Partnership Accounting and Taxation: A Disconnect

New businesses are often formed as general partnerships, because partnerships are the default entity when the partners have take no effort to form a different kind of entity. However even if it is not a default entity, people may deliberately find themselves with a partnership when their adviser puts them in an LLC/LLP, FLP or FLLC/FLLP, limited partnership or general partnership. In some cases, this will leave the general partner with unlimited liability, or create the necessity of an addition entity to try to avoid the problems just created. Assuming, however, that no one forms a corporation to act as general partner, we at the very least are forced to deal with partnership taxation, which probably was sold because using partnership taxation was so simple and intuitive. Partnership taxation is neither easy nor intuitive. In fact, it may be creating hugh problems that we, has practitions, as well as the clients need to become aware.Partnerships can be formed by simple oral agreements. In fact, some partnerships may be formed, even without the specific intent, simply because individuals agree on how they will work together to make money. Partnerships are formed when two or more individuals each contribute property and services and both have a joint profit motive. Of course, even though a partnership can be formed by an oral agreement, it is wise to have a written partnership agreement. In addition, the decision to form a partnership may not result in the ease that was expected. In fact, the expectation that partnerships are easy may get partnerships, their partners and professional advisers in trouble.Although partnerships do not pay taxes, they do file information returns to provide verification that the partners report correct amounts from the partnership on their own tax returns. When partnerships are formed, it may not be apparent what information must be kept for tax purposes, especially since the information is often vastly different than the information generally used in accounting for the partnership books. If this tax information is not kept, it becomes next to impossible for someone to correctly prepare the partnership tax return. Let alone have to reconstruct it sometime later when the information is required.This paper discusses the disconnect between the information used in accounting for the books of a partnership versus the information required for partnership tax reporting. The paper is relevant to anyone who is making a decision about the formation of a partnership or who is advising in a legal, tax, or accounting capacityBothers who may form a partnership. It is also relevant for those accounting for the books or preparing tax returns for existing partnerships.