What are the important federal income tax issues if you choose to operate your business as a partnership with multiple partners? Good question.
We will supply some answers here.
Before we get into the weeds, one important thing to know is that limited liability companies (LLCs) with multiple members—that is, owners—are classified as partnerships for federal income tax purposes unless you elect to treat the LLC as a corporation.
The partnership tax considerations that we will cover here generally apply equally to LLCs. So, when you see “partnership” and “partner,” you can substitute “LLC” and “member,” respectively.
Now, onward.
Partnership Taxation Basics
The generally favorable partnership federal income tax rules are a common reason for choosing to operate as a partnership with multiple partners instead of as a corporation with multiple shareholders. The most important partnership tax rules can be summarized as follows.
You Get Pass-Through Taxation
Your share of partnership taxable income items, gains, deductions, losses, and credits are passed through to your personal return. You then pay taxes at the personal level. Ditto for the other partners.
So, you don’t have to worry about the double taxation issue that can potentially haunt C corporations.
You also don’t have to worry about the tax-law restrictions that can haunt S corporations—for example, shareholders can only be U.S. citizens; U.S. residents; and certain estates, trusts, and tax-exempt entities; and you can have only one class of stock.
You Can Deduct Partnership Losses (within Limits)
You can deduct partnership losses passed through to you on your personal return, subject to various limitations—which can include the passive loss rules, the at-risk rules, the excess business loss disallowance rule, and the partnership interest basis limitation rule. There’s a good chance the limitations won’t apply to you or the other partners.
You May Be Eligible for the QBI Deduction
Through 2025, the qualified business ... Log in to view full article.
