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Reporting profits from partnerships on tax returns

On Behalf of | Feb 3, 2015 | Income Taxes

Partnerships are unincorporated companies, so the IRS does not tax these businesses directly. Rather, the owners are required to report the profits they earn through the partnership on their personal income taxes because they are considered self-employed. New partnership owners in Georgia might not know all of the requirements involved.

Every partnership reports its profits and losses to the IRS via Form 1065 and sends each owner a Form K-1 that indicates their profits earned or lost. This notifies the involved parties of the taxes owed. Owners then use this form to fill in the appropriate figures on their personal income taxes. These figures should be included on Schedule SE.

Partnership owners are taxed based on their distributive shares, which is the profit percentage each owner is assigned. This percentage is determined in the partnership contract. Without an agreement, the amount will be divided evenly. The owners could decide that a fraction or all of the profits remain in the partnership. If no profits are allocated to the owners, neither the company nor its owners have to pay taxes on the profits.

Sometimes special allocations of profits are made that differ from the partnership contract or that are unequal. There must be a significant economic reason for this change, such as one owner taking an extended amount of time off work. If the reasoning is insufficient and the IRS believes the change occurred to reduce the tax burden of one owner, the owners may be required to pay according to their regular allocation.

With so many factors involved in the allocation of profits from a partnership, some owners might be unsure as to what qualifies as reason enough to make changes. These owners might consider talking to accountants or tax lawyers before doing something like this to avoid issues with the IRS later.