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Written by : Gertrudis Anderl
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in this video I'm gonna break down partnership taxation basics and basis which is a common concept for partnerships so I'll be explaining how a partnership is taxed and how to keep partnership accounting records because that's what gives you the information you need for taxes and all of this will lead us right into what the multi-member LLC or partnership business needs to keep track of itself and what individual partner members need to keep track of on their own because the business won't be doing it for them if you've been confused by what you find online I don't blame you there's a lot of technical textbook type examples which tend to be disconnected from reality I'll be showing you my partnership worksheet calculation in Excel which compares the three types of member partner basis calculations which I'll be explaining more momentarily and we'll be looking at my multi-member LLC business spreadsheet template now like many things taxes the partnership taxation is quite complex but I'll be explaining the differences between inside and outside basis capital account tax basis so if you've been hearing these terms when you're trying to figure out your partnership taxation I'll be clarifying the differences in this video now I do have other videos that will go through the individual calculations the differences and paying yourself and you'll find the links to those in the description below however I highly recommend watching this video first my name is Amanda you're watching the business finance coach on YouTube where I simplify business to help small business owners succeed I'm the creator of the small business MBA which is an online program that helps business owners step-by-step to set up their LLC their business accounting taxes and legality all in one online II course I give away a free version of the spreadsheet template that's in that course called the free business spreadsheet template if you need help with accounting quarterly taxes and end-of-year taxes all covered in there so there's links in the description below to everything I just mentioned for now let's get back to partnership taxation first let's just go over who exactly partnership taxation is for we have legal business types of multi-member LLC s meaning there's two or more members and partnership businesses now both of these types of businesses default to be taxed as a partnership now if they qualify they can elect to be taxed as a corporation and then text as an escort and an S Corp combines aspects of the corporation and a partnership and it's really a common tax type so how is a partnership text a partnership is called a flow-through entity because the activity from the business flows through to the partners and so the business itself pays no taxes and this happens on form 1065 which is the businesses tax form the business form reports all of the businesses activity income expenses other income other deductions and that all of these amounts flow through on to schedule K ones and there's a schedule k-1 for each partner attached to the form 1065 so all of the activity is reported to the partners based on their ownership percentage each business has a hundred percent ownership share which it can allocate between its owners so all of the amounts on the schedule K ones need to add up to the amount on the 1065 just like all of the partners ownership percentages need to add up to a hundred percent for the business then each partner reports their schedule k-1 on their personal form 1040 for their taxes that means that the business must file before the partner can file their own personal tax form they report the schedule k-1 just like they would a w-2 or a 1099 however that's where things get more complicated because unlike a 1099 which has one number the schedule k-1 will have often many different numbers because it's related to the business activity when that business activity flows through to the K ones it retains its character that's a tax phrase which means if the income was interest income for the business its interest income for the partner on their personal return if the income was rental income then it's rental income on the partners return so let's flip over to form 1065 and schedule k-1 and I'll show you what this looks like form 1065 u.s. return of partnership income so this page one reports what the business actually does so this is going to be the ordinary business net income or loss the income is reported on top and the expenses reported on the bottom that gets us down to this ordinary income or loss line 22 now you'll notice this income doesn't include things like investments dividends or interest sales of things this is only for what the business is in the business of doing that's why there's costs of goods sold gross profit ordinary income or loss now down here are the expenses we have salaries and wages first and that refers to w-2 employees but that does not include any payments to the partners because partners which could be members in an LLC are never taxed as w-2 employees now if they're receiving a regular payments that like a salary that's under guaranteed payments to partners which is a deduction for ordinary business income however I don't want you feeling like that's a deduction in a better way to do things because at the end of the day it doesn't actually make a difference and I'll go into more detail in that in my video about paying yourself in a partnership many expenses will just go under other deductions with an attached statement if they don't fit into any of the other categories so that gets us to ordinary business income or law and a lot of people see this tax section at the bottom and get confused these are not taxes that are often applicable to partnerships so that's the main business activity now page 2 and page 3 are just based on informational questions page 4 is schedule K and this is where everything is divided out and it's from schedule K that all of the information flows to the K ones so we can see that final net income or loss from page 1 line 22 it's reported first but then we have two other main types of income net rental real estate income or loss or other gross rental income or loss so if you have amounts in more than one of box 1 2 or 3 then you should have additional statements attached to your partnership tax return that explain how the any activity listed below is related to these different activities essentially it would have made more sense for them to just require a separate schedule K to be used for each activity box 1 2 & 3 these are the three main activities for partnership net income or loss then we have these called separately stated items we can see there's interest income dividends capital gains sale of business assets that's section 1231 property section 179 deduction is a special type of depreciation contributions means charitable contributions so the business doesn't take it instead it goes to your own personal return to see if that partner will qualify for those charitable contributions are not investment interest expense that was a schedule a deduction net earnings are lost from self-employment and t
Thanks for your comment Salvatore Tecuanhuey, have a nice day.
