#PassThroughEntities

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🤝 US Partnership Taxes: A Complete Guide for Small Business Owners

If you run a partnership in the US, understanding your tax responsibilities is key to staying compliant and saving money. Unlike corporations, partnerships don’t pay income tax at the business level. Instead, profits and losses pass through to the partners’ personal tax returns.

🔑 How US Partnerships Are Taxed

Pass-Through Taxation: Partnerships file Form 1065, reporting income and deductions, but don’t pay federal income tax themselves.

Schedule K-1: Shows each partner’s share of income or losses, which partners report individually.

💰 Self-Employment Tax for Partners

General partners pay self-employment tax (15.3% in 2025) on their earnings—whether or not they withdraw the money.

Limited partners typically don’t pay this tax unless they’re actively involved in the business.

💸 Guaranteed Payments

Payments to active partners act like salaries, taxed as ordinary income and subject to self-employment tax.

The partnership can deduct these payments as business expenses.

📊 Tax Elections & Deductions

Partnerships can choose cash or accrual accounting methods.

Section 754 election helps adjust asset basis when ownership changes.

Deduct business expenses like rent, utilities, startup costs, and depreciation.

📍 State & Local Taxes

Besides federal taxes, partnerships must navigate varying state and local tax rules, including franchise taxes and additional filings.

Consult an expert to stay compliant.

📌 Summary

Partnerships don’t pay federal income tax directly. Instead, profits and losses flow to partners’ personal returns. General partners pay self-employment taxes; limited partners may have different obligations. Filing Form 1065 and issuing Schedule K-1s is a must. Plus, state taxes vary—stay informed!

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