Answers · Partnerships · Form 1065
How Are Partnership Profits Divided?
Partnership allocations follow the agreement but must satisfy IRC §704 rules; unlike S corporations, some non-pro-rata allocations are possible when economically valid.
How it works
The rule, and what it turns on.
Special allocations, contributed property and changing interests require careful §704 analysis.
Example
50/50 owners can have a special allocation only if the tax rules and economics support it; simply assigning income after year-end is not enough.
Common mistakes
What we see go wrong, and what we do instead.
- Allocating profit to match draws.
- Changing percentages after results are known.
A better approach
- Draft the partnership agreement to reflect intended economics before transactions occur.
Authority
Where this comes from, so you can check it.
IRC §704; Treas. Reg. §§1.704-1 through -3.
Educational information, not individualized tax advice. Treatment depends on your facts, entity classification and tax year, and IRS instructions change. Confirm your own position with us before relying on it. Mint Associates does not provide legal services.
Also asked
The same question, the other ways people put it.
- What Is a Partner's Distributive Share?
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