Partnerships, including partnerships with foreign partners, have many filing and reporting requirements. In addition to filing annual partnership tax returns (Form 1065, U.S. Return of Partnership Income), partnerships could be responsible for other tax issues, such as FIRPTA withholding, NRA withholding, and partnership withholding under sections 1446(a) and 1446(f) of the Internal Revenue Code (IRC).
The information presented in this article serves to provide a comprehensive overview understanding of the topic at hand. It is highly recommended to seek guidance from a qualified tax or attorney advisor regarding the specific forms that you should complete and submit based on your circumstances.
You may like What to Expect from the International Tax Outlook for 2024
Types of Partnerships
Let's take a closer look at the various types of partnerships in the United States. Each partnership has its own distinct characteristics and purposes. Here's a breakdown of the most common ones:
Business Partnerships
- General Partnership (GP): This is the simplest form, where all partners share equally in profits, losses, and management responsibilities. Each partner has unlimited personal liability for the partnership's debts and obligations.
- Limited Partnership (LP): Here, there are two types of partners: general partners (responsible for managing the business and have unlimited liability) and limited partners (investors with limited liability to their capital contribution). This is often used for real estate ventures or investment funds.
- Limited Liability Partnership (LLP): In this type, partners have limited liability for the partnership's debts and obligations, similar to limited liability companies (LLCs). This is popular for professionals like lawyers, accountants, and architects.
- The Limited Liability Limited Partnership (LLLP) is a relatively new modification of the limited partnership that is recognized under United States commercial law. An LLLP is a type of limited partnership that consists of one or more general partners who are liable for the obligations of the entity, as well as one or more protected-liability limited partners. The LLLP combines features of both LPs and LLPs, offering limited liability to all partners, including general partners. However, it's important to note that not all states recognize LLLPs.
Other Types of Partnerships
- Strategic Partnerships: These partnerships bring together entities with a shared vision to achieve common goals, such as expanding their market presence, leveraging resources, or creating innovative products.
- Joint Ventures: This involves the collaboration of two or more parties to establish a separate entity dedicated to a specific project or venture. Profits and losses are distributed based on mutually agreed-upon terms.
- Nonprofit Partnerships: These collaborations occur among nonprofit organizations, pooling their resources and expertise to address pressing social or environmental issues, creating a greater impact together.
It is crucial to consider that the selection of a partnership type relies on factors such as the nature of the business, the desired level of personal liability, and the specific legal and tax implications. Furthermore, partnerships are subject to state laws, and regulations may vary across different states in the U.S. Therefore, it is highly recommended that individuals seek legal and financial advice before establishing a partnership. This will ensure compliance with relevant regulations and allow them to choose the most suitable structure for their specific needs.
You may be interested in LLC vs. Corp: Choosing the Right Business Structure
Partnerships Taxation
The partnership itself is not responsible for paying income taxes. Instead, the profits and losses are distributed to the individual partners. Each partner must report their portion of the partnership's income, deductions, credits, and more on their personal income tax return.
The taxation of partnerships is governed by the rules outlined in Subchapter K of the Internal Revenue Code.
About Form 1065
Partnerships are required to file an information return to report their income, gains, losses, deductions, credits, and other financial aspects. It is important to note that partnerships themselves do not pay taxes on their income. Instead, any profits or losses are "passed through" to the partners, who are responsible for including partnership items on their own tax or information returns.
Schedules K-2 and K-3 (Form 1065).
Schedules K-2 and K-3 replaced prior lines 16 and 20 for certain international codes on Schedules K and K-1. They were designed to provide greater clarity for partners on how to compute their U.S. income tax liability for items of international tax relevance, including claiming deductions and credits.
Additionally, partners are generally subject to self-employment taxes on their share of the partnership income. This includes Social Security and Medicare taxes.
What does a partnership need to file?
Except as provided below, every domestic partnership must file Form 1065, unless it neither receives income nor incurs any expenditures treated as deductions or credits for federal income tax purposes.
Entities formed as LLCs that are classified as partnerships for federal income tax purposes have the same filing requirements as domestic partnerships.
The organization may use Form 1120, U.S. Corporation Income Tax Return, for this purpose. Enter the organization's taxable income, if any, on Form 1065, Schedule K, line 6a, and each member's distributive share in box 6a of Schedule K-1 (Form 1065). Net operating losses aren't deductible by the members but may be carried back or forward by the organization under the rules of section 172.
Real estate mortgage investment conduits (REMICs) are required to submit Form 1066, which is the U.S. Real Estate Mortgage Investment Conduit (REMIC) Income Tax Return.
What we can do
At H&CO, our experienced team of tax professionals understands the complexities of income tax preparation and is dedicated to guiding you through the process. With offices in Miami, Coral Gables, Aventura, Tampa, and Fort Lauderdale, our CPAs are readily available to assist you with all your income tax planning and tax preparation needs. To learn more about our accounting firm services take a look at our individual tax services, business tax services, international tax services, expatriate tax services, SAP Business One, entity management, human capital, and audit and assurance services.
