Remember from a tax perspective, partners agree to share the economic benefits and burdens of ownership. This means that not only will they share profits, but they will also share losses and – in a worst case scenario — perhaps contribute additional capital in support of the business. For tax purposes, we need to create and maintain some record of this activity.
Enter the partner’s capital account. This is the most important element of partnership taxation; it is an ongoing record documenting the partner’s economic participation in the partnership. The actual workings of this account are one of the most complex in US taxation and therefore beyond the scope of a few blog posts. However, some initial observations can be made. Read more