Taxation of Partnerships and Unincorporated Businesses
Core concepts
A partnership is generally tax-transparent: the firm computes trading profit, but each partner is taxed on their profit share at personal rates. Understand the profit-sharing ratio, changes in partnership (admission/retirement of partners), and the basis period rules that allocate profits to tax years.
Unincorporated businesses also face capital allowances on plant and machinery and may qualify for cash basis or simplified regimes for small businesses. Distinguish partners' salaries (a distribution of profit, not a deductible expense) from genuine interest on capital (often deductible).
Traps to watch
- Partners' salaries are not deductible in computing partnership profit; they are an allocation.
- Changes in the profit-sharing ratio require time-apportionment of profit.
- Basis periods can cause overlap profits or a gap; know the current-year vs previous-year basis.
- LLPs may be taxed like partnerships but have separate legal personality-do not confuse liability with tax treatment.
Rule of thumb
Compute firm profit, then allocate by time-weighted profit share; tax each partner separately.
Worked example: Firm profit 120,000 for the year. A and B share equally for 6 months, then 60:40 for 6 months. A's share = (60,000 × 50%) + (60,000 × 60%) = 30,000 + 36,000 = 66,000.