Partnership Losses

Partnership Losses

Didn't find your answer?

We have partnership with 5 partners they are entitled to the following percentages - a 50% b 10% c 10% d 15% & e 15%

A has taken a salary of £2400 in the year and b a salary of £23855. I am having trouble allocating the losses - can anyone jog my failing memory?

The adjusted loss amounts to £23067 after adding back the partners salaries shown in the P/L, and deducting CA's

Jan

Replies (6)

Please login or register to join the discussion.

avatar
By andymeeson
20th Dec 2004 10:12

Note to John
The salaries can't be added back as such, since they aren't really salaries.

The correct approach is to treat them as no more than an advance of drawings. Many partnership agreements include (and, in their absence, the Partnership Act assumes) a provision that shares of profit or loss are taken in a set order:

(1) "Salary" or pre-emption of profit;
(2) "Interest" on capital account;
(3) Division per profit-sharing ratio of any balance.

Where there is an overall partnership loss, the overriding consideration is that no individual partner's final share of that loss can be a profit (and vice versa - if the partnership as a whole is profitable, no partner can show a loss). This is where BIM72245 comes in.

On your calculations, partner (b) shows a profit. Since the exercise is to allocate a loss, this is prima facie inequitable. Hence the reallocation procedures followed by Michael.

Incidentally, this has always been the case, even in the good old days when there was such a thing as a partnership tax computation.

Thanks (0)
avatar
By User deleted
16th Dec 2004 12:18

Here goes....
The loss made by the partnership for the year is £(23,067).

After taking into account the partnership salaries, the loss to be allocated between the Partners becomes (23,067) + (23,855) + (2,400) = £(49,322).

This, in theory, is allocated as follows:

A) 2,400 - (49,322 x 50%) = £(22,261)
B) 23,855 - (49,322 x 10%) = £18,923
C) (49,322) x 10% = £(4,932)
D) (49,322) x 15% = £(7,398)
E) (49,322) x 15% = £(7,399)

Total £(23,067).

The problem is that the losses of A,C,D and E total £(41,990), whereas the actual loss for the year amounts to £(23,067). Consequently, a reallocation is required as follows:

A) 22,261/41,990 x 23,067 = £(12,229)
B) Nil
C) 4,932/41,990 x 23,067 = £(2,709)
D) 7,398/41,990 x 23,067 = £(4,064)
E) 7,399/41,990 x 23,067 = £(4,065)

Total £(23,067).

Unless anyone knows any different...

Hope this helps.

Thanks (1)
avatar
By andymeeson
16th Dec 2004 13:27

I concur with Michael
Just for information, the procedure to be followed is set out in IR Business Income Manual at BIM72245 et seq.

Thanks (0)
avatar
By Abacjm
17th Dec 2004 02:09

Partnership Salary now Allowable for Tax Comps??
I must be getting old, but I always thought that Partnership salaries, although given to reflect any additional duties/responsibilities undertaken by individual partners, were a distribution of profits amongst the partners and although they could be shown in the P & L A/c were not allowed for the Partnership Tax computation and therefore added back to give the true assessable tax figure for profit/loss sharing purposes.

In the example given, ignoring the Cap allowances for the moment, the loss AFTER salaries was £49322 and when the salaries are added back the loss was reduced to £23067.
So should the tax comps not be:-
Prt/ship Indiv.
alloc. Comp.
-------- ------
a) (23067) x 50% = (11533) + 2400 = (9133)
b) (23067) x 10% = ( 2307) + 23855 = 21548
c) (23067) x 10% = ( 2307) = (2307)
d) (23067) x 15% = ( 3460) = (3460)
e) (23067) x 15% = ( 3460) = (3460)
-------
Losses Allocated = (23067)

I can follow the logic in Michael's workings but the end result seems to advantage some partners and disadvantage others.

Thanks (0)
avatar
By Abacjm
16th Dec 2004 01:34

So go on and finish it now
Jan,
From what we have been told by you, there does not appear to be a problem. Your tax adjusted loss is shared in accordance with the normal profit sharing ratios, unless they have agreed otherwise in any Partnership Agreement.

On their personal tax computations, the salary awarded to a) and b) will be shown as well as their share of the D1 Loss for the year, thereby reducing their tax assessable.

Thanks (0)
avatar
By User deleted
17th Dec 2004 14:30

Thanks to those who have commented. I have to say that I came up with the same answer as Michael and was looking for confirmation, it is ages since I did one of these computations.

Thanks (0)