by Ryan McInnis, CEO and founder of PicnicTax
A legal partnership is a common structure for people who go into business with another person. For new startups, organizing as a partnership can be a great way for multiple founders to be involved from the beginning. In a partnership, the partners share ownership of and responsibility for the financial well-being of the enterprise.
When you are planning to file your taxes as a partnership, it is important to get on the same page with your business partners and co-founders. Your tax filing will affect your personal returns, and you need all the details about business expenses and liabilities to properly complete your partnership tax documents.
Filing Taxes for a Partnership.
If your startup is organized as a partnership, the business itself will not pay corporate taxes to the IRS. Instead, the responsibility for paying taxes lies with the individual partners. The information for that tax liability, however, comes from the partnership’s information return, IRS Form 1065. It is similar to other business tax forms and collects information about the income and expenses of the startup throughout the year. The form includes:
- Income from the partnership: This can include the sales of goods. You may calculate the cost of goods sold here in addition to the partnership’s intake overall.
- Expenses for the startup: You can deduct business expenses from your partnership tax liabilities.
- Total reported income: Line 22 of Form 1065 is where you report the net income of your partnership, with deductions subtracted.
Schedule K-1 for Each Founder.
The partnership between founders will also issue each business partner a Schedule K-1, which lists the income of the startup and the share percentage that belongs to that specific partner. The partner will attach this document to his or her personal IRS Form 1040 or individual return for the tax year. The income from the startup or its losses will be calculated with other types of income as part of each partner’s tax return.
Your Schedule K-1 will contain personally identifying information, a report on the changes in your capital account in the partnership during the year, the share of the income and expenses that you are responsible for and any calculated changes in your share of the startup during the tax year.
Communicating With Your Co-Founder.
In most cases, a single partner cannot complete this tax process alone. Unless your partnership is large enough to have a full-time accountant on staff handling all income and receipts or there is only one active partner with the rest passive investors, multiple partners are typically involved in bringing in business and accumulating expenses.
You need a wide variety of information in order to properly calculate your partnership taxes for the year. Not only do you need to have your income statement or profit and loss statement showing the startup’s income for the year, but you need to be able to back up those documents with receipts. Your accountant will need your gross receipts, invoices and receipts for your business expenses during the year.
You’ll also need to document deductible business expenses, including maintenance costs, rent, local or state taxes, depreciation, employee benefits and other costs. It is important to communicate with all partners to gather all relevant business expenses. Without this information, each partner may wind up paying too much on his or her personal income tax return.
Miscommunication or a lack of communication may cost each person thousands of dollars. In addition, since the partnership basis must be recalculated each year, the contribution of each person to the company must be considered. Without getting the documents in advance and communicating with your co-founder, you may need to have your taxes corrected and completed again due to errors.
Reporting Partnership Income On Your Taxes.
In general, each partner will transfer the information from Schedule K-1 to Schedule E of Form 1040. This is the same area where you report your income or losses from an S Corporation. The schedule includes separate areas for active partners or passive partners, sometimes referred to as general or limited partners.
Passive partners are typically investors only, while active partners are involved in managing and directing the business. If your startup has an annual loss, a passive partner may be restricted in how much of the loss he or she can claim.
Partnership Tax Assistance With Online Accountants.
Completing partnership tax documents for your startup can be complicated. Because each partner’s individual tax liabilities are affected by these documents, it is critical that they be complete and accurate.
At Picnic Tax, we connect you to online accountants that can provide professional tax preparation services in complex situations, including partnership income and partnership tax returns. You don’t have to come in for an appointment, and you can upload all your documents online with just a click. With clear pricing in advance, you’ll be ready for everything to come. Contact us today to find out more about how our service can help to make sure your partnership taxes are under control.
Ryan McInnis founded PicnicTax to solve the pain of filing taxes. After working in investment banking, private equity, and other sects of the financial industry, he decided that there had to be a better way for people to do their taxes. Now, Ryan dedicates his time to doing exactly that – making taxes easier and more accessible to everyone.
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via https://www.AiUpNow.com/ by Contributor, Khareem Sudlow
