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Need Some Deductions for 2011?

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10 Oddball Tax Deductions

11 Most Overlooked Tax Deductions

Updated for 2011

Business Structures

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Advantages of a Partnership

1) Raising capital:

In contrast to a sole proprietorship, where your own resources may be limited to start or expand a business, getting other people to invest money and/or services in your business may be good way to go. 

A partnership offers you a broader range of possibilities for raising capital and expanding your business than a sole proprietorship.

Such capital may be in the form of money, services, or both.

2) No double taxation:

A partnership is a pass-through entity (a conduit). All items of income, deductions, gains, losses, and credits flow through the partnership entity to its owners (partners).

It is this pass-through feature that allows a partnership to avoid double taxation because there is no tax at the entity level only at the individual level.,

Schedule K-1 is issued annually by the partnership to each partner to report the partner's share of income, deductions, gains, losses, and credits.

Each partner is responsible for reporting his share of the items reported on Schedule K-1 on his/her own individual income tax return.

Each item reported on Schedule K-1 retains its tax character when it is reported by the partner on his tax return.

For example, if Schedule K-1 reports a partner's share of partnership net income, the partner reports it on Schedule E (then carries it line 17 of Form 1040).

If Schedule K-1 reports a partner's share of partnership charitable contributions, the partner reports the contributions on Schedule A of Form 1040, assuming he/she itemizes deductions..

3) Allocation of income:

Partners may agree to allocate income disproportionate to the their percentage ownership interest.

For example, if partner A has a 40% interest in capital and partner B has a 60% interest in capital, they may agree to pay partner A 70% of the profits and partner B 30% of the profits.

In contrast, if the partners were S-corporation shareholders with the same percentage of ownership, they would not be permitted to make a disproportionate allocation of profits.

S-corporation profits are required to be allocated to shareholders according to their percentage of ownership. Therefore, partners A and B would receive 40% and 60%, respectively, of the profits if they were S-corporation shareholders.

There are Two Types of Partners

  1. General partner
  2. Limited partner

General partners:

  • Participate in the day-to-day operations and management of the business.
  • In return for their investment of capital and/or services, they receive an interest in partnership profits and capital.
  • Are personally liable for partnership debts should partnership assets be insufficient to cover such debts.

Limited partners:

  • Limited partners are passive investors. They do not participate in the day-to-day management of the business; in fact, if they do, they risk losing their limited liability protection.
  • They invest in the business to received a return on their investment.
  • Their liability for partnership debts is limited to their investment.

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Partnerships: Disadvantages of a Partnership

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