A partnership consists of two partners, A and B, with a profit and loss sharing ratio of 60% and 40% respectively. The partnership has the following income and expenses in the current year:

Total income: $2,500,000
Salary and interest paid to partners: $800,000
Operating expenses: $300,000
Depreciation expense: $200,000

The partnership has no other income or expenses.

a) Calculate the partnership's taxable income and income tax liability for the current year.

b) Assume that the partners have other sources of income and are subject to a marginal tax rate of 35%. Calculate the after-tax income for each partner under the current profit and loss sharing ratio.

c) If the partners want to equalize their after-tax income, what should the new profit and loss sharing ratio be? Show your calculations and explain your reasoning.

Answer rating: 100% (QA)

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