7-1 activity

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School

Southern New Hampshire University *

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-655

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Accounting

Date

Feb 20, 2024

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docx

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Uploaded by emilyhavel

Running head: 7-1 Activity 1 7-1 Activity Emily Havel Southern New Hampshire University From the Paper “7-1 Activity” by Havel, E. (2023):

7-1 ACTIVITY 2 To whom it may concern, Upon formation of your partnership there are a few things to think about when it comes to income taxes and ethical principles with how you report your income. I know one of your main concerns is how the partners will generate their income individually and how it will be reported to the partners. I am happy to advise on how to report the partnership income as well as how to pay the partners and discuss tax planning strategies. We will also look at entity alternatives that may suit Smith & Associates, LLP. When reporting income, it is always important to follow ethical standards. When reporting income of any type including income of an LLP it is important to remain honest and always report your income with integrity, care, competence, and due diligence. Remaining honest when reporting income is the best business strategy you can follow. In terms of the partners earnings, it is important to note that a 1065 (partnership return) is a pass-through entity and the income from the partnership will be divided into four equal percentages to each partner and must be reported on their personal income tax return. “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.” ( Partnerships | Internal Revenue Service , n.d.). The IRS states that partners are not employees rather self-employed individuals and should be taxed at the self-employment rate. With that being said, the partners should each receive guaranteed payments from the partnership which will have to be decided and agreed upon by each partner. The partnership should file a 1065 return which is where all partner payments will be reported. The payments and 25% of the net income will be reported to each partners K-1 which

7-1 ACTIVITY 3 will have to be reported on their personal income tax return. When reporting partner salaries, it is important to report honestly and with integrity. I would not suggest under or over reporting what each partner receives but reporting to the exact dollar that each partner receives in the form of any payment from the partnership. There are two different tax planning strategies that Smith & Associates, LLP could take advantage of. That is taking advantage of tax credits and tax deductions. It is important to note that anything that contributes to the business making money is a business expense and therefore a tax deduction. So, the partnership should pay for any and all office expenses, space rent, equipment, advertising, bank fees, licensing fees, taxes paid, wages to other employees of the firm, any business meals, travel expenses, etc. Basically, anything that contributes to the business making money should be written off as an expense which will then reduce the net income each partner receives a percentage of on their K-1. Tax credits are something the federal government releases to help several things within our economy. Looking at certain federal tax credits that reduce the partnerships overall income tax liability would be a great tax planning strategy. Smith & Associates, LLP could consider an entity alternative and choose from being a limited liability company (LLC) or incorporating their business. Either of these entity alternatives would result in a lower tax reduction. Because the business could elect to be taxed an S-Corp which would in turn help the personal income taxes owed by each partner. If taxes as an S-Corp all partners could receive a W-2 wage and the earnings from the company are not subject to the self-employment tax rate of 15%. Considering an entity change may be something to consider for the partners of the company. Overall, we have discussed a number of things and given the partners of Smither & Associates things to discuss in regard to an entity alternative, how to report income under ethical principles, and some tax planning strategies.

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7-1 ACTIVITY 4 Sincerely, Emily Havel References Havel, E. (2023, November 5). 7-1 Activity . Partnerships | Internal Revenue Service . (n.d.). https://www.irs.gov/businesses/partnerships#:~:text=Each%20partner%20reports %20their%20share,Form%201065)%20to%20the%20partner .