The year 2020 was unlike any other, the effects of which are reflecting in the 2021 tax season. Many who experienced layoffs, furloughs, or opened their own business now face some challenges in tax preparation. Suppose you are one of those who have entered into a business partnership. In that case, you may need some assistance to navigate through this new territory. A Business Law attorney can guide you through the wilderness of this process and help you make the best strategic decisions for your new business.
If you have entered into a business agreement with one or more partners, developing a Partnership Agreement is crucial to its formation. Think of it as your roadmap. Your Partnership Agreement should set terms for the nature of your partnership, define contributions from each partner, and specify how profits and losses are allocated. If you have not drawn up a Partnership Agreement, consider consulting with a Business Law attorney to help you cover all the details.
Understand Tax Reporting for Partnerships
A Business Partnership must obtain a Tax ID number. This number is called an “employer identification number,” or EIN. Since partners aren’t considered employees, don’t expect to receive W-2 forms for them or for your business to report income. A partnership, as an entity, doesn’t pay tax on the income received by the business. Instead, that income “passes through” its profits or losses to the partners.
One partner is responsible for obtaining and completing IRS Form 1065. This form is a report of earnings or losses only; it is not a return to calculate what individuals may owe. Think of it as a template for gathering information from each of your partners. Subsequently, each member of your partnership must complete and return a Schedule K-1 form to report their individual share of income – gains or losses, deductions, and credits. Due to the financial details required for each partner to report, your Partnership Agreement is crucial in defining how each partner takes ownership and responsibility for your earnings and/or losses.
Lead Your Business Partners
The partner responsible for completing Form 1065 should distribute Schedule K-1 to all partners no later than March 15 so that they may include this in their annual personal returns. When you complete your Schedule K-1, it’s essential that you include:
- Your employer identification number (EIN)
- What type of partner you are
- Your share of profit (or losses) at the beginning and end of the tax year
- Your share of liabilities at the beginning and end of the tax year
Schedule K-1 also requires each partner’s input for distributions, deductions, credits, tax-exempt income, and nondeductible expenses.
Engage with a Business Attorney
Filing taxes for a new business, especially a partnership, can be a daunting journey. Consider engaging with a Business Lawyer to help you navigate tax preparation and find the best solutions for your partnership. The Boutty Law Firm, P.A. has the ability and experience to help your business succeed. Call The Boutty Law Firm, P.A. today at 407-622-1395 or contact us online to schedule your initial consultation.
IRS Tax Information for Partnerships
Partner’s Instructions for Schedule K-1
Form 1065: U.S. Return of Partnership Income
Partner’s Instructions for Form 1065: