Partnership Pass-Through Benefits Explorer
Interactively see how partnership income, deductions, and credits flow through to the partners, avoiding double taxation.
Partnership Tax Flow Simulator
Visualizing the Pass-Through
Key Partnership Tax Advantages
Unlike a C corporation, a partnership doesn't pay its own income tax. Instead, it "passes through" all profits and losses to its partners. Each partner reports their share on their personal tax return and pays tax at their individual rate. This avoids "double taxation," where corporate profits are taxed once at the company level and again when distributed to shareholders as dividends.
Partnerships pass through special deductions to partners that can provide significant tax savings on their personal returns. A key example is the Section 179 Deduction.
This allows the business to immediately expense the full cost of qualifying equipment and software in the year it's purchased, rather than depreciating it over several years. This creates a large, immediate deduction that flows to the partners, reducing their taxable income. Try it in the simulator above!
This is a powerful, unique benefit for partnerships. When a partner sells their interest or passes away, the new partner's "outside basis" is the price they paid or the value at death. However, their share of the partnership's "inside basis" in its assets is often much lower (the original cost). A Section 754 election allows the partnership to "step up" the new partner's share of the inside basis to match their outside basis. This means the new partner gets larger depreciation deductions in the future, reducing their taxable income from the partnership.