{"id":4856,"date":"2016-04-04T10:47:45","date_gmt":"2016-04-04T15:47:45","guid":{"rendered":"https:\/\/content.findlaw-admin.com\/ability-law\/smallbusiness\/incorporation-and-legal-structures\/partnership-taxes.html"},"modified":"2025-10-24T13:19:00","modified_gmt":"2025-10-24T18:19:00","slug":"partnership-taxes","status":"publish","type":"page","link":"https:\/\/www.findlaw.com\/smallbusiness\/incorporation-and-legal-structures\/partnership-taxes.html","title":{"rendered":"Partnership Taxes"},"content":{"rendered":"\n
\n

Partnership Taxes<\/h1>\n\n
\n
\n By Jade Yeban, Esq.<\/a> | Legally reviewed by Catherine Hodder, Esq.<\/a>\n | Last updated\n
\n

Editorial Note: We earn a commission from affiliate partner links on FindLaw. Commissions do not affect the editorial integrity of our legal content.<\/p>\n\n <\/div>\n \n

\n \n <\/i>\n Legally Reviewed\n <\/summary>\n\n
\n

This article has been written and reviewed for legal accuracy, clarity, and style by FindLaw\u2019s team of legal writers and attorneys<\/a> and in accordance with our editorial standards<\/a>.<\/em><\/p>\n\n <\/div>\n <\/details>\n\n

\n \n <\/i>\n Fact-Checked\n <\/summary>\n\n
\n

The last updated date refers to the last time this article was reviewed by FindLaw or one of our contributing authors<\/a>. We make every effort to keep our articles updated. For information regarding a specific legal issue affecting you, please contact an attorney in your area<\/a>.<\/em><\/p>\n\n <\/div>\n <\/details>\n<\/section>\n\n\n

\n

Partnerships do not pay federal <\/span>income tax<\/span> on their profits through their business. Instead, the profits, losses, deductions, and credits pass through to the individual partners<\/span> using a Schedule K tax form<\/span>. The partnership files Form<\/span> 1065, U.S. Return of <\/span>Partnership Income<\/span> as an informational return<\/span>.<\/p>\n\n <\/div>\n\n\n\n

Partnerships play a crucial role in the small business<\/span> landscape. They offer a unique business structure. In partnerships, business income<\/span>, losses, deductions, and credits pass through to individual partners<\/span>. Understanding partnership taxes<\/span> is vital for optimizing your tax strategy. It\u2019s also important for minimizing tax liability<\/span>.<\/p>\n

Let\u2019s dive into the basics of partnership taxation. Learn why it\u2019s different and what you need to know to handle these taxes correctly below.<\/p>\n

Need help with business formation? Our trusted partner LegalZoom makes it easy\u2014packages start at $0 + state filing fees.<\/a><\/b><\/em><\/p>\n

The Basics of Partnership Taxation<\/h2>\n

In partnership taxation, the company itself doesn\u2019t pay business taxes<\/span> directly to the\u00a0Internal Revenue Service<\/a>\u00a0(IRS<\/span>). Instead, it\u2019s a\u00a0pass-through entity<\/span>.\u00a0This means the profits and losses pass through to the individual partners<\/span>. They then report this business income<\/span> on their individual <\/span>income <\/span>tax<\/span> returns<\/span>. Each partner includes their share of partnership income<\/span> or loss on their personal <\/span>income <\/span>tax<\/span> return<\/span>.\u00a0<\/p>\n

Though a partnership doesn\u2019t pay taxes on its profits, it does declare its operating losses and profits to the IRS<\/span> in Form 1065 for tax filing<\/span>.<\/p>\n

Each partner receives a\u00a0Schedule K-1<\/span> form<\/a>. This form shows their share of the <\/span>partnership\u2019s income<\/span> or losses. This method is different from corporations\u00a0like C corps\u00a0that pay corporate income tax<\/span> on their profits. Through these forms, both the IRS<\/span> and every partner are made aware of how much is owed to the IRS<\/span> by each partner.<\/p>\n

Even before you receive your Schedule K-1<\/span>, you\u2019ll need to estimate the tax amount you owe. This is to be sure that you set aside a sufficient amount of money to pay your taxes.<\/p>\n

Key elements like income <\/span>tax<\/span> rate<\/span>, personal liability, and disclosures are crucial in partnerships. Unlike a\u00a0limited liability company<\/span><\/a>\u00a0(LLC), where the members of an LLC have limited liability, general partners in a partnership can be responsible for the business\u2019s debts. However, limited partners in a limited partnership<\/span> have protection like an LLC. These structures allow owners to safeguard their personal assets.<\/p>\n

Maximizing Deductions and Credits in a Partnership<\/h2>\n

Partnerships can reduce their taxable income<\/span> by claiming deductions and credits. To reduce tax liability<\/span>, it\u2019s important for business owners in a partnership to understand which deductions and credits apply to them. This includes expenses related to running the business, like office supplies and travel expenses. Expenses like rent, utilities, and salaries are deductible.<\/p>\n

