WorldWide Drilling Resource

60 APRIL 2015 WorldWide Drilling Resource ® Drilling Into Money Not Boring by Mark E. Battersby Partnering in Tax Savings Partnerships are a popular way to operate a business, ranking just behind S Corporations as the most common type of business entity. Whether it is two individuals working to run a prof- itable enterprise or a drilling business in a joint venture with others, partner- ships are an attractive option. Unfor- tunately, although an entity isn’t usually required to pay taxes, the complex and confusing tax rules for partnerships have led many astray. With a partnership, all profits and losses flow through to the partners, who are then responsible for taxes. In essence, partnerships are unincorporated busi- nesses or joint ventures with two or more partners. Because partnerships are unin- corporated, the IRS (Internal Revenue Service) does not tax them directly. In- stead, profits flowing to the partners are taxed as their income. Although a partnership does not pay taxes on its profits, it must report its operating losses or profits to the IRS on Form 1065, U.S. Return of Partnership Income. The partnership must also send Schedule K-1 to partners alerting each to their share of profits or losses, with these amounts reported on the partners’ income tax returns. There are three general types of partnership arrangements: 1. General Partnerships , where profits, liability, and management duties are divided equally among all partners. If an unequal distribution is made, the percentages assigned to each partner must be documented in the partnership agreement. 2. Limited Partnerships allow part- ners to have limited liability, as well as limited input in management decisions. These limits depend on the extent of each partner’s invest- ment percentage. Although more complex than general partnerships, limited partnerships are attractive to investors in short-term projects. 3. Joint Ventures are usually classed as general partnerships, but for only a limited period of time, or for a single project. Regardless of whether each part- ner actually receives the amount stated on the Schedule K-1 filed by a partner- ship is irrelevant. The IRS levies taxes based on a partner's "distributive share," which is the percentage of the drilling operation’s profits the partner is entitled to. In the absence of a written partner- Battersby cont’d on page 62. Did I buy the winning ticket? New friends. 2015 Chow time! Looks delicious! Filling out the tickets!