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The timing of the partnership’s deduction and the partner’s income will be the same if: Both parties are using the cash method of accounting. Both parties use the calendar year as their taxable year. The payment is made to the partner during the same year the
services or capital is provided by the partner to the partnership. Taxable Year: General Rules Each partner must include his or her taxable annual taxable income and distributive share of the partnership’s income and guaranteed payments for the taxable year of thepartnership that ends with or within his or her own tax year. The critical date is the date of the partnership taxable year end. Standing alone, this rule allows the partner the opportunity to defer up to 11 months of income earned by the partnership from taxation until the next year. CodeSec.706(b)(1)imposes limitations on this opportunity. A partnership may adopt a “business purpose” taxable year if they can show that they have a natural business year other than the one provided by the statute. In the absence of a business purpose, the partnership’s “requiredyear” is: 1.The taxable year of its partners who have an aggregate interest in partnership profits and capital of greater than 50percent. 2.The taxable year of all its principal partners, if a year described in 1, above, does not exist. 3.The calendar year or such other period (generally the year with the least aggregate deferral of taxable income), if a year described in (1) or (2), above, does not exist.
Taxable Year: Majority Interest Required Taxable Year Under this rule, the partnership must have the same tax year as that of the majority of its partners.o These are the partners having the same tax year and whose the 1st day of the partnership’s taxable year unless the Secretary of Treasury • The majority interest is established on the 1st day of the partnership’s taxable year unless the Secretary of Treasury allows them to test for a majority interest on some other date. o If a partnership is required to change its tax year to that of its majority partners, it isn’t required to change it again for the following 2 years.