Partnership

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. 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 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. Along with the partnership information return 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.