If two people are a partnership what items can they deduct in to lower their taxable income for example if both partners have company cars how does that deduction transfer down to the individual?

Answer 1

A partnership is controlled by the document called the partnership agreement. A properly written partnership agreement will specify the percentage of control, ownership, and profits each partner will get. It does NOT have to be 50%-50%, but often is anyway. Often a basis for deciding how much each partner gets is by how much money they put into the initial pot to start the business.

All the revenue that comes into the partnership is taxable income to the same percentage that each partner owns. Tax deductible items are subtracted from the TOTAL income that the partnership generates, and the remainder is called the profit. If your partnership spends ALL of the money on tax deductible items in the course of running the business, there will be NO profits to divide. Therefore, there will be no taxes that will have to be paid either. It doesn't matter which partner "benefits the most" from having the use of the tax deductible items, as they are supposed to be generating business with those deductions.

The partnership decides whether or not it is "appropriate" for ANYBODY to have a company car or any other expense. It is foolish to waste money in order to generate higher company expenses. Don't buy a new Cadillac if a used Toyota Corolla will do. Open up a SEP IRA and contribute to that instead. The SEP IRA contribution is also tax deductible, and you will still have the money in the SEP IRA to spend on other investments. WISELY spent...hopefully!

A partnership is harder to maintain than a marriage. In a partnership, both people get to argue about who is working the most, (deserving a bigger share of the profits), fight over how the money is being spent (wasted), and all the other details that take place. They get none of the sex (usually), which would otherwise help keep them together. If marriages currently fail at a 50% rate WITH the benefit of having sex, then your partnership has an even less likely chance of success, based on only average numbers and no other information. If you have a very good friendship of many years with your partner, then you know how to work things out already, and might make a go of it, but expect some bumps and surprises in the road anyway.

At the very least, have a clear description in the partnership agreement on how and under what circumstances one partner (or partner's estate) may buy out the interests of another partner. It is rare for two people to agree completely about everything for enough years to get a partnership business off the ground and flourishing.

It might be better to see if you can set up two companies that work very closely together in a cooperative manner. This way, each person can be totally in charge of their own company, and run it as they see fit. If one business owner is dissatisfied with the performance of the other business owner, they are of course free to hire any other business to lend additional assistance in whatever area that they think is important, and they can STILL keep working with the first business anyway! This arrangement helps keep everybody civil to one another, as it is always clear that both people (companies) will only work together for as long as it is worth the effort.

Good luck and let me know how things turn out! I wish everybody would start their own business, and get this country back on its financial feet!