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Taxation

Steve and Erin started a general partnership to do landscaping and sell gardening supplies. Both will work in the business full time and need to withdraw approximately $40,000 year each to live on. The partnership has purchased substantial capital assets that it will hold until the cash from their sale is needed in the business. For the first five years of operations, the partnership expects to earn approximately $140,000 of ordinary income each year before distributions to the two owners. Assume that the entire amount of ordi nary income will qualify for the business income deduction, without being limited by 20% of excess taxable income. Steve and Erin are single taxpayers and have income from other sources so their partnership earnings will be taxed at a 22% marginal rate. Should the two set up $40,000 guaranteed payments for each, or should they take out the $40,000 as draws from their distributive shares of partnership income? Ignore self-employment taxes in your analysis as the self-employment taxes would be the same in either case.

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