Taxation Essentials of LLCs and Partnerships

Chapter 7Reporting Taxable Income for Partnerships and LLCs

Learning objectives

• Identify the federal income tax forms that must be filed with the IRS by an average partnership or limited liability company (LLC), and what forms must be sent to the investors.
• Recognize what information should be disclosed on a Schedule K‐1 received from a partnership or LLC.
• Determine where each partnership item of income or deduction should be reported on the partnership income tax return.
• Indicate how the information provided on Schedule K‐1 can be used to calculate the adjustment to a partner or LLC member's basis and amount at‐risk.

Overview: Partnership tax return

The partnership tax return

Form 1065, U.S. Return of Partnership Income, must be filed annually by most entities classified as partnerships. Form 1065 is an information return only, summarizing the income, deductions, gains, losses, and the like from the entity's business and investment activities. The partnership generally does not pay tax on its income; rather that income or loss is “passed through” to the partners or members, who must add or subtract their shares of each item on the return when computing their own taxable incomes. Therefore, the partners pay tax on the partnership's profits or receive any tax benefits associated with partnership items of loss and deduction.

Note. Certain partnerships may elect to be classified as “large partnerships.” These electing large partnerships file Form 1065‐B, U.S. Return of Income ...