PM163060 - Allocation examples of profits and losses

S850A, S850B Income Tax (Trading and Other Income) Act 2005, S1263, S1264 Corporation Tax Act 2009

Example 1- Allocation of partnership profit: no reallocation required

Alan, Beatrice and Cassandra are in partnership. The partnership makes a profit of £8,900. Alan and Beatrice are entitled to salaries of £2,200 and the balance of profits are shared equally. The partnership profits are allocated as follows

	Alan	Beatrice	Cassandra	Totals
Salary	£2,200	£2,200	nil	£4,400
Balance of profits	£1,500	£1,500	£1,500	£4,500
Net allocated	£3,700	£3,700	£1,500	£8,900

In this case the commercial profit sharing arrangement produces a straight apportionment of the actual partnership profit and no further adjustment is required.

Example 2- Allocation of partnership profit: reallocation required

The facts are the same as in example 1, but Alan and Beatrice are each entitled to a salary of £5,200. The

balance of profit is shared equally.

The partnership profits would initially be allocated as follows

	Alan	Beatrice	Cassandra	Totals
Net Allocated	£5,200	£5,200	nil	£10,400
Balance of profit	(£500)	(£500)	(£500)	(£1,500)
Reallocated	£4,700	£4,700	(£500)	£8,900

In this case the commercial profit sharing arrangement produces a incorrect result. The aggregate notional profit allocated to Alan and Beatrice is £9,400, whilst Cassandra has been allocated a notional loss of (£500).

Therefore the actual partnership profits must be reallocated between the profit making partners.

The re-allocation is made in proportion to the notional profit initially allocated to each partner, i.e. in the ratio

£(4,700) - £(4,700) or 50% - 50%

£(9,400) - £(9,400) - - - -

	Alan	Beatrice	Cassandra	Totals
Net Allocated	£4,700	£4,700	(£500)	£8,900
Percentage	(50%)	(50%)	(0%)
Reallocated	£4,450	£4,450	nil	£8,900

Example 3- Allocation of partnership loss: reallocation required

The facts are the same as in example 1 but Alan is entitled to a salary of £4,400, and profits/losses are shared Alan 25%, Beatrice 25% and Cassandra 50%. This time the partnership makes a loss of (£1,600). The partnership loss is initially allocated as follows

	Alan	Beatrice	Cassandra	Totals
Salary	£4,400	nil	nil	£4.400
Balance of loss	(£1,500)	(£1,500)	(£3,000)	(£6000)
Net Allocated	£2,900	(£1,500)	(£3,000)	(£1,600)

In this case the commercial profit sharing arrangement produces an incorrect result. A notional profit of £2,900 has been allocated to Alan whilst Beatrice and Cassandra have been allocated an aggregate notional loss of (£4,500).

Therefore the actual partnership loss must be reallocated between the loss making partners. The re-allocation is in proportion to the notional loss initially allocated to each partner, i.e. in the ratio

(£1,500) - (£3,000) or 33.3% - 66.7%

(4,500) - (4,500) - - - -

	Alan	Beatrice	Cassandra	Totals
Net Allocated	£2,900	(£1,500)	(£3,000)	(£1,600)
Percentage	(nil)	(33.3%)	(66.7%)	(100%)
Reallocated	nil	(£533)	(£1,067)	(£1,600)