Profit Sharing Change on Partnership

Yes, but there are complex rules to follow. Briefly the allocation has to have economic effect.

Yes, but it may not be respected by IRS unless the economic reality follows the allocation.

Effectively no. But you can keep three sets of books - tax, the 50/50 books, and books with the 100/0 allocation. But the 50/50 books aren't respected by IRS.

Why is this going on? You have left out something. Is this a one year thing? Why will Mr. 0% stick around if he is never going to get anything?

You really need to see a tax professional who can review the legal documents and all the facts before they provide advice. It also sounds like Mr. 0% needs to talk to his lawyer.

-- Drew Edmundson, CPA Cary, NC

Thanks for your response.

Yes, this is a one year thing. Also, because one partner runs the operation while the other is employed elsewhere. So on this basis, can one partner take 100% profit for one year while keeping the Capital 50/50? This would help in their individual tax returns. But In the past, they have shared profit 50/50. Or will this be a red flag to IRS?

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You need to hire a tax professional to help with this. For practical purposes the capital can't be 50/50 if all the profit is allocated to one partner. Lets look at a really simple example. 1/1/08 the capital accounts and basis are $100 for John and $100 for Janice. Income for the year is $50. Nothing else happens. So as of 12/31/08 the capital accounts are John $150 and Janice $100 for a total of $250.

Simple math tells us that John now has $150/$250 or 60% of the capital while Janice has 40%.

The $50 of income can't be 100% taxable to John but split $25 to John and $25 to Janice for capital account purposes. The same rule has to be used for both purposes or IRS will cause you to recast the transactions.

-- Drew Edmundson, CPA Cary, NC