Question

Connie wanted to form a partnership with Chuck to sell insurance. He agreed and they became co-owners in C&C Insurance, an equal partnership. The partnership did well in its first year and, after expenses, had a profit of $150,000. How will the taxation of this profit be handled?

a.Connie and Chuck must both pay tax on the business's profit.
b.C&C Insurance itself will pay the taxes on the business’s profit.
c.Since the partnership was Connie's idea, she will pay income tax on the profit on her personal tax return.
d.C&C Insurance will pay half of the tax liability and Connie and Chuck will pay the other half.

Answer 1

C&C Insurance's profits will not be taxed at the business level. Instead, Connie and Chuck will each pay taxes on their individual share of the profits on their personal income tax returns, as partnerships pass-through income to the partners who are then taxed individually.

Step-by-step explanation:

Connie and Chuck have formed an equal partnership called C&C Insurance, which has made a profit of $150,000 after expenses. In the case of a partnership, the business itself is not taxed on the profits. Instead, each partner pays taxes on their share of the income. This means that Connie and Chuck must both report their respective shares of the profit, which would be $75,000 each if the partnership is equal, on their personal income tax returns.

Partnerships are subject to little government regulation and have the benefit of not having to pay corporate income taxes. Since the business is not a separate taxable entity, it does not pay taxes on profits. Instead, the income is passed through to the partners, who then pay taxes according to their individual tax rates on their personal returns. This is one of the positive aspects of a partnership; there are no special taxes at the business level.