Tax Treatment of Partnership Versus Joint Venture
One of the main reasons business owners should be concerned about the election between a partnership and a joint venture is taxes.
Partnerships are considered “pass through” tax entities, meaning all of the profits and losses of the partnership pass through the business to the partners. The partners then each pay taxes on their share of the profits (or deduct their share of the losses) on their individual income tax returns. As a pass-through business entity owner, partners in a partnership may be able to take advantage of the 20% pass-through deduction established under the Tax Cuts and Jobs Act (TCJA).
Depending on the circumstances, joint ventures may be taxed as a corporation or partnership. Entities that are taxed as corporations are subject to tax at both the corporate and shareholder levels, commonly referred to as double taxation. The TCJA established a single flat tax rate of 21% for corporations, significantly lowering it from the 15% to 35% rate that corporations paid under prior law.
There are positives and negatives to each form of taxation. One benefit of partnerships is that they offer greater flexibility with regard to the allocation of gains and losses. For example, you might be able to structure your partnership so that one partner receives 50% of the gains generated by the business and 99% of the losses, something that might benefit the individuals in your group. Caveat: these are called special allocations and must have what is called ‘Substantial Economic Effect’ (SEE). SEE is defined by the tax code and the tax regulations.
However, you or others in your group might not want to report income on your personal returns and therefore corporate tax treatment might be better. Your decision may also depend on whether you can take the 20% deduction available to partners or if your overall tax rate is better with a flat 21% corporate rate.