Knowledge Center


You may need a tax advisor for your partnership business. This should be either a CPA or a tax attorney who has significant experience with small businesses. Tax problems can cause problems for your business, so you need someone who is knowledgeable and keeps up-to-date with the changes in the tax code. This section will give you some basic ideas regarding taxes, but it will not substitute for a tax professional.

Federal Taxes

For federal income tax purposes, you will pay taxes on your share of the profits of the partnership. This will be reported on an IRS Form 1065. The partnership itself is not taxed. Instead, the distributed partnership income of each partner is taxed to that partner. The partnership will need to file a partnership tax return for informational purposes, but no tax will be paid.

Each partner will report his or her share of the distributed income on his or her individual tax return, and pay any tax that may be due. Exactly what is considered distributed to each partner is a matter of tax law and IRS rules. It may even include money kept by the partnership after all expenses are paid.

State Taxes

There may also be state tax laws to deal with. These can include such things as income taxes, inventory taxes, sales or excise taxes, and license and filing fees.

Consulting a Tax Expert

The bottom line is that you would be well advised to consult a tax expert if you want to go into business as a partnership. Even if you would feel comfortable doing your own taxes as a sole proprietorship, there are several reasons that you might not want to do so as a partnership. Although a partnership itself is not taxed and the profits are passed on to the individual partners, there are additional tax forms that must be prepared and filed. Additional calculations must be made to properly allocate the profit or loss between the partners so that they can file their personal tax returns. This can be made more complicated if property is being depreciated.

Mistakes can be costly and interest charges and penalties can put your business at risk. Further, partners are personally liable for partnership debts. Because partnership profits and losses are attributable to the individual partners, the IRS may go after your personal property as well as partnership property.

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