Tax Considerations

Unlike corporations, a partnership is not a separate taxable entity but a conduit through which taxable income or operating losses pass to the tax returns of the individual partners. The partner ship must file an information return (Federal Form 1065) detailing the partnership revenues and expenses which pass through to the individual partners.

Even though a partnership is not a taxable entity, accounting for partnerships for tax-reporting purposes can become extremely complex. The tax code does not view a partnership as a separate, distinct entity but focuses, rather, on the individual partners. Therefore, activities of the partnership must be evaluated from a tax standpoint based on their impact on individual partners. This viewpoint results in special rules which must be understood by practicing accountants. Furthermore, the unique tax-related aspects of a partnership must be understood in order to advise clients as to whether the partnership form of organization is appropriate. The appendix to this chapter discusses in greater detail the tax-related aspects of a partnership.

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