Three doctors share a clinic. The clinic earns a profit, and the tax office does not send the clinic a bill. It sends each doctor a bill on his own share. One partner is paid a salary, another has lent money to the firm and earns interest, and one leaves in June while a new partner joins.
Each of these facts changes whose income it is, in which year, and on what basis.
This topic covers what a partnership is, which tax authority deals with it, the basis of assessment, the effect of a partner joining, retiring or leaving, amalgamation and conversion to a company, the expenses that are allowed, partnership losses, capital allowances and the computation of each partner’s tax. The previous topic covered self-employed individuals. The next covers trusts, estates and settlements.
In 30 seconds
Who is taxed: the partners, not the partnership, each on his share, on the preceding year basis. Authority: where the principal office stands on the first day of the year. New partner: commencement rules (unless he came from the same or a similar trade). Retiring partner: cessation rules (unless he joins another firm in the same or a similar trade).
Amalgamation: no commencement or cessation; assets pass at tax written down value. Conversion to a company: cessation for the firm, commencement for the company, assets at agreed values, no initial allowance. Allowed for a partnership, unlike a sole trader: partners’ salaries, interest on capital, and cost of leave passages. Capital allowances are deducted before the profit is shared.
Key terms in plain English
| Term | What it means |
|---|---|
| Partnership | Persons carrying on business in common with a view to profit; two to twenty members, more for legal and accounting practices |
| Computed income | The partnership profit after capital allowances, shared among the partners |
| Divisible profit | The profit left to share after partners’ salaries and interest on capital |
| Partnership agreement | The terms on capital, interest, salaries and the profit and loss ratio |
| Admission | A new partner joining the firm |
| Amalgamation | Two or more partnerships joining into one |
| Relevant tax authority | The state or federal body that assesses the partners |
Syllabus check
This topic is in syllabus area C, personal income taxes (25% of marks). It covers:
- meaning of a partnership, the relevant tax authority and the basis of assessment;
- changes in partners, amalgamation and conversion;
- computation of partnership income and each partner’s tax.
CAMA 2020 and partnerships
The Companies and Allied Matters Act 2020 (CAMA 2020) is the company law of Nigeria. The sections below apply to this topic.
| Section | What it says | Link to this topic |
|---|---|---|
| s. 377(1) and s. 378 | Directors prepare financial statements that give a true and fair view | A partnership is not a company, but a firm that converts to a company must then comply with these sections |
| s. 305 and s. 308 | Directors must act in good faith and with the care, diligence and skill of a prudent director | Once the firm is a company, its directors take on these duties |
| s. 119 | A company must keep proper books of account | The partners keep the firm’s accounts, which the revenue relies on for each partner’s share |
The rules in more depth
Meaning and size
The Partnership Act 1890 defines a partnership as the relationship between persons carrying on business in common with a view to profit. It has at least two and not more than twenty members. But section 19(2)(b) of CAMA allows more than twenty in a firm of legal practitioners or accountants, each of whom is entitled to practise.
The agreement usually deals with each partner’s capital, the rate of interest on capital, any salary, and the profit and loss sharing ratio.
Relevant tax authority and basis
The relevant tax authority is the one for the territory where the principal office or place of business in Nigeria is on the first day of the year, or where it is first set up in that year. A partner is assessed on his share of the partnership profit on the preceding year basis. Partners, not partnerships, are taxed.
The income of a partner from a Nigerian partnership is deemed derived from the territory of that authority.
Changes in the partnership
| Event | Treatment |
|---|---|
| A new partner is admitted | He is treated as starting a new business, so the commencement rule applies. If he left another firm in the same or a similar trade before joining, he is in continuous business and is assessed on the preceding year basis |
| A partner retires, resigns or dies | He is treated as ceasing business, so the cessation rule applies. If he leaves to join another firm in the same or a similar trade, cessation does not apply and he continues on the preceding year basis |
| Two or more partnerships amalgamate | Neither commencement nor cessation applies. Qualifying capital expenditure is transferred at tax written down value, so there is no balancing adjustment and only annual allowance is claimed |
| The partnership converts to a limited liability company | The firm ceases (cessation rules) and the company commences (commencement rules). Assets pass at agreed values, balancing adjustments are computed, initial allowance is not given, and the allowance takes account of the time the asset was with the old owners |
Computing the income of the partnership
The computation is like that of a sole trader, with these differences. Allowed: partners’ salaries, interest on capital payable to partners and the cost of passages to and from Nigeria for leave or recreation. Not allowed: private or domestic expenses of a partner. Capital allowances are deducted from the adjusted profit before the computed income is shared. The allowable and non-allowable expenses are otherwise those of the self-employed.
Partnership losses
If the computation produces a loss, it is shared among the partners as the agreement provides and each partner sets his share against his other income (current-year relief). Any loss not relieved is carried forward against his later partnership profit.
