When two parties come together to form a business partnership, one of the first things they need to do is establish how they will split profits and expenses. This is where a tax allocation agreement comes in.
A tax allocation agreement outlines how the partnership income and expenses will be allocated between the partners for tax purposes. This agreement is necessary for partnerships to accurately report their income and expenses to the IRS.
Here is a sample tax allocation agreement that can be used as a starting point for crafting your own:
[Partnership Name]
Tax Allocation Agreement
This agreement is entered into on [Date] between [Partner 1] and [Partner 2], collectively referred to as the “Partners.”
1. Purpose
The purpose of this agreement is to establish a method of allocating partnership income and expenses between the Partners for tax purposes.
2. Allocations
For tax purposes, partnership income, gains, losses, deductions, and credits will be allocated to the Partners in accordance with their respective percentage ownership in the partnership. The percentage ownership will be determined by the capital contributions of each Partner.
3. Tax Reporting
The Partners will report their share of partnership income, gains, losses, deductions, and credits on their individual tax returns in accordance with the allocations set forth in this agreement.
4. Adjustments
In the event that the IRS challenges the allocations set forth in this agreement, the Partners agree to work together to resolve any issues and make any necessary adjustments to their individual tax returns.
5. Term
This agreement will remain in effect for the duration of the partnership unless amended or terminated by mutual agreement of the Partners.
6. Governing Law
This agreement will be governed and interpreted in accordance with the laws of the state in which the partnership is registered.
7. Entire Agreement
This agreement constitutes the entire agreement between the Partners and supersedes all prior understandings or agreements, whether written or oral.
In conclusion, a tax allocation agreement is an essential tool for any business partnership. It ensures that the partnership income and expenses are properly allocated for tax purposes and can prevent disputes down the line. By using this sample agreement or crafting one that fits your specific needs, you can establish a clear and fair method for sharing the tax burden in your partnership.