Partnership Tax Basics: Flow-Through, K-1s & Partner Basis Explained
Overview: Partnerships are flow-through entities — the partnership itself doesn’t pay federal income tax. Instead, income, deductions, and credits pass through to the partners, who report them on their personal returns. This guide covers the essentials: how Form 1065 works, guaranteed payments, partner basis, startup costs, and the QBI deduction.
✅ Partnership Tax Return: Form 1065 & Schedule K-1
- Partnership files Form 1065 as an informational return.
- Each partner gets a Schedule K-1 showing their distributive share of ordinary business income (loss) and separately stated items (interest, dividends, capital gains, charitable contributions, Section 179, etc.).
- Partners must report these items whether or not they received actual distributions.
✅ Guaranteed Payments
- Payments to partners for services or use of capital, regardless of profit-sharing ratio.
- Deductible to the partnership; taxable ordinary income to the partner.
- Not included in QBI for Section 199A deduction.
✅ Pass-Through Items: What’s Ordinary, What’s Separate?
Ordinary business income = gross business income – salaries, guaranteed payments, rent, depreciation, etc. Separately stated items include interest income, dividends, capital gains/losses, charitable contributions, Section 179 deductions, and tax credits. These must be reported separately because each partner’s tax treatment may differ.
✅ Partner’s Basis in Partnership Interest
- Begins with initial capital contribution + partner’s share of partnership debt.
- Increased by: additional contributions, share of income/gain, debt increase.
- Decreased by: distributions, share of losses/deductions, debt decrease.
- Losses are deductible only to the extent of tax basis; excess is suspended until basis is restored.
📊 Example Basis Calc
- Initial contribution: $50,000 + share of debt: $10,000 → Basis: $60,000
- Income and gains increase basis; distributions and deductions decrease it.
✅ Startup Costs & Organizational Expenditures
- Up to $5,000 each can be deducted immediately if total costs are under $50,000.
- Excess amortized over 180 months.
- Syndication costs (e.g., issuing partnership interests) are nondeductible.
✅ Section 199A Qualified Business Income (QBI) Deduction
- Partners may be eligible for a 20% QBI deduction on ordinary business income from a partnership.
- Guaranteed payments and certain investment income are excluded.
✅ LLCs: How They’re Taxed
- Multi-member LLCs are taxed as partnerships by default, unless they elect C corporation status.
- Single-member LLCs are disregarded entities — taxed as sole proprietorships for individuals.
🔗 Helpful References
👉 Understand your partnership tax basics — stay compliant and maximize your deductions!
