TAXATION OF PARTNERSHIP

 Partnership doesn’t pay tax i.e. is not taxable

 It is the partners who are taxed on their share of partnership profit and other income such as rental
income, dividends, farming etc.

Income of a partners from partnership include:-

 Salaries
 Interest received form partnership
 Less interest paid to the partnership (interests on drawings)

Taxation of taxable income is similar to other businesses apart from:

 Salaries
 Interest on capital
 Commission
 Interest charged to partners into income

Allocation
Salaries XX
Interest XX
Interest drawings XX
Share XXX
Income Tax Computation of a Partnership
Shs Shs
Net profit as per A/C XXX
Add back:
Partnership salaries XX
Interest paid to partners XX
Goods taken by partners XX
Goodwill written off XX
Partner's insurance XX
Legal fees on Partnership agreements XX XX
Less
Non taxable income X
Capital deductions allowed X (XX)
Adjusted partnership profits XXX

Income Allocation to Partners

Total Partner A Partner B
Shs Shs Shs
Salary XXX XX XX
Interest on capital XX XX XX
Interest on drawings (X) (X) (X)
Share of profit XX XX XX
XXX XX XX

1
Gatwiri, Kiende and Kanyiri are partners, operating a supermarket in Meru town. They share profits and losses in the
ratio 2:2:1 respectively. During the year ended 31 December 2023, the partners reported a loss of Sh.4,425,000 after
deducting the following:

Sh.
Interest on capital:
Gatwiri 232,000
Kiende 232,000
Kanyiri 348,000
Salaries to partners:
Gatwiri 400,000
Kiende 420,000
Kanyiri 576,000
Motor vehicle running expenses 304,000
Repairs and maintenance 96,000
Office expenses 240,000
Goodwill 400,000
Loss on investment 600,000
Postage and telephone 170,000
Water and electricity 136,000
Subscriptions to Kenya National chamber of Commerce 128,000
Salaries and wages 712,000
Donations 300,000
Bad debts written off 346,000
Rent, rates and licences 160,000
Professional fees 960,000
Depreciation 1,760,000
Purchase of lorry 1,331,000
Dividend receive (Net) 264,000
Insurance recovery on motor vehicle 520,000

Notes:
1. Offices included cost of office cabinet of Sh.110,000.
2. Travelling expenses amount to Sh.12,000 per month related to personal use.

3. Provision for bad and doubtful debts account

Sh. Sh.
Bad debts 246,000 General b/f) 330,000
Specific (c/f) 192,000 Specific (b/f) 152,000
General (c/f) 390,000 Profit and loss account 346,000
828,000 828,000

4. Kiende had taken goods worth Sh.70,000 for her own use.
5. Wear and tear allowances agreed with the commissioner amounted to Sh.706,000.
6. Included in repairs and maintenance is Sh.80,000 paid for office partitions in 2005.

Required:
The taxable profit (loss) from the partnership business and show the distribution among the partners as at 31 December
2023 and tax payable thereon. (20 marks)

2
Gatwiri, Kiende & Kanyiri Partnership
2023 Tax Computations

Reported Loss (4,425,000)

Add back
Interest on capital
Gatwiri 232,500
Kiende 232,000
Kanyiri 348,000
Salaries to partners
Gatwiri 400,000
Kiende 420,000
Kanyiri 576,000
Office expenses – cabinet 110,000
Travelling expenses (12,000 x 12) 144,000
Increase in general provision for bad debts 60,000
Drawings – Kiende 70,000
Office partitions 80,000
Goodwill 400,000
Loss on investment 600,000
Donations 300,000
Depreciations 1,760,000
Purchase of lorry 1,331,000 7,063,000
2,638,000

Deduct:
Wear & Tear allowance (706,000)
Dividends received (264,000)
Insurance recovery on Motor vehicle (520,000) (1,490,000)
Taxable partnership profit/(loss) 1,148,000

Allocation to Partners

Gatwiri Kiende Kanyiri Total

Interest on capitals 232,000 232,000 348,000 812,000
Salaries to partners 400,000 420,000 576,000 1,396,000
Share of loss (424,000) (424,000) (212,000) (1,060,000)
208,000 228,000 712,000 1,148,000

3
Class Exercise

Lio, Kelly and Kituo trade are trading as Liko enterprises. They share profits and losses equally. The following
details in the draft accounts regarding their profit and loss status as at 31 December 2023 have been provided:

Debits Credits
Sh. Sh.
Office expenses 408,000 Gross profit 2,600,000
General expenses 188,000 Interest earned 240,000
Salaries and wages 560,000 Discounts received 160,000
Show room expenses 234,000 Other receipts 300,000
Rents, rates and taxes 300,000 Rent income 264,000
Printing and stationery 128,000 Capital gain on shares. 200,000
Instalment tax paid 90,000
Advertising 146,000
Legal charges 164,000
Interest on capital 420,000
Depreciation 184,000
Bad debts 136,000
Commission to partners 160,000
Donation for poverty 200,000
Property taxes 24,000
Electricity expenses 92,000
General reserve 240,000

The partners provided additional information as follows:

1. Closing stock had been understated by Sh.30,000 as at 31 December 2023.
2. Lio was paid Sh.100,000 as salary (included in salaries and wages) and PAYE Sh.31,000 was paid on it.
3. The firm was fined Sh.30,000 for breach of regulations. This is included in legal charges.
4. Interest on capital was Sh.160,000 to Lio, Sh.120,000 to Kelly and sh.140,000 to Kituo.
5. Commission to partners include sh.90,000 to Lio and the balance to Kituo
6. Capital allowances had been agreed at sh.1,800,000 with the tax authorities.

Required:
(a) Compute the total income (loss) from the partnership business.
(b) Show allocation of profit/loss among partners.
(c) How is the profit/loss of each partner to be treated for tax purposes?
(d) Specify five matters you are likely to question on the above accounts and state why