Retained Earnings in Partnership

If I decide to retain earnings in our firm (rather than distributing them as profit at the end of the year), will I and my business partner be liable for the taxes on that money this calendar year?

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    Hi, if you and your partner opt to not take distributions you will still be taxed on the net income of the partnership. The way partnership taxation works, at the end of the year, the partnership income (loss) is split based on the partnership agreement. If the agreement states that the partnership is a 50/50 split then the net income will be split 50/50 and reported on the partners K1 at the end of the year. Income is taxable in the year earned. The partnership itself is not taxed, so the income has to be taxable to the partner in the year earned. This process is not contingent upon whether or not you and your partner take distributions.

    Distributions are paid out of retained earnings. So for example, if the partnership makes $100,000 and you did not distribute the $100,000, you will have retained earnings of $100,000. When you do decide to take a distribution of your retained earnings, your retained earnings will be reduced by the amount distributed. However, you will not be taxed on the distribution.

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