Question

Discuss the tax implications for the different types of partnership transactions, such as partner-partnership, partner-partner, partner-external partner. How are gains and losses allotted for each pass-through entity?

Answer 1

Answer

Gains arising in a sale / exchange of property are considered ordinary income between a person and a partnership if person interest is more than 50% in the capital or he has profits interest in the partnership.

For businesses that operate as partnerships, it’s the partners who are responsible for paying taxes on the business’ income, not the business. Each partner is responsible for filing an individual tax return reporting his share of income, losses, deductions and credits that the business reported on the informational 1065 tax form.

As a result, the partnership must prepare a Schedule K-1 to report each partner’s share of these tax items. K-1s are provided to the IRS with the partnership’s tax return and also to each partner so that they can add the information to their own tax returns. For example, if a business earns $100,000 of taxable income and has four equal partners, each partner should receive a K-1 with $25,000 of income on it.