Posted on: 25 November 2020
Are you forming a partnership with others to start a business? A partnership offers a great opportunity to be your own boss while still sharing the load with others who bring their own talents to the table. But your income tax reporting obligations will change, and much more of the burden will be on you as an individual and your business. What can you expect regarding how and when to report your income for taxation and how your partnership will affect your personal taxes? Here's a short guide.
How Do Partnerships Report Income?
Reporting income from your business begins with the business itself. The partnership must complete its income tax returns using Form 1065 (Return of Partnership Income). Form 1065 is due during the third month after the close of the partnership's tax year in order to give time for partners to use the results in filing their own tax returns.
Form 1065 outlines the business's financial picture, including profit, loss, deductions, and tax credits. It is used to generate Schedule K-1 for each partner. These forms are the breakdowns of what portion of each of these financial elements of the business are assigned to each partner. Schedule K-1 must be given to each relevant partner by the due date.
What Do You Do With Schedule K-1?
Once you have Schedule K-1 listing your portion of partnership income, your accountant will use this information to complete your Form 1040 declaring your personal income.
Along with your portion of any profit or loss, Schedule K-1 also identifies items that the partner may be able to use on their income taxes to lower their rate or that they may be obligated to list in addition. These include what are known as "separately stated items" and may include nontaxable income, Section 1231 gains or losses, charitable contributions, or depreciation deductions.
What Makes Partnership Income Complex?
There are two main challenges when preparing partnership tax forms. The first is that the partnership must be ready to complete its tax obligations on time and distribute the necessary schedules.
Once this is done, you must also understand how and where to use all the individual items listed on Schedule K-1. This generally requires professional assistance, even if you're used to being able to complete your own returns as a wage earner.
Want to know more about your particular partnership income obligations? Start by meeting with a professional who provides tax service in your state today.Share