Basis increases when: • You contribute more cash or property • The partnership earns income allocated to you • Your share of partnership debt increases Basis decreases when: • You receive distributions
• The partnership has losses allocated to you • Your share of partnership debt decreases Why it matters: You can only deduct losses up to your basis. If your basis is zero, you can't deduct any more losses until you increase your basis. Character of Income Passes Through Like sole proprietorships, the type (or "character") of income and deductions passes through to partners. For example: • Capital gains remain capital gains • Rental income remains rental income • Charitable contributions remain charitable contributions This can be a tax advantage because certain types of income receive favorable tax treatment. In contrast, C corporations don't pass these items through—everything stays at the corporate level. Special Tax Rules for Partnerships and S Corporations with Nonresident Owners. If your partnership or S corporation has owners who live outside Minnesota, you have three options for handling their Minnesota taxes: Option 1 : Composite Income Tax Your business can pay tax on behalf of nonresident individual partners or shareholders who don't have other Minnesota income. Rate: 9.85 percent of the individual's Minnesota income from your business. Benefit: The nonresident owner doesn't have to file a separate Minnesota tax return. Option 2: Withholding Tax If you don't use composite tax, you must withhold Minnesota tax from nonresident owners' Minnesota income. Rate: 7.85%.
31
Made with FlippingBook - Online Brochure Maker