This Formula System for Distribution of Earnings to Partners provides a list of provisions to conside when making partner distribution recommendations. Some of the factors to consider are: Collections on each partner's matters, acquisition and development of new clients, profitablity of matters worked on, training of associates and paralegals, contributions to the firm's marketing practices, and others.
Wyoming Formula System for Distribution of Earnings to Partners
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US-L05041A
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FAQ
Partnership accounting is the same as accounting for a proprietorship except there are separate capital and drawing accounts for each partner. The fundamental accounting equation (Assets = Liabilities + Owner's Equity) remains unchanged except that total owners' equity is the sum of the partners' capital accounts.
A partnership is not taxable on the income of the entity. Each partner includes his or her share of the partnership's income or loss on his or her tax return. Get more information and filing requirements for general partnerships and limited partnerships.
A partnership must file an annual information return to report the income, deductions, gains, losses, etc., from its operations, but it does not pay income tax. Instead, it "passes through" profits or losses to its partners.
Distributions to partners may be extracted directly from their capital accounts, or they may first be recorded in a drawing account, which is a temporary account whose balance is later shifted into the capital account. The net effect is the same, whether a drawing account is used or not.
If the partnership had income, debit the income section for its balance and credit each partner's capital account based on his or her share of the income. If the partnership realized a loss, credit the income section and debit each partner's capital account based on his or her share of the loss.
Ordinarily, a partner is not taxed on a current distribution because it represents a withdrawal of his previously taxed share of partnership income or a return of his capital contribution.
Are partnership distributions taxable? Because each individual partner pays taxes on their share of the partnership income, they are not taxed on any withdrawals or distributions.
Business income from a partnership is generally computed in the same manner as income for an individual. That is, taxable income is determined by subtracting allowable deductions from gross income. This net income is passed through as ordinary income to the partner on Schedule K-1.
The net income for a partnership is divided between the partners as called for in the partnership agreement. The income summary account is closed to the respective partner capital accounts. The respective drawings accounts are closed to the partner capital accounts.
Each partner reports their share of the partnership's income or loss on their personal tax return. Partners are not employees and shouldn't be issued a Form W-2. The partnership must furnish copies of Schedule K-1 (Form 1065) to the partner. For deadlines, see About Form 1065, U.S. Return of Partnership Income.