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How are Partnerships Taxed? Advice From a CPA

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If you have a partnership or you are considering forming a partnership, there are specific tax implications to be aware of that affect businesses in North and South Carolina. Before deciding a partnership is right for your business, you should take the time to meet with an accountant to discuss the following:


Federal Partnership Taxes

 Partnerships do not pay income taxes to the federal government. However, they must file Form 1065 every year. The IRS uses this information to assess if you're reporting your income in your tax filings accurately. 

 The IRS also requires partnerships and each partner in the business to file a Schedule K-1 form. This form shows each partner's individual share of the partnership's profits and losses so the IRS can assign tax liabilities accordingly. Each partner is, then, responsible for setting aside the amounts they need to pay their share of business income taxes on the year's profits. Partners must make estimated payments of these amounts quarterly: in January, April, July, and October. 

 The tax obligation for partners is based on what's termed their "distributive shares." This distribution of shares usually correlates with the partner's percentage of ownership or stake in the partnership. If partners wish to distribute share differently, they must set out the guidelines for this distribution in the written partnership agreement. 


Self-employment Taxes

 You may also need to pay self-employment taxes on your share of partnership profits if you took an active role in running the business. The way self-employment taxes are handled for partners of a partnership is different than for regular workers. A CPA for small businesses can help navigate these requirements to find the right way to file your self-employment taxes. 



 Remember that you can deduct qualified business expenses from your taxable income and lower your tax burden as a partner in the business. These include, but are not limited to, the following:

  • Startup costs
  • Operating expenses
  • Travel costs
  • Advertising and product outlays
  • A portion of your business-related entertainment and meals expenses

North Carolina Partnership Taxes

 All partnerships operating in North Carolina are required to file a partnership income tax return every year that the partnership is required to file a federal return. The form to use when you file your NC partnership income taxes is D-403. Partners in partnerships are not required to make estimated partnership income tax payments quarterly or otherwise. In addition, if a deduction is available to an individual tax filer in North Carolina, a partner of a North Carolina partnership can take that deduction on their share of partnership profits as well. 

 For help filing your partnership's taxes or for help forming a new partnership, contact a top tax accountant in Charlotte.


Posted by Scott Boyar CPA


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