Supreme Court Considering Hearing Business Partnership Tax Dispute
On December 18th, 2023, Bloomberg Tax reported that the Supreme Court of the United States is considering taking up a business partnership tax dispute. It could have significant implications for the future of the taxation of business partnerships at the federal and state level. Within this blog post, our West Palm Beach partnership dispute attorney discusses the case in more detail.
Background: Recent Ninth Circuit Ruling Limits Ability to Offset Partnership Losses
In a recent legal dispute, taxpayers Ritchie Stevens and Julie Keene-Stevens—who have owned and operated a business partnership—are locked in a legal dispute. This case arose after the Ninth Circuit reversed a 2020 US Tax Court decision that initially found the couple did not owe taxes or penalties on $18 million in claimed partnership losses from 2007 and 2009-2012.
Broadly speaking, the couple sustained major losses in their business partnership during these years. They used those partnership losses to deduct them against income. However, the Ninth Circuit Court of Appeals determined that those losses could not be deducted because of the absence of properly filed tax returns.
It is a technical tax question that could have important implications for partnership income. The plaintiffs, Mr. and Mrs. Stevens, are seeking a review of the matter from the nation’s highest court. They allege that the Ninth Circuit’s decision represents a clear and unambiguous error.
Understanding How Business Partnerships are Taxed
Understanding how business partnerships are taxed is crucial for anyone involved in or planning to enter into such a business. You do not want to end up in a tax-related dispute—either with your business partner or with tax authorities. Here are some key points to consider:
- Pass-Through Taxation: Unlike corporations, partnerships are typically subject to “pass-through” taxation. The partnership itself does not pay taxes on the income it earns. Instead, profits and losses are passed through to the individual partners.
- Self-Employment Taxes: Partners are often considered self-employed. As such, they are responsible for paying self-employment taxes. These are the taxes that cover Social Security and Medicare contributions.
- Deductions and Credits: Partners can claim deductions for certain expenses incurred in the operation of the partnership. These deductions can reduce the taxable income passed through to them.
- Allocation of Income and Loss: The partnership agreement typically outlines how profits and losses are divided among partners. The allocation affects how much tax each partner pays and it is absolutely crucial that it is handled properly.
- Filing Requirements: As a general rule, business partnerships must file an annual information return (Form 1065) with the IRS. The form reports the income, deductions, gains, losses, etc., of the business. However, the partnership does not directly pay tax on this income.
Get Help From Our South Florida Partnership Dispute Lawyer for Immediate Help
At Pike & Lustig, LLP, our West Palm Beach partnership attorney is standing by, ready to go above and beyond to protect the best interests of our clients. If you have any questions about a partnership dispute, please do not hesitate to contact us today. From our West Palm Beach office, we handle partnership disputes all over Southeast Florida.