Income from Partnerships, LLCs,
and S Corporations
A partnership is not
a taxable business entity. Although it generally pays no tax on its
income, it must file a tax return with the government on Form 1065,
U.S. Partnership Return of Income. As part of the Form 1065, it will
include a Schedule K-1 for each partner showing his or her share of
all partnership tax items. The partner then must report these items
on the appropriate line of his or her tax return, generally in Part
II of Schedule E.
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Warning While the partnership will report your
share of any partnership losses on your K-1, you might not be able
to deduct them all. Your deductions are generally limited to your
tax basis: the amount you have invested in the partnership, plus your
share of any partnership liabilities, net income or gains, and minus
previous distributions to you. The partnership isn't responsible
for keeping track of your tax basis as time passes; you are. However,
the K-1s you receive over the years will generally provide a good
foundation for your records. |
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A limited liability company (LLC) is a business structure
allowed by state law. The federal government does not recognize an
LLC as a classification for federal tax purposes. An LLC business
entity must file a tax return as a corporation, partnership or sole
proprietorship. If you are a member of an LLC that files as a partnership,
you will receive a Schedule K-1.
As with any other partnership's
K-1, you will transfer the amounts from the K-1 to the appropriate
schedules and lines on your Form 1040. If the LLC has elected S Corporation
status, you will receive a Schedule K-1, which is handled exactly
as the partnership K-1 is handled. If the LLC has only one member,
and has not elected to be treated as a corporation, it doesn't exist
for federal income tax purposes - there is no Form K-1; you simply
report all the relevant tax items directly on your Form 1040.
S
corporations may have to pay some tax in certain circumstances. For
the most part, however, they follow the partnership pattern of passing
through most items of income, deductions, credit, etc., to the shareholders
through a K-1 form. The shareholders report these items on their
own Form 1040, generally in Part II of Schedule E.
Passive
activities. If you own a partnership, LLC or S corporation
interest that is classified as a passive
activity and you have losses for
the year, you will have to complete Form 8582, Passive Activity
Loss Limitations, to compute your allowable passive losses. Generally
passive losses are allowed only to the extent that you have passive
income for the year. Any amounts that are disallowed are generally
deductible in full in the year you dispose of the activity. For more
information, see IRS Publication 925, Passive Activity and At-Risk
Rules, which can be obtained for free by calling 1-800-TAX-FORM
or by accessing the IRS
website.
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