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How is Partnership Income Taxed?

Partnerships don’t pay taxes—their income passes through to the partners who pay their share of the taxes. If you are involved in a partnership, you should understand the tax ramifications to avoid incurring IRS tax debt or increasing your risk of an IRS tax audit.

Partnership Tax Forms

Partnerships file their annual tax return on Form 1065. Each partner must receive a Schedule K-1. This is the form you’ll need to use when filing your individual tax return.

The Schedule K-1 breaks down your income, deductions, gains, and losses into various categories. These will all be reported on your tax return.

Note that income is allocated to partners in the year to partnership earns it. You may not have actually received this income. Partnerships can set their own rules on when and how distributions are made, so you could be paying taxes on your share of partnership income without actually receiving the distribution.

Taxes on Partnership Income

In addition to income tax and capital gains tax, you may need to pay self-employment tax on partnership income. General partners are typically required to pay self-employment taxes of 15.3% on their share of the partnership’s income. Limited partners may not have to pay self-employment taxes.

Partnerships may also be eligible for the pass-through business income deduction that was made a part of the Tax Cuts and Jobs Act. This 20% deduction on qualified business income may be limited based on your income and the type of trade or business you are conducting.

Best Practices

Make sure you understand the partnership agreement and how distributions. You may need to pay both income and self-employment taxes when the partnership turns a profit, so you want to make sure you have funds available to pay these taxes.

Work with a tax professional to make sure you do your taxes right. Partnerships can have complicated tax returns, and your Schedule K-1 will make your return more complex as well.

If you fall behind on tax payments or are undergoing a tax audit, contact a tax attorney. Avoid making the problem worse and figure out your options by talking with an attorney who regularly handles tax resolution and/or tax audit defense.

Get help with partnership tax problems by calling The Gartzman Law Firm at (770) 939-7710. We can listen to your concerns and help you find the best tax resolution strategy for your case.