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Stephen G.
Stephen G., Sr Income Tax Expert
Category: Tax
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Experience:  Extensive Experience with Tax, Financial & Estate Issues
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My husband has had a partnership which is said to be 50/50.

Customer Question

My husband has had a partnership which is said to be 50/50. His partner put in more start up money at the start but my husband has since put triple that amount into the company. He is the only one who works the company and takes a very small paycheck so he can build the business. The tax return shows the capital as 60 percent for the other partner and only 40 for my husband. I think this should be 50/50 since it has been over 5 years and my husband has more into the business then the initial investment of his partner.
JA: Thanks. Can you give me any more details about your issue?
Customer: My husband has 50% ownership interest in an LLC. His partner is reporting the busines K1 as 63% for partner share of capital and 37% for my husband. I told him to change this last year and it is still the same this year on the K1. My husband has put more sweat and equity into this company then his partner, as stated in previous question submitted. Should this be changed to 50 -50? l
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Submitted: 6 months ago.
Category: Tax
Expert:  Stephen G. replied 6 months ago.
How are the profits split?Is there a written partnership agreement?Who keeps the books & records of the partnership?Does the partnership have an accountant; a CPA?Who prepares the tax returns?
Customer: replied 6 months ago.
Profits are 50/50 Loss is 50/50 Capital 37.25 for my husband, which I believe should be 50/50 actually more favorable for my husband but 50/50 will due.
I asked the partner to send me the partnership agreement. I need to read it over should be receiving that today.
The partner
Yes, the partnership uses a CPA
The partner uses tax firm to prepare the returns.
Expert:  Stephen G. replied 6 months ago.
Apparently the Tax Preparer is just reflecting the balances in the capital accounts in the figure that you are quoting.If the profits/losses are split equally, (50/50) that's the only thing that affects anything currently. For that it appears they are equal partners. When you say that your husband has put triple the amount of capital into the business more than the other partner are you talking about cash or sweat equity. Generally in arrangements similar to what you are describing, one partner puts in the capital to start the business in exchange for an ongoing 50% interest in the partnership.It's great that they have a written partnership agreement as for a partnership to be valid for income tax purposes, you don't need a written agreement. I don't know what the business is but if your husband has put additional cash into the partnership, it would have had to be recorded on the books either as addition capital or a loan from him to the Partnership.Unfortunately, for tax purposes, there's no value to be recorded for "Sweat Equity". The value is reflected in the initial 50% share of the partnership without a cash contribution equal to the non-operating partner.So, basically, I would get too concerned about the relationship of the capital accounts to one another, what is important is that the partnership agreement reflects that they are equal partners.All that said, is there something specific that you are concerned about or is it just that from the relationship of the capital accounts it appears that you husband isn't an equal partner? So, if the operations are proceeding as agreed initially, you wouldn't want to upset the apple cart because the tax rules require one thing and you believe it should be something else.If you want me to comment further, I'd be happy to do so, but you'll need to tell me more about the partnership and it's operations and who is doing what to promote the business. Perhaps you should read the partnership agreement first and then I may be able to assist you if there are provisions that concern you.You can just start another question and ask for me "Steve G", and I'll be happy to assist you in any way I can.Thanks very much,Steve G.PS Please remember to rate my response as that is the only way we receive credit for our work.
Expert:  Stephen G. replied 5 months ago.
Just checking in......................I see you had a chance to review my response on 4/16/2016.Do you have any follow-up questions?If not, I would appreciate it if you would take a moment and rate my response as that is the only way we receive credit for our share of the payment you already made. Otherwise, without a rating, we are not compensated for our efforts on your behalf.Thanks very much,Steve G.

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