Partnerships can also enjoy tax credits<\/span>. These credits are specific to their industry or for certain business practices. For example, this might include credits for energy efficiency improvements. Proper record-keeping and understanding of the available deductions and credits are key. It\u2019s important to keep good records. Get legal advice<\/span> or consult a tax professional<\/span> for accurate tax preparation.<\/p>\n

Understanding Capital Gains<\/span> and Distributions<\/span> in Partnerships<\/h2>\n

When a partnership sells an asset for more than its purchase price, this results in capital gains<\/span>. These gains are passed on to the partners and reported on their individual tax returns<\/span>. Distributions<\/span> are payments made to partners from the partnership. They can be in cash or property. Distributions<\/span> are not considered salary or wages and have their own tax implications. It\u2019s important to understand how these distributions<\/span> affect each partner\u2019s tax liability<\/span>.<\/p>\n

Distributive Shares<\/span><\/h2>\n

Whether each partner actually receives the amount stated on Form K-1 is irrelevant. The IRS<\/span> taxes are based on a partner\u2019s\u00a0distributive share<\/span>.\u00a0This share is the percentage of the profits the partner is entitled to.\u00a0<\/p>\n

For example, if the partnership agreement<\/span> states, or the partners simply agree, that a certain percentage of profits should stay within the partnership (e.g., to pay for expansion or overhead), this doesn\u2019t matter to the IRS<\/span>. The focus is on what each partner\u2019s share<\/span> ought to be. Otherwise, partnerships could retain profits to avoid paying taxes.<\/p>\n

The partnership agreement<\/span> determines the distributive share<\/span> of each partner. In the absence of a written\u00a0partnership agreement<\/span><\/a>, the partnership\u2019s profits<\/span> will be split evenly. For example, consider that a partnership agreement<\/span> states that you will receive 70 percent of the profits and losses. It also states that your partner will be allocated the other 30 percent. Then, that 70\/30 split will represent each of your distributive shares<\/span>.\u00a0<\/p>\n

If there\u2019s no written agreement, each of your distributive shares<\/span> will be 50 percent of profits and losses.<\/p>\n

Understanding Special Allocations<\/span> in Partnerships<\/h2>\n

A\u00a0special allocation<\/span><\/a>\u00a0is when a partnership decides to allocate shares of profits in a way that\u2019s different from that specified in the partnership agreement<\/span>. It can also be when a partnership allocates shares unequally without a written agreement.<\/p>\n

For example, if you\u2019ve been splitting profits equally with your partner but then decide to split them 60\/40 one year, you may do so. Your reason must be for a substantial economic reason, such as your partner took an extended vacation and didn\u2019t work much. If it\u2019s not, the IRS<\/span> determines that the change was made primarily to lessen the aggregate tax burden of the partners. Then, the IRS<\/span> will reallocate the special allocation<\/span>. You\u2019ll have to pay taxes according to your regular schedule.<\/p>\n

Special allocation<\/span> rules are complicated. You should consult a tax attorney or accountant before making such changes.<\/p>\n

Other Partnership Taxes<\/span><\/h2>\n

There are several tax issues partners must consider when filing their tax returns<\/span>. Partners are considered to be self-employed, not employees, and therefore need to file a\u00a0Schedule SE<\/span> with their Form 1040<\/span><\/a>\u00a0to pay their\u00a0self-employment taxes<\/span><\/a>.<\/p>\n

Because of this self-employed status, you\u2019re also responsible for paying your share of Social Security<\/span> taxes and Medicare<\/span>. Partners are responsible for paying double what a normal employee would pay\u00a0because employers normally match employees\u2019 contributions.\u00a0By being self-employed, you\u2019re both employer and employee, but the tax burden is reduced by the allowance of deducting half of the self-employment contribution from taxable income<\/span>.<\/p>\n

Get Professional Answers to Your Partnership Taxation Questions<\/h2>\n

Whether you\u2019re just starting your partnership and need a better understanding of your tax obligations or have other legal needs, it\u2019s often in your best interests to contact an attorney before making important legal decisions.<\/p>\n

Get started today and find a\u00a0tax law<\/span> attorney<\/a>\u00a0with partnership experience.<\/p>\n\n\n

\n \n Was this helpful?<\/span>\n \n Yes<\/span>\n \n \n \n <\/path>\n <\/g>\n \n \n <\/rect>\n <\/clipPath>\n <\/defs>\n <\/svg>\n <\/i>\n <\/button>\n \n No<\/span>\n \n \n \n \n <\/g>\n \n \n \n <\/clipPath>\n <\/defs>\n <\/svg>\n <\/i>\n <\/button>\n <\/div>\n <\/span>\n