Question

jack and jill have a partnership, but did not secure a partnership agreement. historically, they have been splitting profits 50/50. this year they have determined that a net loss is inevitable and would like to change the allocation to 80/20, so that jack can offset some other anticipated income. what allocation can jack and jill use for this year's partnership return?

Answer 1

Without a formal partnership agreement, Jack and Jill should legally split the losses 50/50, as they have done with profits. Altering the loss allocation to 80/20 for tax reasons may be scrutinized by tax authorities unless justified with a valid business reason and an amended partnership agreement.

Step-by-step explanation:

Jack and Jill have been splitting profits equally in their partnership due to the lack of a formal partnership agreement. With an expected net loss for the year, they want to alter the loss allocation to 80/20. In the absence of an agreement stating otherwise, partners typically share profits and losses according to their respective share of the partnership. Since their historical arrangement was a 50/50 split, without additional justification or changes to their partnership agreement, the IRS would likely expect them to continue to split the losses equally. An attempt to change the allocation to 80/20 purely for tax benefits might be scrutinized by tax authorities unless they amend their partnership agreement to reflect the new arrangement and have a valid business reason for doing so.