5 Tax Saving Strategies Partnerships Can Utilize

Whether we like it or not, paying taxes is an inevitable part of being a business owner. If you own a partnership, this means that the result of your business operations are taxed on your personal tax return.  While you won’t be able to avoid income taxes completely, you may be able to lower them using the strategies we discuss below…

1. Maximize The Qualified Business Income (QBI) Deduction 

In 2017, The Tax Cuts and Jobs Act implemented the Qualified Business Income  Deduction.  This allows pass-through entities (which includes your partnership) to deduct up to 20% of their qualified business income. 

So what is Qualified Business Income? By definition, QBI refers to the “the net amount of qualified items of income, gain, deduction and loss with respect to any trade or business.” Some items of income excluded from the amount included in your qualified business income for deduction purposes are:

• Capital Gains/losses
• Dividends 
• Interest Income 
• Guaranteed payments made to partners 

The next step in determining eligibility for the QBI deduction is to make sure that your taxable income is under the income thresholds. To receive the full QBI Deduction, your total taxable income must be below $170,050 for single filers and $340,100 for joint filers in 2022.   

Because of the various limitations on the QBI deduction, different tax planning moves can increase or decrease your allowable QBI deduction. For example, if you are over the taxable income threshold, you may want to strategize  how to bring your partnership’s taxable income down by deferring income or accelerating expenses.  The Qualified Business income deduction is a fantastic way to save on taxes, but is scheduled to expire in 2025. Speak with your CPA to find out how to utilize the QBI deduction within your partnership to optimize on tax savings. 

2. Claim Bonus Depreciation 

Bonus Depreciation is a way that businesses can instantly recover the cost of capital purchases through expensing the asset. This expense will be deductible from taxable income and will result in lower taxes for the partners of your partnership. 

Thanks to the Tax Cuts and Jobs Act, certain property may be eligible for 100%  bonus depreciation that was placed in service between sept. 27, 2017 and January 1, 2023.  If your property is eligible, you will be able to deduct the full amount of the property from your income. This is a powerful tax incentive for businesses to purchase qualified property used in their business, and should be considered for your 2022 tax planning. But act fast, because the enhanced bonus depreciation tax break will be gradually phased out beginning after 2022.  

3. Elect Pass Through Entity (PTE) Tax  

Beginning in 2018, the maximum amount of state and local taxes (SALT) that can be deducted on your federal return is $10,000. In an effort to  mitigate the negative effects of the “SALT Cap ” limitation , nearly 30 states allow pass-through entities to be taxed at the entity level. The state PTE tax election could be beneficial to the members of your partnership depending on your state’s PTE tax regime and each members’ individual tax situations. 

So, how would being taxed at an entity level save you on taxes? Typically, the owners of Pass-through- entities are responsible for paying taxes on their distributive share of the entity’s income on their personal return. The option to elect Pass-Through-Entity Tax shifts the payment of state and local income taxes to the entity. Those income taxes (which were once subject to the $10,000 limitation) can then be fully deducted for federal tax purposes by the entity. The deduction will then be passed through to each members’ income. Depending on which state you are in, the members will receive this deduction by either: 

• Claiming a tax credit for the their share of the taxes paid, or 
• Reducing their AGI by their share of the income 

In Illinois, for instance, members are required to include their share of the entity’s income in their adjusted gross income, but are allowed to claim a tax credit for the amount of tax that was paid by their entity. 

Electing for your partnership to be taxed by the state at the entity level can enable you to deduct the full amount of State and Local tax for Federal purposes. Make sure to run through the federal and state tax consequences of your PTE for each member to see if this election may be right for you. 

4. Take Advantage of the 100% meal deduction in 2022 

As a part of The Consolidated Appropriations Act in 2020, there was a change in the deductibility of business meals in an effort to help struggling restaurants during the COVID-19 pandemic. During the years of 2021 and 2022, food and Beverages purchased from a restaurant are 100% deductible! However, the 100% deduction does not apply to food purchased from businesses that primarily sell pre-packaged foods and beverages, so make sure that you plan accordingly. 

5. Consider structuring a Limited partnership 

Limited Partnerships are partnerships that have at least one general partner and at least one limited partner. A general partner runs the operations of the business, while a limited partner contributes a certain sum of money into the business, but is not involved in the operations or held liable for debts beyond the amount contributed. One of the biggest tax advantages for a limited partner is that they are not subject to paying self-employment taxes, which is 15.3% of taxable income.  

Limited partnerships may also provide additional tax advantages in specific circumstances, such as for family-owned companies or for estate planning. If you have a situation that applies to these special circumstances, a limited partnership might be the most optimal structure for you.