- Gertrudis Anderl, Staff Member
hi mark Kohler here with another two-minute tax and legal tip I want to talk about the legal structure for a partnership now this is really really important because there's a lot of options and a lot of people screw this up by just doing a handshake or some sort of deal via email and so I want to give you two or three ideas and the best way to structure your partnership first let's talk about the basic joint venture agreement now this can be a little dangerous because it would be considered a general partnership and both parties could be personally liable for an any action of the other that's usually not the best structure for asset protection but at least it gets the deal started in it and bare minimum I want you have a quality joint venture agreement sometimes loosely you can call it a partnership agreement a lot of people Claud a JV agreement where you could have two people with this JV agreement agree to do a project together and what's cool in fact one of the parties could be an entity like an S corp and the other one could be a person the other one could be an LLC it could be to market something on the web it could be something to do with real estate but it's called a joint venture agreement typically two to three pages and it memorializes the agreement between the parties folks please do not do your partnerships on a handshake start at least with a joint venture agreement number two and you knew I was going to say it it's the limited liability company the LLC this is a phenomenal structure because it's so flexible and easy to allocate partnership profits voting rights all that good stuff we love the LLC for this but an LLC beacon can be used in two different places so the second tip here is using an LLC to hold property an LLC where you might hold real estate or an apartment complex or a development of some sort this is an LLC used for holding assets now this is a very unique LLC in the sense it's like a holding company and typically you might have an individual's trust as an owner or another LLC that's kind of a parent company for multiple LLC's and Holdings this LLC should be set up in the state where you're doing business watch some other videos on that issue but this is a holding company LLC and perfect when you're holding assets have a good quality operating agreement and checkbook for that type of relationship with a partner now number three I want to talk about an operational partnership so you're running a business think of this as the building now here is the restaurant this could be the development this is the rental so you've got all these different operational aspects of selling a product or a service and typically again we're gonna lean on an LLC now that's not in every state but generally that's where you're going to start but we don't want to pay self-employment tax on this ordinary income we're producing in these operations and so we need to involve a S corporation and this is where the individual owners of an LLC might be their own S corp where they can do all sorts of their own individual tax planning save on self-employment tax but have an operational partnership in a form of an LLC separate from an LLC that's a holding LLC love this these are three options that can help you structure your partnership to stay out of hot water and get better tax planning watch them my other videos on these topics to continue education on ways to better live your American Dream thanks for listening and I hope that information was helpful and let me speak from the heart here I've been talking about topics like this for 10-15 years I'm a CPA attorney best-selling author radio show host and I am passionate about helping small business owners save taxes build wealth and protect it please check out the link right here download my free ebook on 10 common mistakes small business owners make in the tax and legal arena also check out my social media links here I've got daily tips a weekly blog radio show every week this information is free and I'd love to help you click below find out more about me and thanks for listening
Thanks Sherita your participation is very much appreciated
- Gertrudis Anderl
About the author
I've studied sociology of space at John Jay College of Criminal Justice in New York City and I am an expert in historical sociology. I usually feel bittersweet. My previous job was athletes' business manager I held this position for 25 years, I love talking about bell ringing and caving. Huge fan of Bruce Jenner I practice tennis and collect sneakers.
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