Income of a partner
A partner is taxed on (a) any remuneration, interest on capital or cost of passages charged in the firm’s accounts for him, and (b) his share of the firm’s income, computed after the charges in (a) for all the partners, but before any expenses of the partnership that are private or domestic to one partner.
Computing a partner’s tax
- Take his share of the computed profit.
- Add his salary, interest on capital, interest on loans to the firm, cost of passages and other taxable income.
- Deduct the tax-exempt items (NHF, pension, NHIS, life assurance, gratuity) to reach gross income.
- Deduct the CRA, the higher of ₦200,000 or 1% of gross income plus 20% of gross income, to reach chargeable income.
- Apply the graduated rates.
The position from 2026
Under the Nigeria Tax Act 2025, which took effect on 1 January 2026, an individual with taxable income of ₦800,000 or less a year pays nothing; the rates then rise by band from 15% to 25%, and the consolidated relief allowance no longer exists. Residence is now defined in the Act, and a resident is taxed on world income. Compensation for loss of employment or injury is exempt up to ₦50 million (it was ₦10 million).
Each partner’s share of the profit is therefore taxed on the new bands with his other income. Use the rules above, including the commencement and cessation rules for changes in partners, for years before 2026.
Worked examples
Example 1: three medical partners. Net profit is ₦9,425,000 after charging allowance for doubtful debts ₦650,000, a donation ₦800,000, depreciation ₦7,800,000, staff loans written off ₦270,000, interest on Erewa’s loan ₦455,000 and interest on capital ₦225,000 (Erewa), ₦315,000 (Sola) and ₦360,000 (Wole). Capital allowances are ₦9,500,000. The sharing ratio is 5:7:8.
- Add back ₦650,000 + ₦800,000 + ₦7,800,000 + ₦270,000 = ₦9,520,000, giving adjusted profit ₦18,945,000.
- Less capital allowances ₦9,500,000 = computed income ₦9,445,000.
- Shares: Erewa ₦2,361,250; Sola ₦3,305,750; Wole ₦3,778,000.
- Erewa’s total income.
₦225,000 + ₦2,361,250 + ₦455,000 (loan interest) = ₦3,041,250.
CRA = ₦200,000 + 20% × ₦3,041,250 = ₦808,250.
Chargeable income = ₦2,233,000.
Tax = ₦224,000 + 21% × ₦633,000 (₦132,930) = ₦356,930. - Sola: chargeable income ₦2,696,600, tax ₦454,286. Wole: chargeable income ₦3,110,400, tax ₦541,184.
Example 2: a partner retires and another joins. A firm’s profits are ₦1,650,000 for 2015 and ₦2,400,000 for 2016. Profits are shared 1:2:1. Dejo (one quarter) retires on 31 May 2016; Dandy joins on 1 June 2016 on a salary of ₦180,000 and capital of ₦210,000 at 6%, taking Dejo’s share.
- Dejo ceases on 31 May 2016.
His income for the final year = salary 5/12 × ₦360,000 (₦150,000) + interest ₦3,750 + share 5/12 × ₦2,400,000 × ¼ (₦250,000) = ₦403,750. - Dandy commences on 1 June 2016 and is assessed on actual income for 2016: salary ₦105,000 + interest ₦7,350 + share 7/12 × ₦2,400,000 × ¼ (₦350,000) = ₦462,350.
- The continuing partners stay on the preceding year basis: each takes his share of the 2015 profit of ₦1,650,000.
Example 3: two lawyers. The firm’s net profit is ₦36,600,000. It includes partners’ salaries ₦550,000 (Wachukwu) and ₦400,000 (Orlando), a personal driver’s salary ₦300,000 for Orlando, depreciation ₦4,800,000, partners’ private loan interest ₦150,000 and ₦100,000, repairs to each partner’s house ₦200,000, and profit on sale of assets ₦980,000. Capital allowances are ₦6,400,000, profits shared equally. Wachukwu is also paid ₦200,000 interest on a loan to the firm.
- Add back.
₦300,000 + ₦4,800,000 + ₦250,000 + ₦400,000 = ₦5,750,000
adjusted profit = ₦36,600,000 + ₦5,750,000 − ₦980,000 = ₦41,370,000. - Less capital allowances ₦6,400,000 = ₦34,970,000; each share is ₦17,485,000.
- Orlando.
₦17,485,000 + salary ₦400,000 = ₦17,885,000; less life premium ₦2,800,000 = ₦15,085,000; CRA = ₦200,000 + 20% × ₦15,085,000 = ₦3,217,000; chargeable income ₦11,868,000; tax = ₦560,000 + 24% × ₦8,668,000 (₦2,080,320) = ₦2,640,320. - Wachukwu.
₦17,485,000 + ₦550,000 + ₦200,000 = ₦18,235,000; CRA ₦3,847,000; chargeable income ₦14,388,000; tax = ₦560,000 + 24% × ₦11,188,000 (₦2,685,120) = ₦3,245,120.
