Business & farm

Ownership percentages are governed by the partnership agreement and should not change during the year unless there is a change in ownership (add or remove a partner). In most cases, profit and loss are allocated based on the ownership percentages, unless otherwise stated in the partnership agreement. Pro-rata allocations of income, contributions, and distributions are required by the IRS (see IRS Pub 541 Partnerships).

The date of the percentage change is important for allocating income/loss to the partners relative to the period of ownership. TurboTax assumes that income flow is constant over the year and uses a weighted average to calculate the "effective" profit/loss percentage for the year. However, if the partnership income was not constant, you may need to manually override the allocation percentage to reflect the actual income that should be reported to each partner.

Here is an example, using a four-member partnership with equal ownership at the beginning of the year, which is 25% for each partner. One partner leaves on July 1, resulting in 33.333% ownership for the remaining partners for the rest of the year.

$10,000 net income January-June = $2,500 per partner (25% of $10K)

$ 6,000 net income July-December = $2,000 per partner (1/3 of $6K)

 $16,000 Total Income

Partners One, Two and Three have a total of $4,500 income for the year. This results in an effective income allocation percentage of 28.125% each (4500/16000).

Partner Four has only $2,500 income, because they exited the partnership as of 6/30. This is an effective income allocation percentage of 15.625% (2500/16000).

TurboTax allows you to enter one of three allocation percentages under Business Info >> Partner/Member Information. You may use Profit, Loss, or Ownership Percentage to allocate income. The actual percentages are entered under each partner's info. Once you have calculated the effective allocation percentage, you can enter that number under profit or loss, whichever applies.