The salary and interest allowances in a partnership profit-sharing agreement can best be described as
A) expenses of the business that are deducted from revenue in the determination of net income.
B) amounts on which each partner will not have to pay income tax.
C) a means of distributing net income in relation to the services provided and the capital invested by each partner after which profits or losses are distributed as specified in the partnership agreement.
D) a legal requirement in order for a partnership to be formed.

Question

Quizplus · Accepted Answer

The salary and interest allowances in a partnership profit-sharing agreement are a means of distributing net income in relation to the services provided and the capital invested by each partner after which profits or losses are distributed as specified in the partnership agreement. This is one of the key components of a profit-sharing agreement and determines how the partners will be compensated for their contributions to the business. It is not an expense of the business, nor is it a legal requirement for a partnership to be formed. Additionally, the partners will still need to pay income tax on their share of the profits, even if they have received a salary or interest allowance.

The Salary and Interest Allowances in a Partnership Profit-Sharing Agreement