How is gain or loss computed in a partnership?

Question

I am contemplating entering into a partnership with my brother mainly to invest in securities and/or make loans to other businesses. Basically, we anticipate the income to be mainly from buying/selling securities and from interest income from the loans. How is gain or loss computed? Say the partnership sells securities at a gain, does the partnership recognize gain or do my brother and I recognize the gain and report it on our 1040? What about interest income? Does the partnership recognize ordinary income gain and if some of the money is distributed to my brother or I, will we recognize gain as ordinary or capital gain?

Answer 1

If you and your brother are forming a legal partnership (filling out a SS-4 form to get a tax ID # for the partnership), then you would be filing a form 1065 return. Normally selling securities would result in either a capital gain or a capital loss, however, I believe that because your business would be buying and selling securities that any gain or loss would be ordinary income/loss. You will need to keep track of gains/losses from selling the securities, and of course any interest/dividends that the partnership earns. You would also keep track of any expenses that the partnership incurs in running the business. Whatever profit/loss the partnership makes would pass through to you and your brother through a K-1. My advice to you would be to find a CPA and tell him/her of your plans.

Answer 2

For tax purposes, the partnership does not exist. You and your brother report any income, gains, or loses in the same manner as if you earned them directly. The partnership must REPORT earnings and each partners share. Each partner then pays taxes on their share. Taking money out or leaving it in has no effect on the amount or timing of taxes.