Topic 10- Partnerships Flashcards
What is a partnership and how is it taxed?
Partnership is an unincorporated business but is not a separate legal entity. It’s a collection of individuals working in business together.
how is it taxed?
Partnership itself is not taxed but each partner is responsible for their own tax liability arising from the partnership. Each partner pays income tax on their share of the partnership tax adjusted trading profit (Same profoma) as if he or she were a sole trader i.e. CYB
What is step 1 in calculating trading income?
Step 1- Determine the tax adjusted trading profits after capital allowances of the partnership for each accounting period per the partnership accounts
What is step 2 in calculating trading income?
Step 2 allocated the profits/losses according to the profit share agreement in the accounting period
- If PSA requires a salary or interest on capital allocation then treat it as a share of the trading profit.
- If a partner joins or leaves during the accounting period then treat it as if there is a change in PSR and time apportion the profits- apply the appropriate PSA to each part
What is step 3 in calculating trading income?
Step 3 the basis of assessment rules
Determine the taxable trading income assessment for the tax year or the loss reliefs available for each partner using his/her share of the accounting profit/loss
Join- Opening year rules
Leaves- Closing year rules
Other year- CYB
How are salaries and interest treated?
These are taxed as trading profit and NOT salary or interest income.
They are allocated to the partners first and then any remaining balance of the partnership profits are allocated according to the partnership profit sharing ratio
What is the treatment for when a partner leaves or joins for the individual themselves and the existing unchanged partner?
when a partner leaves or joins,the individual themselves the special opening/closing year rules only apply to that individual joining or leaving.
The continuing partners will continue to be assessed on the CYB
How are trading losses in partnerships dealt with?
The losses are calculated and allocated between the partners in the same way as profits.
Each partner may claim loss relief under the normal rules.
Only partners joining the partnership are eligible for special opening years carry back relief
only partners leaving the partnership are eligible for terminal loss relief
What is limited liability paratnership?
This LLP is a special type of partnership where the amount that each partner may be required to contribute towards the partnership losses, debts and liabilities is limited by agreement.
For tax, they are taxed in the same way as other partnership
What events cause a change in Profit sharing ratio?
admission of a new partner
death
retirement
experience so requests more ratio
How is the change in profit sharing ratio dealt with?
If a partnership changes its basis of profit-sharing during a period of account, then the accounting period needs to split between the old profit share and the new profit share and allocated under the agreements.
What MUST you remember when there is a change in Profit sharing ratio?
If there is a salary then this is per annum so this must be changed to time apportion from when the change was made!!
