Are profits from a Partnership double taxed?

Question

I am involved in a real-estate investment partnership. My portion of the profits made last year were $50,000. I had to pay taxes on that profit, so I withdrew $20,000 to pay the taxes. Now my accountant tells me that the $20,000 I withdrew is considered a dividend and will be taxed next year. It just doesn't make sense to me that I should be taxed twice on the $20,000 - ESPECIALLY when it was sent to the IRS!

Answer 1

Wayne Z is correct. Distributions from a partnership or other pass-thru entity are not taxed as dividends. Dividends are paid from the Earnings and Profits (E&P is specifically defined in tax law) of a corporation. Distributions from pass-thru entities such as partnerships or S corporations are payouts of money on which you have already paid tax. A few years ago before some terminology changes in tax law they were referred to as PTI - Previously Taxed Income.

Had you already drawn out the $50k profit from last year? If the $20k came from this year's profits, he might be thinking of it that way, but you will pay tax on this year's profits next year anyway not because you took them out to pay last year's tax and his terminology is wrong.

Answer 2

Your accountant is wrong.

Distributions are not taxed assuming that you have a basis in the partnership. Even if your basis was $0.00, the $50k in income increased the basis to at least $50k.

The $20k distribution is not taxed.

He seems to be confused between partnerships and corporations. Partnerships pay distributions, not dividends.

Answer 3

From an worker's paycheck social protection and medicare taxes are withheld at 7.sixty 5%, and the corporate will pay (over and above the worker's earnings) yet another 7.sixty 5% from their fund. for your self employment earnings from sole proprietor, you're the two an worker and an company. so which you pay 15.3% employment taxes. earnings out of your sole proprietorship company/corporation is your individual earnings. You finished variety C for corporation earnings and fasten it to your 1040. You company/corporation would not report any separate return. once you have a partnership, the partnership records variety 1065 and would not pay any taxes. The income of a partnership is split between the companions. companions might desire to contain this income of their very own earnings and in this earnings pay 15.3% employment taxes.

Answer 4

Your accountant is wrong. I would strongly suggest getting someone qualified or else you are looking at paying tax on money you shouldn't.

Distributions from partnerships are not taxable unless your basis falls below zero - then it is treated as capital gain.