Form 1120 (PDF), U.S. Corporation
Income Tax Return, is filed.
The election referred to is made by filing Form 8832 (PDF), Entity Classification Election.
References:
For IRS purposes, how do I classify a limited liability company?
Is it a sole proprietorship, partnership or a corporation?
A limited liability company (LLC) is an entity formed under state law by
filing articles of organization as an LLC. Unlike a partnership, none of the
members of an LLC are personally liable for its debts. An LLC may be classified
for Federal income tax purposes as a sole proprietorship (referred to as an
entity to be disregarded as separate from its owner), partnership or a corporation.
If the LLC has only one owner, it will automatically be considered to be a
sole proprietorship (referred to as an entity to be disregarded as separate
from its owner), unless an election is made to be treated as a corporation.
If the LLC has two or more owners, it will automatically be considered to
be a partnership unless an election is made to be treated as a corporation.
If the LLC does not elect its classification, a default classification of
partnership (multi-member LLC) or sole proprietorship (single member LLC)
will apply. The election referred to is made using the Form 8832 (PDF), Entity Classification ElectionIf a taxpayer does not
file Form 8832 (PDF) , a default classification
will apply.
References:
Must a partnership or corporation file a tax form even though it
had no income for the year?
A domestic partnership must file an income tax form unless it neither receives
gross income nor pays or incurs any amount treated as a deduction or credit
for federal tax purposes.
A domestic corporation must file an income tax form whether it has taxable
income or not.
References:
12.5 Small Business/Self-Employed/Other Business : Form SS–4 & Employer Identification Number (EIN)
Is an employer identification number (EIN) required if the husband
and wife are the only persons working in the business?
If both of you carry on a business together and share in the profits and
losses, you are a partnership and each would receive a Form 1065, Schedule K-1 (PDF) that is important for determining your self-employment
income. If you work for your spouse, you should receive a Form W-2, showing
taxes withheld and the owner spouse would claim the wages paid to you as a
deduction. Both a partnership and a sole proprietor with an employee must
have an EIN.
References:
12.9 Small Business/Self-Employed/Other Business : Starting or Ending a Business
Which form do I use to file my business income tax return?
To determine which form you should file for your business entity, select
one of the following links:
. Publication 541, Partnerships
. Publication 542, Corporations
. Publication 3402 (PDF), Tax Issues
for LLCs
. Publication 334, Tax Guide for Small Business
. Entities: Sole Proprietor, Partnership, Limited Liability Company/Partnership
(LLC/LLP), Corporation, Subchapter S Corporation
References:
I need help with Form K-1. How do I report this on my income return.
If you are a partner in a partnership and have received a 1065 K-1, Please
see
Instructions for Form 1065, Schedule K-1 for help
in preparing your form.
If you are a shareholder in an S-Corporation and have received a 1120S
K-1, please see
Instructions for Form 1120S, Schedule K-1 for
help in preparing your form.
References:
- Publication 542, Partnership
- Publication 3402 (PDF), Tax
Issues For LLCs
- Publication 334, Tax Guide for Small Business
- Entities: Sole Proprietor, Partnership Limited Liability
Company/Partnership (LLC/LLP), Corporation, Subchapter S-Corporation
What deductions can I take on my partnership or S Corporation return
In general, ordinary and necessary business expenses are deductible on
business return. However, there are some items that partnership and S Corporation
do not deduct at the business entity level but rather at the partner or shareholder
level. These are referred to as separately stated items. For a more complete
explanation of business in general, see Publication 535 , Business
Expenses Publication 541, Partnerships, and
Instructions for Form 1120S.
References:
I am waiting for K-1s to file my return. What is due date for sending
a K-1 to the partners/shareholders?
The due date for a K-1 is the same as the due date of a Partnership or
S Corporation return that created the K-1. For example, if you are a partner
in a partnership and the partnership return has a due date of April 15, 2004,
then the due date for the K-1 is also April 15, 2004. You may wish to file
an extension if you do not believe you will receive your K-1 in time to adequately
prepare your return.
References:
Where is a loss reported on my return and how much can I deduct?
The place where your loss is reported depends on how much is deductible,
the type of loss, and the type of return you are filing. If your business
deductions are more than your business income for the year, you may have a Net Operating Loss (NOL). You can use an NOL by deducting
it from your income in another year or years. Partnerships and S Corporations
generally cannot use an NOL. But partners or shareholders can use their separate
shares of the partnership's of S Corporation's business deductions to their
individual NOLs. For additional help, see Publication 541, Partnership, Publication 542, Corporation, Publication 925, Passive
Activities and At-Risk Rules, and Publication 536, Net
Operating Losses (NOLs) for individuals, Estates, and Trusts.
If you have a Capital Loss, it is generally from
the sale or loss of investment property, a business, or a capital asset used
in a business. Publication 544, on Sales and Other Disposition
of Assets, will provide additional information on this subject.
