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Old 04-17-2007, 07:09 AM
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Partnership

Hey Guru

A little - late, but am hoping to get an answer in time.

I am in a partnership, where we both are sustained by it.

The business is run out of our apartment, so the business pays for the apartment.

Food and daily necessities - same thing.

We have not taken from the business - ie put money into our own bank account - so do we have to report an income on our taxes?

I am filing an extension - so I am hoping to be able to estimate properly.

Thanks in advance,
Weber



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Old 04-18-2007, 01:47 AM
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Dear Weber,

A partnership tax return generates a K-1 that represents a distributive share of income or losses that is attributable to each partner of the partnership. From the facts of your particular situation, it appears that there may be no profits and you may even have losses sustained from your operations. But, the fact that you have not taken money from the Partnership is irrelevant to whether or not you have profits or not, you could have made profits and not taken a distribution.

Again, you could have paid personal expenses from the partnership and have no money left in the account. These personal expenses would be characterised as a distribution, which could result a net profit for the partnership.

However, I noticed that you are claiming rent from the apartment! Did you receive a 1099-Misc for rents received? This is taxable to you or your partner!!! Also, food and necessities are not a deductible expense for your information, so exclude these amounts from your expenses and recompute your profit and loss statement and determine if you still sustained a loss.

I would include Rental income in your calculation for estimated income tax and make an estimated tax based on this income (your effective tax rate x total rent paid/received). Later on, you can have your CPA determine whether or not this rent should in fact be includable in your income. Therefore, file your extension making a payment to IRS based on the above along with other income that you may have.

The IRS could make a case that the Rent paid for your apartment looks more like a distribution rather than an expense. So, better to check with your CPA to determine if you are taking a deduction within the IRS guidelines.

If unclear at this time and your books are not prepared, I would suggest you file an extension for the partnership, and you generally pay no tax at the partnership level, so this should not cost you any money!

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Last edited by TaxGuru : 04-18-2007 at 01:51 AM.


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