In: Finance
Partnership P ("P") has two individual partners (A and B). Each are 50% owners in P. At the beginning of Year 1, A's outside basis was $1,000 and B's outside basis was $10,000. During Year 1 P earned $2,000 of income from operations, $1,000 of tax exempt income, and paid off $10,000 of a recourse liability. What income, gain or loss, if any, will A report on A's individual income tax return (for Year 1) as a result of being a partner in P?
The internal Revenue service does not consider partnership to be different from the partner. Partners are as good as owner and hence they consider pass through tax entities means all the profit and gains of the partnership business are passed on to the partner, and the partner are the one who will pay tax. Partnership will file informational return under form1065 to internal Revenue service. It will also provide schedule K-1 which provides about breakup of share holding.
Any remuneration and Interest received from partnership firm by partner will be taxable in the hands of partners
but share of profits received from partnership firm will not be taxable in the hands of partners
Question is mentioning about ownership ratio of 50% each. But profit sharing ratio is not mentioned. In absence of any information about profit sharing ratio, partners distributes profit & losses equally (i.e., 50%).
Total income of partnership = Income from operations + tax exempt income
= $ 2,000 + $ 1,000
= $ 3,000
A's individual profit share from partnership to be reported in his income tax return = 3000 * 50%
= $ 1,500