Every year we encounter a range of new tax rules. Certain of these tax rules are set to impact partnerships/LLCs. Anyone involved in an organization like this should become aware of the new tax rules which affect them and react accordingly.
How Partnerships are Taxed
The IRS does not believe that the partnership is an alternative to individual personal income. It’s not a separate entity. The people involved in the partnership must take into account the profits from the partnership, as well as other streams of income when it comes to tax.
You should file based on this. It’s easy to make the mistake of trying to separate the two.
Profits are taxed whether you receive them or not. You can decline to take the profit and leave it in your business account, but you still have to pay tax on it. Every person must pay income taxes on what’s known as a distributive share. You get this profit as a partner or stakeholder in the business.
The IRS assumes you receive your share of the profits each year, even if you don’t. If they didn’t do this, people would simply hoard their profits in the company until they had a bad year. That way they could get out of paying the correct amount of tax.
New tax rules have changed little about filing taxes when you are part of an organization like this. If you are struggling to adjust to the new rules, get in touch with a tax professional today. They will be able to show you what you need to do.
Image credit: Anthony Easton