Partnership Taxation

dead_tree

Hello,

I have a query on tax to be paid by a partnership.
Firstly this is extremely low in turnover so I’m trying to keep accounts myself and I’m documenting everything.

I have some queries in the basic principles of tax though:
If myself or partner withdraw money from the partnership bank account: this goes down as “drawings” in the accounts in the profit and loss and on our own personal tax returns we declare this as income and may get a tax bill then based on that return.

But if the partnership earns e,g 1000 euro net profit in the year and there are zero drawings made. Is it okay for that 1000 euro to sit in the account and no tax is payable?

In summary, is the only tax to be paid by a partnership when drawings are made and that is by the individual who gets the drawing of funds? (i.e the partnership itself does not pay tax and can accumulate a bank balance without tax until the money is drawn)

Thanks in advance – there are so few transaction in this partnership that I should be able to keep accounts myself but I just don’t want to land myself or partner in trouble by total ignorance.
By the way, annual turnover has been less than 1000 euro. I work full time and my partner is unemployed and trying to get this business off the ground.
On a side note: does any one know the max someone can earn as self employed before losing social welfare?

smeharg

Each partner is taxed on their share of the partnership profits. The amount of drawings is irrelevant.

Drawings is a balance sheet transaction it does not go into or affect the profit and loss account.

Eg, say a partnership (where each partner owns 50% of the business) made a profit (before drawings and tax) of €10,000. Partner 1 withdrew €7k in drawing and partner 2 withdrew nil. Each partner would still be tax €10,000/2, ie €5,000 each.

Even if neither partner draws any cash from the business the each partner is still taxable on their share of the profits.

dead_tree

Ok - thank you, that actually makes sense.

dead_tree

Another question on this actually.

So you pay tax individually whether there is drawings or not. But what if you leave the money in the account. Does this remain on the accounts as capital until it is drawn etc or is quite simple for a partnership as in you simply pay tax at the end of the year based on the split and net profit and each new year is a fresh start meaning whatever is in the bank account for the partnership is irrelevant to the accounts for the new year?

smeharg

This isn't really the place for a lesson in double entry bookkeeping

You are taxed on profit - not cash. For example you may make a big sale on the last day of the year but not actually receive the cash until the following year. That sale would be included in the first year, not the second.

The profit and loss account is re-set to zero at the start of each year. Balance sheet items (which contains things you own and things you owe, such as equipment, bank account, debtors, creditors) carry forward to the next year. As it's a balance sheet it must balance, ie all the things you own must equal all the things you owe. Things you (or the business, really) owe also includes funds you've introduced into the business (capital) and profits (as the business owes these to the partners). Retained profits are generally shown net of drawings in what's called the partners' current accounts.

dead_tree

Thanks again. I'll do a night course if I still have more queries

Citizenpain

dead_tree wrote: »

Thanks again. I'll do a night course if I still have more queries

Have you registered the partnership? - Might be worth your while having a chat with an accountant

dead_tree

Yep, it's registered.

I did a consulatation with an accountant last year and all I really wanted to get out of it was the basics and avoid doing anything wrong but the accountant seemed more focused on tax deductables etc.

Also, the fee the accountant wanted is currently more than our annual turnover! If we get busier this year I will probably seek advice again and shop around. Fingers crossed.

thanks again.