I Just Formed a Partnership. What Does it Mean for Taxes?

Most of us have entrepreneurial thoughts at some point in our lives. Some of us even act on those thoughts and pursue our dreams. While doing so, there’s plenty to think about, depending on the type of business, like inventory, customers, and business processes. 

Most of those starting out don’t think of other implications, like taxes, until they become relevant. And the relevance of taxes to a small business comes into play generally sometime between December 31st and April 15th.

Jonathan writes in, “Hey Mike, my brother and I just started a business together in May of last year. Do we just report our income on our own separate returns and take the expenses that each of us paid for or how does that work? Any insight would be incredibly helpful. Thanks!”

Great question, Jonathan, and truly, congratulations on going after your business idea. 

Unfortunately, things will likely only get more complicated from here because any time there is more than one person involved in ownership of a business, filing only your personal income tax return to report the income is generally not an option.

Since this is your brother, and if this venture was started together with the idea of sharing ownership in a business for each other’s skills and not just a way to split expenses, then you will need to file a Form 1065 U.S. Return of Partnership Income

The reason you have to do this is, well you guessed it, you’re in a partnership! The way the income and expenses are split up depends on how the agreement between the two of you was thought up.

If the agreement is for 50/50 ownership, then you each get to claim half of the expenses and half of the income on your personal return.

But all of that information will flow from the Form 1065 to the K-1’s that will get reported on your personal returns. 

Now, you might be wondering why the other partner gets to claim half of the expenses if only one partner paid the expenses. The reason is simple: the partner that paid the expenses actually invested the money into the partnership first (which increased his/her basis in the business), and then the partnership itself incurred the expense.

Unfortunately, we won’t be able to go into all the intricacies of a partnership tax return in this single article, but for more in-depth questions about the taxation of partnerships, please feel free to ask in a comment below.

 


Thank you for reading. This information should not be used to constitute legal or tax advice. For more personalized discussion, please leave a comment below.

Author: Foxx Financial

We are focused on financial literacy and a want to help others grow assets, reduce and remove debt, or just understand financial concepts better. The site will be updated often so subscribe for more content.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s