Corporation Tax Act 2009 section 1263

Profit-making period in which some partners have losses

Section 1263 deals with situations where a partnership is overall profitable, but the allocation of that profit under the partnership agreement results in one or more partners showing a loss — typically because of guaranteed salaries or interest on capital — and explains how the remaining partners' profit shares must be adjusted downwards so that the total allocated does not exceed the firm's actual profit.

• Where a partner's allocated share is a loss even though the firm overall is profitable, that partner's share is treated as neither a profit nor a loss for corporation tax purposes.
• Where a partner has a profit share but at least one other partner has a loss, the profit-making partner's share is reduced using a formula so that total allocated profits do not exceed the firm's overall profit.
• The reduction formula is: firm's profit multiplied by (the partner's profit divided by the sum of all profit-making partners' comparable amounts).
• The "comparable amount" for each other partner is their notional share of the firm's profit worked out using the firm's profit-sharing arrangements, regardless of whether that partner is subject to corporation tax or income tax.