Partnership Tax Questions

Partnership Tax Questions

Didn't find your answer?

Hi

I do the accounts for a partnership.

All 3 Partners invested the same amount into the company (about 30k each - which is still outstanding showing on the balance sheet)
Partner 1 gets 20k per year (wages/drawings) then any remaining profit is split equally between the 3 partners.
Partner 1 has a leased company car (not purchased - its not an asset on the balance sheet) and the monthly rental has been set against the profit. He uses the car 90% of the time for business.
The end of the year to Mar 08 the company made a loss of 10k before partner 1 took their drawings.

What I am having trouble with is:

1. How do I treat the partners company car? Do I class the 10% of the car rental costs as additional drawings and leave the 90% in the P&L?
2. Partner 1 has taken 20k in drawings of which there was no profit to take from. Can I just show this payment as an asset to the company on the balance sheet or will partner 1 have to pay tax on it? If so would I be better off setting this 20k off against his loan amount as a repayment?

I hope I have explained myself clearly and any help/advise would be much appreciated.

Thanks
Scott Cullen

Replies (5)

Please login or register to join the discussion.

avatar
By User deleted
08th Sep 2008 18:50

Illustrative calculations
Scott

The accounts position and tax position should be considered separately. A previous poster is correct in that for the leased car it depends upon whether the partners agree to treat the whole cost as a partnership expense.

Let's assume they do. In the tax computation you would need to
a) add back 10% of the rental first of all
b) add back an additional amount if the list price of the car exceeds £12,000 - the amount to add back is 90% of the rentals x (List price - 12,000) / List price x one half.

To illustrate, if the rentals were £4,800 and the car has a list price of £20,000 the amounts added back would be:
a) 10% of £4,800 = £480, and
b) 4,420 x (20,000 - 12,000)/20,000 x 0.5 = £884
A total add back of £1,364.

If the car is kept out of the partnership, then the partner would claim relief for the rentals in his/her own tax return of £4,800 - 10% x £4,800 - £884.

Re: the £20,000 drawings. In the accounts this can either be shown as an overdrawn Partner's current account or as a reduction in Partner's capital account. If the agreement includes interest on capital, the former would be the norm. Check if there is anything in the partnership agreement about interest on drawings when allocating future profits. If there is no agreement, then no interest is taken into account.

If you show the amount as an asset it implies that the partner has an obligation to pay it back into the partnership which is possibly unlikely.

Hope this help.

Malcolm

Malcolm Greenbaum
Greenbaum Training & Consultancy
IFRS, US GAAP, UK GAAP, Tax and VAT

Thanks (0)
David Winch
By David Winch
02nd Sep 2008 18:50

Knowing the answer . . .

Scott

I haven't done any tax or accounts preparation work in the last few years, so I could not be confident that my reply would be up to date. That's why I didn't seek to guide you.

However you might want to check whether the whole of the business proportion of the car lease payments are tax deductible. In the old days there was a restriction in respect of 'expensive' cars (which meant cars costing more than £12,000 to buy) - but things may have changed!

David

Thanks (0)
avatar
By neileg
02nd Sep 2008 12:53

Mmm...
I echo Stephen and David's concerns. If you're aware of your shortcomings, then why are you offering accounting services? I expect my plumber to deal with fitting a shower as well as changing a tap washer. However in the spirit of helpfulness and support I'll make some comments.

I assume that this is truly a partnership and not an incorporated entitity of any sort.

1. How do I treat the partners company car? Do I class the 10% of the car rental costs as additional drawings and leave the 90% in the P&L?
There's no one answer to this. If the partners agree that 100% of the costs are borne by the partnership, then you put 100% in the P&L and add back 10% in the tax comp. If the partners consider that the 10% should be funded by that partner with the car, then put it to drawings. Or maybe the cost of the car is borne by the partner entirely in which case he gets 90% deucted from his profit share for tax purposes.
2. Partner 1 has taken 20k in drawings of which there was no profit to take from. Can I just show this payment as an asset to the company on the balance sheet or will partner 1 have to pay tax on it? If so would I be better off setting this 20k off against his loan amount as a repayment?
The treatment of the prior salary depends on what the partners have agreed. They may have agreed that partner 1 gets the first 20k of the profit if there is one, or is entitled to 20k anyway, or something else. The 20k in cash is drawings pure and simple. No tax effect at all. It is possible, though old fashioned, to treat partners as having a capital account and a current account, so the 20k drawings would be an overdrawn current account. If it was me, I'd net it off the capital introduced. I certainly wouldn't show it as an asset.

Thanks (0)
avatar
By stephenkendrew
01st Sep 2008 22:41

Scott
I do wish you would take David’s comments on board more than you appear to have done.

I’m not clear, from your question whether you are doing the accounts for a partnership or a limited company.

Whilst you say “I do the accounts for a partnership”, you then talk about the 3 partners putting money into the company, “a leased company car”, “the company made a loss of £10K”, “the partners company car” and “an asset to the company on the balance sheet.”

So, is it a partnership or a limited company? The answers to your two questions would be very different for each.

Thanks (0)
David Winch
By David Winch
01st Sep 2008 20:38

I do think . . .

Scott

From your question I assume that not only do you do the accounts for the partnership, you deal with the partnership tax return as well - because you are asking questions relating to the tax consequences for the partners.

With respect Scott, I do think you should suggest to the partners that they get someone else to deal with the partnership tax return.

Issues relating to the tax consequences of a leased car and to calculation of taxable profits for each partner are not straightforward.

I hope you don't mind me saying that you appear to be out of your depth here and that is not good for you or for the partners!

David

Thanks (0)