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Business: Distributions of cash/property for partners.

Under Business partner summary it's asking me for the distributions of cash/property but one partner didn't get/take any money. How do we fill that out? It's a father/son partnership and the son had a full time job with a company and didn't take any kind of pay/property and so we're trying to figure out how to fill out the % of profit that needs to be factored in. As far as we were aware it was split 50/50 with whatever the end profit(s) are when the year closes/ends and if we paid ourselves. This is very hard/confusing for us to figure out and the worst part is that there's no information on how to fill this section out which is why I am having to reach out to you guys. If we can't get this figured out we just wasted over 100 bucks on this product and that's frustrating for sure!

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Employee Tax Expert

Business: Distributions of cash/property for partners.

Distributions are separate from Partnership income.  As a pass-through entity, a partnership (and, by extension, a partnership return), first figures out how much taxable income was generated by the entity.  The income itself is then passed through to each partner and reported on Schedule K-1 to each.  This passed-through income is taxed to each partner on their personal return regardless of whether they pull any out from the business (receive distributions) or not.  If they choose to leave the money "in the business", they create basis for themselves for future distributions.  When a partner has more basis in the business than what he receives in distributions, the distributions he receives are not taxed.

To illustrate:  a partnership in year one earns 50,000 net income in a year and apportions out 25,000 each to the two partners (50-50).  One partner decides to withdraw his share that he earned, the other decides to leave his 25,000 in the business.  Both partners report 25,000 of income in year one, but now partner one (who left his money in the business) has a basis of 25,000 in the business, whereas partner two has a basis of zero.

In year two, the partnership earns another 50,000.  Again, both partners report 25,000 in taxable income, but now, Partner 1 decides he needs a little money and takes out 35,000.  He only pays tax on the 25,000 of the business income reported to him.  The extra distribution of 10,000 came out of the 25,000 basis he had, leaving him with a basis of 15,000.  Partner 2 decides to receive all of his money again, and continues with a net basis in the partnership of zero.

In TurboTax, you will need to report what each partner's share of income is (50/50), and then what each decided to take in distribtutions.  If one partner did not take any distributions, you report zero for that partner.  But, tracked separately from the return itself, keep a total of the amount the partner is keeping "in the business" so to speak.  This amount is that partner's basis, which will be needed to keep future distributions from being taxed to the partner.

Feel free to comment if you have any additional questions.

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