NAME: FREDRICK OMONDI ONAYA

ADM NO: PBA/H/01-70294/2024

UNIT NAME: TAX LAW AND PRACTICE

UNIT CODE: PBC 921

TAXATION OF PARTNERSHIP

Section 2 of the partnership act 2012 defines partnership as relationship which exist between persons

who carry on business in common view to making a profit. Partnership in Kenya fall into 3 categories;

general partnership, limited partnership and limited liability partnership.

General partnership

-is common type of partnership

-all partners are equally responsible for managing the business

-all partners are jointly liable for debts and obligations

-easiest and cheapest type of partnership to form

Limited partnership

A partnership with both general and limited partners

A general partners manage the business and have unlimited liability

Limited partners contribute capital and have liability limited to their investment

Limited liability partnership

Owners aren’t held personally responsible for the business debts or other partners actions

You typically can’t lose your personal assets if someone face legal action against the partnership firm.
Pin registration for partnerships

Under Kenyan law partnership is required to apply for a Pin in I tax (KRA)

The partners are required to present the following documents for registration:

-A copy of acknowledge receipt

-pin certificate of the partners

-deed of partnership

-tax compliance certificate of the partners

Income tax partnership return (IT2P)

Partnership declare their profit through the income tax partnership return (IT2P)

When filing a partnership return one is required to capture the pin of each partner and indicate the

profit sharing ratio. Any profits or losses are then transferred to each partners pin to be used when filing

their annual return

There is no requirement for the accounts to be audited as each partner is required to prepare his own

accounts.

All partners must individually account for their taxes. Their profit is distributed to the individual partners

in the ratio of their ownership. The profits then forms part of each individual income from where it is

taxed as business income.

Illustrations
Ambala and basanyo have been trading in partnership sharing profit and losses in the ratio 3:2.they have
the accounts for 2020 as follows
kshs
Interest on capital (Ambala) 20000
Interest on capital (basanyo) 10000
Goodwill written off 4000
Bad debts 20000
Audit ,insurance & legal 20000
Motor vehicle 30000
Depreciation 60000
Special expenses 8000
Withholdings tax on dividends 3000
Partnership salary 60000
Loss on sale of investments 10000
Repairs and renewals 6000
Salaries and wages 60000
Utility expenses 20000
Net profit 32000
403000
Gross profit 380000
Dividend received 17000
Sub letting rent income 6000
403000

Notes
a) Bad debts:
The bad debts account is as follows: sh sh
Bad debts written off 10000
Reserves carried down:
General 80000
 Specific 22000 102000
112000
Balances
General 60000
Specific 30000 90000
P&L 20000
Debts recovered 2000
112000
b) Audit ,insurance and legal sh
Audit expenses 10000
Partners insurance 2000
Legal fees debt collection 500
Legal fees (partnership deed) 7500
20000
c) Special expense:
Penalty for breach of sales tax regulations 4000
Redundancy pay to employee 3000
Christmas gifts to partners wives 1000
8000
d) Withholdings tax on dividend
Dividends were received net of tax
Loss on sale of investments:
The shares in a quoted company were disposed of by sale during the year. They had cost shs.60000 and
were disposed of for shs 50000.there were no other incidental expenses
Repairs and renewals:
Office partitions 2000
Office carpet 1500
Replacement of adding machine 1000
Generals repairs 1500
6000
Wear and tear schedule Class iii class iv
Written down value 90000 56000
A third of the motor vehicle expenses is used on private motoring by partners.

Required calculate adjusted profit for tax purposes for each partner
 kshs
Profit as per profit and loss account 32000
Add back deductions not allowable
Interest on capital Ambala 20000
Interest on capital basanyo 10000
Goodwill written off 4000
Depreciation 60000
Withholding tax on divends 3000
Partnership salaries 60000
Loss on sale of investment 10000
Bad debts 20000
Partners insurance 2000
Legal fee for parnership agreement 7500
Personal use of M.V 10000
Penalty for breach of sales tax regulations 4000
Christmas gift 1000
Office partions 2000
Office carpet 1500
Replacement of adding machine 1000 216000
248000
Less net business income: Dividend 17000
231000
Less capital allowances (30060)
Add back dividend received 20000
220940
Each partner’s schedule
Ambala Basanyo Total
Salary 60000 60000
Interest on capital 20000 10000 30000
Profit share 78564 52376 130940
Taxable income 98564 122376 220940