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Need Some Deductions for 2011?

Don't overlook these!

10 Oddball Tax Deductions

11 Most Overlooked Tax Deductions

Updated for 2011

Business Structures

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How Partners Are Taxed

Each partner acts as an agent of the partnership when carrying out partnership business.

For federal income tax purposes, a partner is considered self-employed and pays income taxes and self-employment taxes on his/her share of partnership net income.

A partner is not considered an employee of the partnership and does not have payroll taxes deducted from his/her distributions.

Each partner reports his/her share of partnership net income (or loss) on Schedule E.

As a self-employed person, a partner is also required to pay self-employment tax on net earnings from self-employment of $400 or more.

Schedule SE is used to figure self-employment tax and is filed along with Schedule E and Form 1040.

Self-employment tax is social security and Medicare taxes.

Form 1065 is filed for the partnership entity. This is simply an information return. The partnership entity does not pay income taxes.

The partnership issues Schedule K-1 (instructions) annually to each partner to report each partner's share of income, deductions, credits, gains, and losses.

Items reported on Schedule K-1 retain their tax characteristics.

For example, if the partnership made charitable contributions, each partner deducts his/her share of charitable contributions reported on Schedule K-1 on Schedule A of Form 1040 as an itemized deduction.

Licensing Requirements

There are no IRS licensing requirements for partnerships.

However, for state and local purposes you may need a business license and/or sales tax permit if you sell merchandise at retail. Check with your state.

Tax Identification Number for a Partnership:

A partnership is required to have its own federal employer identification number because it is a tax-reporting entity, separate and apart from its partners.

However, it is not a tax-paying entity.

Reporting Income and Losses of a Partnership:

A partnership files an annual information return, Form 1065, with the IRS to report net income or loss of the partnership.

A partnership is a pass-through entity.

This means, partnership income, deductions, credits, gains, and losses are passed-through the entity to each partner according to each partner's proportionate interest in the partnership.

Each partner receives Schedule K-1 annually from the partnership reporting his/her share of income, deductions, credits, gains, and losses.

Each partner then uses Schedule K-1 to report these items on his/her personal income tax return.

Schedule K-1 indicates the appropriate tax form or schedule each partner must use to report his/her share of all items.

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Partnerships: Taking Money Out of a Partnership

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