Special Situations
S Corporations
In general, if an S corporation purchases a C Corporation at the end of
the year and the C Corporation has a loss, the S Corporation does not get
to claim the C Corporation loss. A C Corporation is a taxable entity in itself
and gains and losses do not flow through to the shareholders.
S Corporation shareholder who hold stock at any time during the year may
claim their proportionate share of corporate losses on their individual tax
returns subject to certain limits. For more information about the limitations,
see the instruction for
Instructions for Form 1120S, Schedule K-1.
Partnerships
In general, a partner loss is allocated base on his/her percentage of ownership
of the year. This percentage is referred to as the partner's distributive
share. The partners' distributive share of items is reported to the partner
on Schedule K-1 (Form 1065). A partner's distributive share of partnership
loss is allowed only to the extent of the adjusted basis of the partner's
partnership interest. A loss that is more than the partner's adjusted basis
is not deductible. For additional deductibility of partnership losses, see Publication 541, Partnership, and Publication 925, Passive
Activities and At-Risk Rules
References:
How do I terminate a Partnership?
A partnership terminates when one of the following events takes place.
1. All operations are discontinued and no part of any business, financial
operation, or venture is continued by any of its partners in a partnership,
or
2. At least 50% of the total interest in the partnership capital and profits
is sold or exchanged within a 12-month period, including a sale or exchange
to another partner.
Regardless of the method of termination, the final Form 1065 (PDF) , U.S. Return of Partnership Income of a partnership
and the corresponding Form 1065, Schedule K-1 (PDF) should
be marked as "Final Return". This notifies the IRS that the partnership has
been terminated. See Treasury Regulation 1.708-1 (b) for additional information
on the termination of a partnership.
The partnership's tax year ends on the date of termination. If a partnership
is terminated before the end of the tax year, Form 1065 must be filed for
the short period, which is the period from the beginning of the tax year through
the date of termination. Publication 541 Partnership, for
additional information.
References:
What type of entity am I?
If you an unincorporated business by yourself, you are considered a sole
proprietor. However, if you are the sole member of a domestic limited liability
company (LLC), you are not a sole proprietor if you elect by filing Form 8832 (PDF) , Entity Classification Election, to
treat the LLC as a corporation.
An husband or wife may be sole proprietor with the spouse an employee.
An unincorporated organization with two or more members is generally classified
as a partnership for federal tax purposes if it members carry on a trade,
business, financial operation or venture and divide its profits.
If a husband and wife jointly own and operate a business and share in the
profits and losses, they are partners in a partnership.
The following businesses are taxed as corporations:
A business formed under a federal or state law that refers to it as a
corporation, body corporate, or body politic.
A business formed under a state law that refers to it as a joint-stock
company or joint-stock Company.
Insurance Company
Certain banks
A business wholly owned by a state or local government.
A business specifically required to be taxed as a corporation by the
Internal Revenue Code (for example, certain publicly traded partnerships).
Certain foreign business
Any other business that elects to be taxed as a corporation by filing
Form 8332.
References:
- Publication 541, Partnerships
- Publication 542, Corporations
- Publication 3402 (PDF), Tax
Issues For LLCs
- Publication 334, Tax Guide for Small Business
- Entities: Sole Proprietor, Partnership, Limited Liability
Company/Partnership (LLC/LLP), Corporation, Subchapter S Corporation Form 8332 (PDF) , Release for Claimed to Exemption for
Child or Divorced or Separated Parents
What is the due date for business returns?
Some forms and entities have due dates other than the well-known April
15th due date. The instructions for the each type of form used will have the
appropriate due date(s) noted. In general, sole proprietor's schedule of income
and expenses is attached to the 1040. Therefore, the due date is the same
as the 1040.
A Corporation must generally use the calendar year, unless the entity can
establish a business purpose for having a different tax year. The due date
is usually March 15th.
A partnership generally must conform its tax year of the partners unless
the partnership can establish a business purpose for having a different tax
year. The tax year is the same as one or more partners that own (in total)
more than a 50-percent interest in partnership profits and capital. If there
is no majority interest tax year, the partnership must adopt the same tax
year as that of its principal capital holder. Where neither condition is met,
a partnership must use the calendar year. A limited Liability Company reporting
as a partnership has the same tax year as a majority of its partners.
References:
- Publication 541, Partnerships
- Publication 542, Corporation
- Publication 334, Tax Guide for Small Business
- Entities: Sole Proprietor, Partnership, Limited Liability
Company/Partnership (LLC/LLP), Corporation, Subchapter S Corporation
How is the withdrawal of a partner handled?
Unfortunately, the answer to this question has many variables. Publication 541, Partnerships "Disposition of Partner's Interest"
on Partnerships should provide the information needed.
References:
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