Your Partnership Income Tax Questions Answered

Partnership Income Tax
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A partnership is a business owned by several individuals who have signed a partnership agreement and have invested in the business. There are various types of partnerships, but all pay income tax in the same way.

LLC's as Partnerships

A limited liability company (LLC) with more than one owner (called "members") is usually taxed as a partnership because the IRS does not recognize LLC's as business entities for tax purposes. (An LLC may elect to be taxed as a corporation.) See more about LLC's as partnerships, below.

A single-member LLC (with only one owner) is taxed as a sole proprietorship, not a partnership. The single-member LLC business income is reported on Schedule C of the person's personal tax return. 

What forms do I use to file partnership income taxes?

The partnership files an information return on IRS Form 1065. A Schedule K-1 is distributed to each partner, showing the partner's share of profits (or losses) for the year. The partner includes the K-1 income or loss on his or her personal tax return.

A partnership itself does not pay income taxes directly to the Internal Revenue Service. Instead, the partners are taxed on their shares of the income/loss of the partnership on their personal tax returns. The partnership files an information return on Form 1065, showing the total amount of income and expenses and other deductions, the net income of the partnership, and the share of that income for each partner.

When are partnership income tax returns due?

Form 1065 and the individual Schedule K-1's are due March 15 of the year following the tax year, effective with the 2016 tax year (filed in 2017). If March 15 falls on a weekend or holiday, the due date is the next business day.

Here is more information about due taxes for business income taxes for the current tax reporting year. 

Who pays the taxes - the partnership or the partners?

Partners in a partnership are not paid a salary as employees; they are owners and each partner receives money each year based on their share of the total ownership of the partnership.

The partnership tax return on Form 1065 is filed with the IRS just for information purposes. The partnership income taxes are paid by individual partners, based on their share of profits or losses distributed to them by the partnership for the year. The partners must also pay self-employment tax (Social Security/Medicare) based on their share of profits (not losses); each year. if the partnership doesn't have income, no self-employment tax is due.

How do the partners file a Schedule K-1 and pay taxes?

Along with the partnership information return on Form 1065, the tax preparer also prepares a Schedule K-1 for each partner, which breaks down the partnership income and share of that income for that partner, along with other information. The Schedule K-1 is filed with the partner's personal income tax return, and the amount of loss or income is included along with the partner's other income. Thus, partners pay income tax on their business activities and other income at the applicable personal tax rate for the year.

Do different types of partners pay income taxes differently?

There are a variety of ways partners can set up their shares of ownership in the partnership. Some partners may not be share-holding, but most do have shares. Some partnerships give a greater share to a general partner who has additional responsibilities, but sometimes this person is paid a salary as an employee.

When and how do I file an extension application for a partnership tax return?

You must file by the tax return/tax payment due date above. The application is for six months, so you must file your return by September 15. 

Are LLC's taxed differently from partnerships?

In terms of taxes, the two are the same, if the LLC has multiple owners (members). The IRS doesn't recognize an LLC as a taxing entity, so multiple-member LLC's file partnership taxes, as described above. In regard to your state business registration, LLC's register with the state as an LLC, not a partnership. LLC's have an operating agreement, while partnerships have a partnership agreement (similar documents; different names).

What information do I need to prepare a partnership or LLC tax return? 

To file your partnership's federal income tax return you will several documents:

  • A copy of your end-of-year Profit and Loss (Income) Statement for the partnership. In addition, you will need detail and totals on all the sources of income and types of expenses paid by the partnership during the year.
  • A copy of your end-of-year Balance Sheet, details on all the property you purchased during the year, for depreciation calculation purposes.
  • Listing of all of the shares of each partner and how the profits or losses are to be shared by the partners.

This article provides detailed information about the documents and files needed for your tax preparer.