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Partnerships

Partnerships

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PartnershipsWhat You Need to Know About Partnerships

A partnership is the relationship existing between two or more persons who join together to carry on a trade or business. Each person contributes money, property, labor, or skill and expects to share in the profits and losses of the business.

A partnership must file an annual information return to report the income, deductions, gains, or losses from its operations, but it does not pay income tax. Instead, it passes through any profits or losses to its partners. Each partner includes his or her share of the partnership’s income or loss on his or her tax return.

Partners are not employees and should not be issued a Form W-2 (nor a Form 1099). The partnership must furnish copies of Schedule K-1 (Form 1065) to the partners by the date Form 1065 is required to be filed, including extensions.

A partnership or individual partner may find the following information helpful to determine some of the forms which may be required to be filed.

Partnership Forms

Annual Return of Income—Form 1065, U.S. Return of Partnership Income
Every partnership that engages in a trade or business, or has gross income, must file an information return on Form 1065 showing its income, deductions, and other required information.

A partnership is not considered to engage in a trade or business and is not required to file a Form 1065 for any tax year in

which it neither receives income nor pays or incurs any expenses treated as deductions or credits for federal income tax purposes. However, a partnership not currently engaged in a trade or business may want to file Form 1065, even though not technically required to do so, in order to avoid unnecessary correspondence from the IRS.

Employment Taxes
• Social Security and Medicare taxes and income tax withholding—Form 941, Employer’s Quarterly Federal Tax Return. Generally, each quarter, all employers who pay wages subject to income tax withholding or Social Security and Medicare taxes must file Form 941 by the last day of the month that follows the end of the quarter.
• Federal unemployment tax (FUTA)—Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return. Generally, the FUTA tax applies to the first $7,000 paid to each employee during a calendar year after subtracting any payments exempt from FUTA tax.
• Depositing employment taxes. Employers must deposit federal income tax withheld, plus both the employer and employee portion of Social Security and
Medicare taxes, plus or minus any prior period adjustments to tax liability. All taxpayers must use the Electronic Federal Tax Payment System (EFTPS) to
make federal tax deposits.
• State payroll tax requirements. The partnership should check with each state in which it conducts business or has employees to ensure the state requirements are met.

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Partnerships

Information Returns, Form 1099
The partnership may have to file information returns if, in the course of its trade or business, it makes payments of rents, commissions, or other fixed or determinable income totaling $600 or more to any one person during the calendar year. Generally, Form 1099-MISC, Miscellaneous Income, is used.

Excise Taxes/State Sales Taxes
Excise taxes are taxes paid when purchases are made on a specific good, such as gasoline. There are also excise taxes on activities, such as on wagering or on highway usage by trucks. Sales taxes are imposed by states on sales of particular merchandise or services. The partnership needs to be aware of when these taxes may need to be collected and/or remitted to the proper authorities.

Individual Forms

Income Tax—Form 1040, U.S. Individual Income Tax Return, and Schedule E, Supplemental Income and Loss
Schedule E is used by the partner to report income or loss from the partnership as provided to the partner on Schedule K-1. Losses from partnerships are limited to the partner’s basis. Other separately stated items from Schedule K-1 are reported on various forms and schedules of the partner’s Form 1040.
Unreimbursed business expenses paid by a partner are deductible if the expenses were required to be paid under the partnership agreement. Self

Employment Tax—Schedule SE (Form 1040),
Self-Employment Tax
A partner’s distributive share of partnership income is included in figuring his or her net earnings from self-employment.

Estimated Tax—Form 1040ES, Estimated Tax for Individuals
Estimated tax is the method used to pay tax on income that is not subject to withholding, such as partnership income.

General and Limited Partners

• General partner. A general partner is a partner who is personally liable for partnership debts. A general partner is subject to SE tax on guaranteed payments and on the distributive share of partnership income.
• Limited partner. A limited partner is liable only for the amount of money or other property that the partner contributed, or is required to contribute, to the partnership. A limited partner is subject to SE tax on guaranteed payments but is not subject to SE tax on the distributive share of income.
• LLC members. An LLC with more than one owner is treated as a partnership by default, unless the LLC elects to be taxed as a corporation. Members of an LLC are subject to SE tax on guaranteed payments, but uncertainty exists as to whether and when LLC members are subject to SE tax on the distributive share of income. For more information, ask your tax preparer for the handout titled Limited Liability Companies (LLCs).

 

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Limited Liability Companies (LLCs)

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Limited Liability Companies (LLCs)

Limited Liability Companies (LLCs)

What is a Limited Liability Company?
A limited liability company (LLC) is a business entity organized in the United States under state law. Unlike a partnership, all of the members of an LLC have limited personal liability for its debts. Depending on elections made and the number of owners, an LLC may be classified for federal income tax purposes as a partnership, corporation, or an entity disregarded as separate from its owner.
This information applies to LLCs in general, and different rules may apply to special situations, including banks, insurance companies, or nonprofit organizations that are LLCs. Check your state’s requirements.