How to score full marks
- Compute the firm’s adjusted profit and capital allowances first; share only the result.
- Add each partner’s own salary, interest and passages to his share.
- Decide the basis for each partner: preceding year, commencement or cessation.
- Compute each partner’s tax separately with his own reliefs.
Common mistakes in the exam
- Taxing the partnership instead of the partners.
- Disallowing partners’ salaries and interest on capital.
- Sharing the profit before capital allowances.
- Applying cessation to a partner who joins another firm in the same trade.
- Using the CRA from 2026.
Quick revision
- Partners taxed on shares, preceding year basis.
- Joining is commencement; leaving is cessation; exceptions for the same trade.
- Salaries, interest on capital and passages are allowed.
- Capital allowances before sharing.
Practice questions
Questions 1 to 10 are multiple choice. Questions 11 to 13 are written. Try each before opening the answer.
Question 1. A partnership has a minimum and maximum membership of:
- 2 and 10
- 2 and 20
- 5 and 30
- 2 and 50
Show the answer
B. Two to twenty, except legal and accounting practices.
Question 2. Who is taxed on partnership profit?
- The partnership
- The partners
- The managing partner only
- The bank
Show the answer
B. Partners, not partnerships, are taxed.
Question 3. The relevant tax authority is where the principal office is on:
- The last day of the year
- The first day of the year
- The date of registration
- The date of the return
Show the answer
B. The first day of that year, or where first established.
Question 4. Which is NOT allowed in computing partnership income?
- Partners’ salaries
- Interest on capital
- Private expenses of a partner
- Cost of leave passages
Show the answer
C. Private or domestic expenses are not allowed.
Question 5. A new partner who has not been in a similar trade is assessed under:
- Preceding year basis
- Commencement rules
- Cessation rules
- No tax
Show the answer
B. He is treated as starting a new business.
Question 6. On amalgamation of partnerships, assets pass at:
- Market value
- Cost
- Tax written down value
- Nil
Show the answer
C. No balancing adjustment arises.
Question 7. Conversion of a partnership to a company means:
- No change
- Cessation for the firm and commencement for the company
- Only commencement
- Only cessation
Show the answer
B. Both sets of rules apply.
Question 8. Capital allowances of a partnership are deducted:
- After sharing
- Before sharing the profit
- Never
- From the partners’ salaries
Show the answer
B. They are deducted from adjusted profit before sharing.
Question 9. A retiring partner who joins another firm in the same trade is assessed on:
- Cessation rules
- Preceding year basis
- Commencement rules
- Actual basis
Show the answer
B. He is in continuous business.
Question 10. A partnership loss is first:
- Carried back
- Shared per the agreement and set against partners’ other income
- Ignored
- Paid by the state
Show the answer
B. Unrelieved loss is carried forward.
Question 11 (10 marks). State the tax treatment of (a) admission of a partner, (b) retirement of a partner, (c) amalgamation and (d) conversion to a company. (10 marks)
Question 12 (10 marks). A firm has adjusted profit ₦12,000,000 and capital allowances ₦2,000,000. Partners A and B share equally, and A is paid a salary of ₦600,000 already charged in the accounts. Compute A’s total income from the firm. (5 marks)
Question 13 (10 marks). Explain how a partner’s chargeable income is computed. (10 marks)
Model answers
Show the model answer to Question 11
(a) Commencement rules apply, unless he left another firm in the same or a similar trade, when he stays on the preceding year basis. (2½) (b) Cessation rules apply, unless he joins another firm in the same or a similar trade. (2½) (c) No commencement or cessation; assets pass at tax written down value and only annual allowance is claimed.
(2½) (d) The firm ceases and the company commences; assets at agreed values; balancing adjustments; no initial allowance. (2½)
Show the model answer to Question 12
Computed income = ₦12,000,000 − ₦2,000,000 = ₦10,000,000. (2) A’s share = ₦5,000,000. (1) A’s total income = ₦5,000,000 + salary ₦600,000 = ₦5,600,000. (2)
Show the model answer to Question 13
Take his share of computed profit; (2) add salary, interest on capital, interest on loans and passages; (2) deduct tax-exempt items to get gross income; (2) deduct the CRA (higher of ₦200,000 or 1%, plus 20%); (2) apply the graduated rates. (2)
Pathfinder on Partnership income, changes in partners and each partner’s tax
These are the ICAN Pathfinder questions that test this topic. ICAN owns the questions and the suggested solutions, so we point you to them and do not copy them. Open your Pathfinder, attempt each question under exam conditions, then check your answer against the notes above.
Revise first: Changes in the partnership
Revise first: CAMA 2020 and partnerships
Revise first: CAMA 2020 and partnerships
Revise first: CAMA 2020 and partnerships
Revise first: CAMA 2020 and partnerships
Revise first: The rules in more depth
Source: ICAN Pathfinder, Taxation. Diets covered: May 2026 and November 2025.
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