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Distributed Income Amounts on Partnership Tax Return

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Newbie

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Hi,

I have a question regarding the amounts to be put on the partnership tax return form as far as the partner distribution is concerned. 
In this scenario; my partnership has made a profit of lets say 1000 for financial year, the drawings between my partner and myself are 400 each, the total distribution being 800, and the remaining 200 is sitting in the bank account.
It seems like I can only enter the distibution as the profit amount, i.e. 1000 rather than the 800 which was actually drawn out by the partners. I don't understand how this is so (unless I am mistaken but my software will only allow me to enter amounts adding up to the profit of the partnership). Then what happens with the personal tax returns if the partners only drew 400 each but the partnership return shows a distribution of 500 each?  I'm very confused. Any help is very much appreciated. 
Many thanks. 

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Most helpful response

Devotee

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The important thing to remember about partnerships are that they are a flow-through legal structure. That means that any profit/loss generated in each financial year "flows though" and is assessed at the partner level.

 

When you generate a profit of $1,000 in a partnership during the year, that amount is derived by the partners in that year - in your case $500 each.

 

The derivation of income for tax purposes is independent of how much you physically draw (or do not draw). Otherwise you would be deferring the payment tax by not drawing the amount - even though you already generated the profit and can use the profit as part of your partnership. The understanding is that you are entitled to the profit generated and it is your choice to not draw the amount.

 

In your alternative case, that is correct. If the partnership already has $50,000 in there then you can draw it back out without tax consequence. Think of it this way - if you put $50,000 into a partnership, nothing happens and then you take the $50,000 out - why should you pay any tax on that?

3 REPLIES 3
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Devotee

Replies 2

Partners of a partnership pay tax based on their share of the profit. The amounts physically drawn out of the partnership's bank account is irrelevant.

 

In this case, and assuming you have a 50% share, you are paying tax on $500

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Newbie

Replies 1

Thank you for your time and response. 

What is the reasoning/logic behind this? If the money hasn't actually been drawn for the partners how are they expected to pay tax on it? 

 

Can it then work the other way too, for example if the partnership has made a loss or zero profit, but the partners have drawn say $50000 for the year, then they don't have to pay tax on the $50,000 because the partnership distrubution is put down as zero on the tax return because partnership made no profit? (Sorry if I am not articulating this well). 

 

Again, thanks for your time. 

 

 

Highlighted

Most helpful response

Devotee

Replies 0

The important thing to remember about partnerships are that they are a flow-through legal structure. That means that any profit/loss generated in each financial year "flows though" and is assessed at the partner level.

 

When you generate a profit of $1,000 in a partnership during the year, that amount is derived by the partners in that year - in your case $500 each.

 

The derivation of income for tax purposes is independent of how much you physically draw (or do not draw). Otherwise you would be deferring the payment tax by not drawing the amount - even though you already generated the profit and can use the profit as part of your partnership. The understanding is that you are entitled to the profit generated and it is your choice to not draw the amount.

 

In your alternative case, that is correct. If the partnership already has $50,000 in there then you can draw it back out without tax consequence. Think of it this way - if you put $50,000 into a partnership, nothing happens and then you take the $50,000 out - why should you pay any tax on that?