Forming an LLC
Choose a business name. Your business name must be different from any existing LLC in your state, it must indicate that it is an LLC, and must not include words restricted by your state.

File the Articles of Organization. The articles of organization is a document that is filed with your Secretary of State that makes your LLC a legal entity and includes information such as your business name, address, names of members, and your resident agent. There is usually a filing fee.

Create an Operating Agreement. Most states do not require operating agreements, but they are highly recommended, especially for multi-member LLCs. The operating agreement structures your LLC’s finances and organization, and provides rules and regulations for its operation. Sometimes tax treatment can be dictated by a written operating agreement. Default tax rules of multimember LLCs will split income and expenses evenly, unless otherwise noted in an operating agreement.

Hold and document annual member meetings. If the operating agreement requires an annual meeting, these meetings must be held and documented. Failure to adhere to provisions in the operating agreement and other formalities could result in loss of liability protection for your LLC.

Apply for an EIN. An employer identification number (EIN) is a nine-digit number assigned by the IRS used to identify the tax accounts of employers and certain others who have no employees. If you will hire employees or have an LLC with multiple members, you need to apply for an EIN. See IRS Form SS-4, Application for Employer Identification Number, or apply online at www.irs.gov.

Limited Liability Companies (LLCs)

Classification of an LLC
Default classification rules. An LLC with at least two members is classified as a partnership for federal income tax purposes. An LLC with only one member is treated as an entity disregarded as separate from its owner for income tax purposes (but as a separate entity for purposes of employment tax and certain excise taxes). See Single Member LLCs—Disregarded Entities, below.
Elected classification. If an LLC does not choose to be classified under the above default classifications, it can elect to be classified as an association taxable as a corporation or as an S corporation. After an LLC has determined its federal tax classification, it can later elect to change that classification. See IRS Form 8832, Entity Classification Election.

LLCs Classified as Partnerships
Ifan LLC has at least two members and is classified as a partnership, it generally is subject to the same filing and reporting requirements as partnerships. For certain purposes, members of an LLC are treated as limited partners in a limited partnership. For example, LLC members are treated as limited partners for purposes of material participation under the passive activity limitation rules.

Change in default classification. If the number of members in an LLC classified as a partnership is reduced to only one member, it becomes an entity disregarded as separate from its owner. However, if the LLC has made an election to be classified as a corporation and that elective classification is in effect at the time of the change in membership, the default classification as a disregarded entity will not apply. Other tax consequences of a change in membership, such as recognition of gain or loss, are determined by the transactions through which an interest in the LLC is acquired or disposed of.

Single Member LLCs—Disregarded Entities
If an LLC has only one member and is classified as an entity disregarded as separate from its owner, its income, deductions, gains, losses, and credits are reported on the owner’s income tax return. For example, if the owner of the LLC is an individual, the LLC’s income and expenses would be reported on the following schedules filed with the owner’s Form 1040.

• Schedule C, Profit or Loss from Business (Sole Proprietorship),
• Schedule E, Supplemental Income and Loss, or
• Schedule F, Profit or Loss From Farming.

Employment tax and certain excise taxes. If the LLC pays wages to employees, employment taxes must be reported and paid in the name and EIN of the LLC rather than in the name and EIN of the single member owner. The single-member LLC is also required to use the LLC’s name and EIN to register for certain excise taxes.

Self-employment tax. An individual owner of an LLC treated as a disregarded entity is not an employee of the LLC. The owner is subject to self employment tax on the net earnings in the same manner as a sole proprietorship.

Taxpayer identification number. For all income tax purposes, a single-member LLC classified as a disregarded entity must use the owner’s Social Security Number (SSN) or EIN. This includes all information returns and reporting related to income tax.

LLCs Classified as Corporations
An LLC with either a single member or more than one member can elect to be classified as a corporation rather than be classified as a partnership or disregarded entity under the default rules. An LLC classified as a corporation is subject to the same filing and reporting requirements as a corporation. The
entity may elect to be treated as an S corporation if it otherwise qualifies.

C corporation. If the entity is treated as a C corporation, it is taxed on its taxable income and distributions to members are includible in each member’s gross income to the extent of the corporation’s earnings and profits (double taxation).

S corporation. If the entity elects to be an S corporation, the corporation is generally not subject to an income tax. The income, deductions, gains, losses, and credits of the corporation pass through to the members.

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Copyright © 2019 Tax Materials, Inc.
All Rights Reserved