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When filing taxes for an LLC-Partnership, what should be done if the earned income varies from that of the partnership share?

For example, if there are 4 members, and $100,000 is earned, their ownership is 25%, but not ever member earned $25,000 as income.

Our operating agreement specifies that each individual partner has 25% shares and voting rights, but our income is distributed based on different circumstances (i.e. how much contribution and work the individual does, and the type of work). Is there any reason why we can't file 4 K-1's for each partner with varying income?

The reason this concerns me is becaues of quotes like this - https://turbotax.intuit.com/tax-tools/tax-tips/Small-Business-Taxes/What-is-a-Schedule-K-1-Tax-Form-/INF19204.html

As a result, the partnership must prepare a Schedule K-1 to report each partner’s share of these tax items. K-1s are provided to the IRS with the partnership’s tax return and also to each partner so that they can add the information to their own tax returns. For example, if a business earns $100,000 of taxable income and has four equal partners, each partner should receive a K-1 with $25,000 of income on it.

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Why would you file four K-1s for each partner? You file one K-1 per partner, on which you report the total of income attributed to that partner. It shouldn't and cannot "vary". There's no variables here, the income you report is the income already earned and attributed to that partner. What's there to vary?

How you decide the attribution of income is governed by your operating agreement, the IRS only needs the bottom line.

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  • Fair enough. Sorry if I poorly communicated, I did not think each partner would file 4 K-1s. What am I asking is - does a legal partnership share and income distribution need to match (i.e. a partner has 1/4th share and therefore should have earned 1/4th the income)? Do they need to be the same as described in the example above?
    – RCNeil
    Mar 24, 2014 at 1:15
  • No, there are no shares in partnership, so there's nothing to match. You can even attribute losses and earnings in different proportions, you can essentially do whatever you want as long as it is according to the operating agreement.
    – littleadv
    Mar 24, 2014 at 1:18
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It would appear that you are not actually "equal" partners. You have differently valued interests and those values fluctuate based on individual performance. The TurboTax advice is simplified for entities that don't track interests relative to partner inputs.

IRC § 704(a), partner's distributive share is set by the partnership agreement, and § 704(b), failing an allocation by the agreement it is set by the partner's interest in the partnership. But note § 704(b)(2), which prevents blatant tax-rigging in the partnership agreement.

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