Publication 225 |
2000 Tax Year |
Partnership
A partnership is the relationship between two or more persons who
join to carry on a trade or business, including farming. Each person
contributes money, property, labor, or skill, and expects to share in
the profits and losses.
For federal income tax purposes, the term "partnership"
includes a syndicate, group, pool, joint venture, or similar
organization carrying on a trade or business and not classified as a
trust, estate, or corporation.
Family partnership.
Members of a family can be partners. For instance, a husband and
wife or parents and children can conduct a farming enterprise through
a partnership. To be recognized as a partnership for federal tax
purposes, a partner relationship must be established and certain
requirements must be met. For information on these requirements, see
Family Partnership in Publication 541.
Merely doing chores,
helping with the harvest, or keeping house and cooking for the family
and hired help does not establish a partnership.
If a husband and wife are partners in a farm operation or other
business, they should report their partnership income or loss on Form
1065. See Form 1065, later.
Co-ownership and sharing expenses.
Mere co-ownership of property that is maintained and leased does
not constitute a partnership. For example, if an individual owner or
tenants-in-common of farm property lease that property for a cash
rental or a share of the crops, a partnership is not necessarily
created by the leasing. However, tenants-in-common may be partners if
they actively carry on a farm or other business operation and share
its profits and losses. A joint undertaking merely to share expenses
is not a partnership.
Partner's distributive share.
Each partner's distributive share of partnership income, gain,
loss, etc., must be included on that partner's tax return, even if the
items were not distributed.
Self-employment tax.
Unless you are a limited partner, your distributive share of income
from a partnership is self-employment income. If you and your spouse
are partners, each should report his or her share of partnership
income or loss on a separate Schedule SE (Form 1040),
Self-Employment Tax. This will give each of you credit for
social security earnings on which retirement benefits are based. The
self-employment tax of a member of a partnership engaged in farming is
discussed in chapter 15.
Selling or exchanging a partnership.
When you create a partnership, you generally do not recognize gain
or loss on contributions of money or property you make to the
partnership. However, you generally recognize gain or loss when you
sell or exchange your interest in the partnership.
You may be able to avoid recognizing gain or loss when ending a
partnership if you buy out your partners or change to a corporation
status.
Form 1065.
Partnerships file a return on Form 1065, U.S. Return of
Partnership Income. This is an information return showing the
income and deductions of the partnership, the name and address of each
partner, and each partner's distributive share of income, gain, loss,
deductions, credits, etc. No tax is due on Form 1065.
Form 1065 is not required until the first tax year the partnership
has income or deductions. In addition, it is not required for any tax
year a partnership has no income and expenses.
Schedule F (Form 1040).
Use Schedule F (Form 1040) to report a farm partnership profit or
loss. This schedule should be filed with Form 1065. The profit or loss
shown on Schedule F, adjusted for amounts to be reported on Schedule
K-1 and Schedule K of Form 1065, is entered on line 5 of Form 1065.
Other schedules.
Each partner's distributive share of partnership items, such as
ordinary income or loss, capital gain or loss, net earnings from
self-employment, etc., is entered on Schedule K-1 of Form 1065.
Fill in all other schedules listed on Form 1065 that apply to the
partnership.
Filing penalty.
A penalty is assessed against a partnership that is required to
file a partnership return in the following situations.
- The return is not filed on time, including
extensions.
- The return does not show all the information
required.
The penalty is $50 times the total number of partners for each
month (or part of a month) the return is late or incomplete, up to 5
months.
Exception to filing penalty.
A partnership does not have to pay the penalty if it can show
reasonable cause for failure to file a return. A small farm
partnership with 10 or fewer partners is generally considered to meet
this requirement if the following information can be shown.
- All partners have reported their entire share of all
partnership items on timely filed income tax returns.
- All partners are individuals (other than nonresident
aliens), deceased partners' estates, or C corporations.
- The partnership has not elected to be subject to the rules
for "consolidated audit procedures."
Consolidated audit procedures. In a consolidated audit
proceeding, the tax treatment of any partnership item is generally
determined at the partnership level, rather than at the individual
partner's level. After the proper tax treatment is determined at the
partnership level, the IRS can automatically make related adjustments
to the tax returns of the partners, based on their share of the
adjusted items.
More information.
For more information on partnerships, see Publication 541.
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