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Partnership Tax Implications

To file a tax return for a Partnership you will need to utilize a Form 1065. Each partner (taxpayer) in a Partnership should be issued a Schedule K-1 to report pass-through income/deductions on their own returns.

Elections Made by Partner

The partnership determines whether to make some tax elections, but each partner may make others on his or her own return. Possible partner elections include:

  • 59(e) - Deduct certain qualified expenditures ratably
  • 108(b)(5) - To reduce tax basis
  • 263A(d) - Preproductive expenses election
  • 617 - Deduction & recapture of certain mining exploration expenditures
  • 901 - Foreign tax credit

A partner generally must treat the items shown on Schedule K-1 in the same way that the partnership treated them, unless the partnership falls within the "small partnership exception." If a partner's treatment is inconsistent with that of the partnership, the partner must file Form 8082 with the partner's return to explain the inconsistency.

A partner who sells or exchanges a partnership interest in a section 751(a) exchange must notify the partnership in writing within 30 days of the exchange or, if earlier, by January 15 of the calendar year after the year of the exchange. The notice must contain the names and address of both parties to the exchange, their identifying social security or employer identification numbers, and the date of the exchange. This requirement does not apply to sales and exchanges of publicly traded partnership interests.

Limitations on Losses, Deductions, and Credits

The partner generally may not claim a share of a partnership loss to the extent that it exceeds the adjusted basis of the partner's interest in the partnership at the end of the partnership's tax year. Disallowed losses and deductions can be carried forward and deducted in a later year if the basis limit for that year permits.

The at-risk rules limit the amount of losses and deductions that the partner can claim to the amount that the partner could actually lose in the activity.

The passive activity rules may limit the partner's deduction of certain losses and credits of a trade or business activity in which the partner does not materially participate.

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