This Formula System for Distribution of Earnings to Partners provides a list of provisions to conside when making partner distribution recommendations. Some of the factors to consider are: Collections on each partner's matters, acquisition and development of new clients, profitablity of matters worked on, training of associates and paralegals, contributions to the firm's marketing practices, and others.
Kentucky Formula System for Distribution of Earnings to Partners
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US-L05041A
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FAQ
Hear this out loud PauseAre partnership distributions taxable? Because each individual partner pays taxes on their share of the partnership income, they are not taxed on any withdrawals or distributions.
Each partner reports their share of the partnership's income or loss on their personal tax return. Partners are not employees and shouldn't be issued a Form W-2. The partnership must furnish copies of Schedule K-1 (Form 1065) to the partner. For deadlines, see About Form 1065, U.S. Return of Partnership Income.
Because each individual partner pays taxes on their share of the partnership income, they are not taxed on any withdrawals or distributions. If a partner takes a withdrawal or distribution that exceeds their net share in the partnership, that withdrawal or distribution would be considered taxable income.
Note: Distributions in excess of stock basis are treated as capital gains regardless of whether or not the taxpayer has debt basis.
Hear this out loud PauseAlthough the partnership generally isn't subject to income tax, you may be liable for tax on your share of the partnership income, whether or not distributed. Include your share on your tax return if a return is required. Use these instructions to help you report the items shown on Schedule K-1 on your tax return.
Hear this out loud PauseOrdinary income reported to an individual shareholder on Schedule K-1 from an S-Corporation is not considered earned income. Such income is investment income, thus not subject to self-employment tax, and it isn't taken into account when calculating a tax credit that uses earned income in its calculation.
Although the partnership generally isn't subject to income tax, you may be liable for tax on your share of the partnership income, whether or not distributed. Include your share on your tax return if a return is required. Use these instructions to help you report the items shown on Schedule K-1 on your tax return.
Once all basis is depleted, including basis from debt, or the debt is repaid, any distributions in excess of basis are taxed as capital gains (long term or short term based on how long the interest in the partnership has been held) to the partner receiving them.
Hear this out loud PauseIf you received a Schedule K-1 tax form, inheritance tax rules determine how much tax you'll owe. Since the estate is a pass-through entity, you're responsible for paying income tax on the income that comes from it.
If any part of the distribution exceeds a partner's basis in the partnership, then the excess is treated as a capital gain.