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How are Partnerships Taxed?

How are Partnerships Taxed?

In short, they are not. Partnerships are pass-through tax entities. This means that all profits and losses flow directly through to the partners. The partnership may file an informational tax return, but it does not have liability for or directly pay income taxes.

The partners receive a form K-1 from the partnership outline the share of profits and losses allocated to them. A partnership may choose not to distribute its profits and losses. Regardless, the profits and losses are allocated to partners, whether they actually receive any profits or not. The partner reports these profits or losses on their personal income tax returns.

There are numerous tax aspects applicable to partnerships that are quite complicated. These aspects include basis calculations, gain recognition and deferral, passive and active profits or losses rule, and at-risk amounts. These topics are covered further in the startup accounting resources section.

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