Partners generally have significant flexibility when allocating percentages of income, gains, losses, expenses, and credits. Unlike...

  

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Partners generally have significant flexibility when allocating percentages of income, gains, losses, expenses, and credits. Unlike other entity forms, partnerships can specially allocate certain types and amounts of income, gains, losses, and the like among partners. As long as the allocations are economically realistic, partners with different marginal tax rates can receive allocations that provide relatively advantageous benefits. Partners may take cash withdrawals from their businesses, but, as with a sole propri- etorship, these payments are not going from one taxable entity to another. Unless the withdrawals represent guaranteed payments, the partnership may not deduct them and they are not taxable to the partner. They are nontaxable returns of capital. Therefore, part- ners are not subject to double taxation when earnings are distributed as cash withdrawals. Example 11 Assume the same facts as in example 10, except that Monte's cousin Beau manages one station and receives a salary of $40,000. Monte and Beau organize the gas station enterprise as a partnership called M&B Company. Monte owns an 80% interest and Beau owns a 20% interest. Monte is paid a salary of $60,000. Beau is single and has other income equal to his allowable deductions. How does this affect the total tax lability of the business income? For reference Example 10 Monte, who is married and has 3 children, owns and operates a chain of gas stations. In 2021, he draws a salary of $60,000. The net income from the gas sta- tions before payment of the salary has consistently been $160,000 a year. What is Monte's income tax liability in 2021 if he operates the business as a sole proprietorship? For illustra- tive purposes, assume that Monte and his spouse have other income that exactly offsets their allowable deductions. Partners generally have significant flexibility when allocating percentages of income, gains, losses, expenses, and credits. Unlike other entity forms, partnerships can specially allocate certain types and amounts of income, gains, losses, and the like among partners. As long as the allocations are economically realistic, partners with different marginal tax rates can receive allocations that provide relatively advantageous benefits. Partners may take cash withdrawals from their businesses, but, as with a sole propri- etorship, these payments are not going from one taxable entity to another. Unless the withdrawals represent guaranteed payments, the partnership may not deduct them and they are not taxable to the partner. They are nontaxable returns of capital. Therefore, part- ners are not subject to double taxation when earnings are distributed as cash withdrawals. Example 11 Assume the same facts as in example 10, except that Monte's cousin Beau manages one station and receives a salary of $40,000. Monte and Beau organize the gas station enterprise as a partnership called M&B Company. Monte owns an 80% interest and Beau owns a 20% interest. Monte is paid a salary of $60,000. Beau is single and has other income equal to his allowable deductions. How does this affect the total tax lability of the business income? For reference Example 10 Monte, who is married and has 3 children, owns and operates a chain of gas stations. In 2021, he draws a salary of $60,000. The net income from the gas sta- tions before payment of the salary has consistently been $160,000 a year. What is Monte's income tax liability in 2021 if he operates the business as a sole proprietorship? For illustra- tive purposes, assume that Monte and his spouse have other income that exactly offsets their allowable deductions.

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Example10 The tax liability would be Total business income 160000 Total deductions 60000 Taxable ... View the full answer