Definition
Distributive Share refers to the allocation of income, gain, loss, deduction, or credit to a partner in a partnership. This allocation is generally controlled by the partnership agreement, although there are important exceptions governed by tax laws and regulations.
Examples
- Income Allocation: In a two-partner business, Partner A and Partner B agree to share profits equally. If the partnership earns $100,000 in a year, both Partner A and Partner B receive a distributive share of $50,000 each.
- Loss Allocation: If the same partnership incurs a loss of $20,000, each partner’s distributive share will reflect a $10,000 loss.
- Specific Item Allocation: If a partnership agreement specifies that Partner A will receive all gains from the sale of the partnership’s immovable assets while income from regular business activities is shared equally, the distributive share of the partners will differ accordingly.
Frequently Asked Questions
1. How are distributive shares reported for tax purposes?
Distributive shares must be reported on the individual tax returns of the partners. Even if money is not physically distributed, the allocated share is taxable income.
2. Can the distributive shares differ from actual cash distributions?
Yes, distributive shares refer to the allocation of the items specified, while actual cash distributions are the physical transfer of funds, which may not occur at the same time or in the same proportions.
3. What if the partnership agreement does not specify the distributive shares?
If a partnership agreement does not specify distributive shares, the default allocation is typically based on the proportion of capital contributions or as mandated by local partnership laws.
4. Can the IRS reallocate distributive shares?
Yes, the IRS has the authority to reallocate distributive shares if it finds that the allocation stipulated in the partnership agreement does not have substantial economic effect.
5. Are there any special rules for calculating distributive shares in family partnerships?
Yes, family partnerships often have special considerations for distributive shares to prevent income shifting between family members in different tax brackets.
Related Terms
Partnership Agreement
A legal document stating the terms of the partnership arrangement, including the allocation of distributive shares.
Income Allocation
The process by which income from the partnership is divided among the partners.
Tax Benefit Rule
A principle that adjusts taxable income to reflect benefits received from deductions and credits.
Substantial Economic Effect
A tax principle ensuring that allocations in a partnership agreement reflect actual economic arrangements.
Online References
- Internal Revenue Service (IRS) - Partnerships
- Nationwide - What is a Partnership Agreement?
- Investopedia - Distributive Share
Suggested Books for Further Studies
- “Taxation of Partnerships and Partners” by Stephen R. Barkume and Andrew R. Rosenzweig
- “Understanding Partnership and LLC Taxation” by Jerold A. Friedland
- “Principles of Partnership Taxation” by Stephen Schwarz and Daniel Lathrope
Fundamentals of Distributive Share: Taxation Basics Quiz
Thank you for exploring the concept of distributive share. This understanding is central to effective partnership management and tax compliance. Keep learning and excelling in your knowledge of finance and taxation!
