Partnership Tax Basics

Partnership Tax Basics

What Is a Partnership?

A business owned by two or more people. By default, multi-member LLCs are taxed as partnerships.

Pass-Through Taxation

Partnerships don't pay federal income tax. Instead, profits and losses pass through to the partners, who report them on their individual returns.

Form 1065 and Schedule K-1

• Form 1065: The partnership's informational return (not a tax-paying return)
• Schedule K-1: Each partner's share of income, deductions, and credits
• Partners use K-1 information to complete their own returns

Partner's Distributive Share

Each partner's share of income, loss, deductions, and credits is determined by:

• The partnership agreement (can be different from ownership %)
• Special allocations are allowed if they have substantial economic effect

Self-Employment Tax

• General partners: Include all distributive share in self-employment income
• Limited partners: Generally not subject to SE tax on distributive share
• Guaranteed payments: Always subject to SE tax

Outside vs. Inside Basis

• Outside basis: Partner's basis in their partnership interest (individual level)
• Inside basis: Partnership's basis in its assets
• Track both carefully for gain/loss calculations

At-Risk and Passive Activity Rules

Limited partners and passive partners may face restrictions on deducting losses.

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In a partnership? K-1 reporting and partnership taxation can be complex — let our experts guide you.