Partnerships Flashcards
Taxation of partnerships
A partnership itself is not a taxable person. Each of the partners is liable to tax on his share of the taxable trading income of the partnership on the same basis as a sole trader.
Allocation of partnership profits
Step 1: The net profit or loss of the partnership for the period of account must be adjusted for tax purposes (ie in the same way as for a sole trader)
Step 2: Capital allowances for the partnership must then be computed and deducted from the adjusted trading profit. Capital allowances are available on partnership assets and are computed as for a sole trader.
Step 3: The resultant taxable trading income of the partnership for the period of account is allocated between the partners according to the profit sharing agreement for the period of account.
The agreement may specify that one or more of the partners is entitled to a “salary” (an allocation of profits) and / or interest on capital introduced into the partnership. These amounts are allocated first and then the remaining amount of taxable trading income is allocated in accordance with the agreed profit sharing ratios.
Change in profit sharing ratio during period of account
When there is a change in the profit sharing agreement during the period of account, divide the period of account into the periods of the different profit sharing agreements.
Any salaries and interest on capital as appropriate must be time apportioned accordingly.
Partner joining partnership
If a new partner joins a partnership, the opening year rules will apply to that partner, but the continuing partners will continue on the current year basis.
The change in the partnership profit sharing agreement is dealt with in the same way as a change in profit sharing agreement in a continuing partnership.
Partner leaving partnership
If a partner leaves a partnership, the closing year rules will apply to that partner, but the continuing partners will continue on the current year basis.
The change in the partnership profit sharing agreement dealt with in the same way as a change in profit sharing agreement in a continuing partnership.
Notional profits and losses ( overall profit but one partner makes a loss)
Sometimes if the partnership makes an overall profit, the allocation of profits results in one or ore of the partners making a notional loss. In this case the profit allocation must be adjusted in proportion to the profit initially allocated to the partners.
Steps:
- calculate the profit or loss of each partner using the usual PSR arrangements.
- treat the loss making partner as having nil profits (no loss)
- reallocate the actual profits between the partners using the proportions of the profit share calculated in step 1
Notional profits and losses ( overall loss but one partner makes a profit)
Sometimes the partnership makes an overall loss but the profit share arrangements mean that one partner appears to make a notional profit. In this case the actual loss needs to be reallocated to the partners.
- calculate the profit or loss of each partner using the usual PSR arrangements
- treat the profit making partner as having nil profits (no loss)
- reallocate the actual loss between the partners using the proportions of the loss share calculated in step 1
What is a limited liability partnership?
Most partnerships are formed so that the partners each have unlimited liability for the debts of the partnership.
However, it is possible to form a limited liability partnership under which the liability of the partners is limited to the amount of capital they contribute to the partnership.
Income tax on limited liability partnerships
The partners of an LLP are taxed on a similar basis to those in an unlimited partnership.
Thus each of the partners is liable to tax on his share of the taxable trading income of the LLP
Restriction of loss relief in a limited liability partnership
Sideways loss relief for an LLP is restricted to the amount of capital invested. The remaining loss is carried forward as usual.
