Partnership Taxation
Partnerships are pass-through entities that file Form 1065 and allocate income, deductions, gains, losses, and credits to partners via Schedule K-1.
Explanation
Partnerships are not subject to entity-level tax. Instead, each partner reports their distributive share of partnership items on their individual return. Partners' outside basis tracks their investment and limits loss deductions. Contributions of property are generally tax-free under Section 721, and distributions are generally tax-free to the extent of basis. Special allocations must have substantial economic effect. Guaranteed payments to partners are ordinary income to the recipient and deductible by the partnership.
Key Points
- •Pass-through entity: no entity-level tax; income flows to partners
- •Outside basis limits deductible losses (along with at-risk and passive activity rules)
- •Section 721: generally tax-free contributions of property to a partnership
Exam Tip
Track partner basis carefully: start with contributions, add income, subtract distributions and losses. Losses are limited to basis, then at-risk, then passive activity rules.
Frequently Asked Questions
Related Topics
Basis Calculations
Basis is the amount of a taxpayer's investment in an asset for tax purposes, used to determine gain or loss on disposition and depreciation deductions.
Passive Activity Rules
Passive activity rules under Section 469 limit the deduction of losses from passive activities to the amount of passive income, preventing taxpayers from sheltering active or portfolio income.
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