TAXES > Partnerships (1065)

Form 1065 - U.S. Partnership Tax Return

A partnership is an organization (syndicate, group, pool, joint venture or other unincorporated entity) by which any business, financial operation or venture is carried on, with two or more members, not mandatorily classified as a corporation, and that has elected, or defaulted to, partnership tax status. A limited liability company (LLC) is a creation of state law which is owned (in some cases managed) by members who are not personally liable for the LLC's debts or obligations. It is generally taxed as a partnership unless certain elections are made to be taxed as a corporation. As such, a partnership is a "pass-through" entity, i.e., its income is subject to tax only once, at the partner level, similar to S corporations, but not C corporations (whose income is taxed twice, at the corporate and again at the shareholder level). Partnerships have no limitation on who may be a partner, or on how many persons may be partners, unlike the S corporation which is subject to limitations on who may be a shareholder and on how many shareholders the corporation may have, and there is far greater flexibility in allocating the enterprise's profits, losses and credits among partners of a partnership than among shareholders of an S corporation. Finally, a partner's basis in his partnership interest, unlike a shareholder's basis in S corporation shares, includes the partner's share of partnership liabilities.

Partner's capital consists of contributions to the partnership, either upon formation of the partnership or at a later date, plus partnership income, less distributions. The partnership is essentially a conduit which passes through to each partner the share of income and deductions generated by the partnership. The partners, not the partnership, are taxed on the partnership's income. The partnership only files an information return (Form 1065) showing each partner's distributive share of the partnership income, gains, losses, etc., on Form 1065, Schedule K-1. Each partner includes the proportional share of these items on Form 1040. Partnership taxable income is computed the same as an individual's except that there is no standard deduction or personal exemption, and it may not deduct charitable contributions, medical or other nonbusiness expenses, alimony, taxes and interest paid to cooperative housing corporations, capital loss carryovers, net operating losses, taxes paid to a foreign country or U.S. possession that can be taken as a credit or as a deduction, or oil and gas well depletion. It must separately state certain such items which will pass through to the partners, who then deduct them on Form 1040. These include charitable contributions, dividends, capital gains or losses (including Sec. 1231), foreign taxes, and the like. Similarly, certain partner dealings with their partnerships in other than their capacity as partners are taxed as income, including "guaranteed payments" to partners for services rendered which are treated like salary payments to employees or interest payments to creditors, not partnership distributions. Losses may be deducted by partners against other taxable income, but may not exceed the basis of interest in the partnership. However, partners are allowed loss carrybacks and carryovers. Excess losses disallowed to a partner in any year are carried over, and are deductible at the end of the partnership year in which the adjusted basis of the partner's interest at the end of the year exceeds zero (before reduction by that year's loss).

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