A partner’s initial basis in his partnership interest (the determination of which varies depending on how the interest was acquired) is increased by his share of partnership taxable income. Each partner gets a Schedule K-1 showing his or her share of partnership items.īasis and distribution rules ensure that partners aren’t taxed twice. Examples of such items include capital gains and losses, interest expense on investment debts and charitable contributions. This is so that each partner can properly treat items that are subject to limits or other rules that could affect their correct treatment at the partner’s level. On Schedule K of Form 1065, the partnership separately identifies income, deductions, credits and other items. This makes it possible to pass through to partners their share of these items.Ī partnership must file an information return, which is IRS Form 1065. While a partnership isn’t subject to income tax, it’s treated as a separate entity for purposes of determining its income, gains, losses, deductions and credits. (However, various rules may prevent a partner from currently using his share of a partnership’s loss to offset other income.) Similarly, if a partnership has a loss, the loss is passed through to the partners. Instead, each partner is taxed on the partnership’s earnings - whether or not they’re distributed. Unlike regular corporations, partnerships aren’t subject to income tax.
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