A Guide to Partnership Taxation

Partnership taxation is, quite literally, the taxation of a partnership. The exact procedures involved in partnership taxation may vary from state to state to a certain extent, as each state may easily have slightly different regulations and codes regarding partnership taxation and partnership accounting.

There are some general rules concerning partnership taxation which are held throughout multiple jurisdictions, however, for ease of use. Specifically, according to the Internal Revenue Code of the United States, partnership taxation occurs in a "flow-through" fashion. What this means is that partnership accounting does not involve needing to pay taxes on the income of the partnership.

The partnership itself will not pay taxes. Instead, once the money reaches the owners of the partnership as income, then the money is taxed. Thus, partnership taxation is something of a misnomer, as the income is taxed only at the level of the individual owners and not at the level of the partnership itself.

This element of partnership accounting is actually part of the reason why many companies form partnerships in the first place, as corporations might be effectively taxed twice compared to the single time involved in partnership taxation. A corporation is normally taxed when the company receives income, and then that income is taxed again when it reaches the owners.

Partnership taxation is further complicated based on the exact type of partnership, be it limited liability, limited, or any other variation, and based on the exact understanding under which partnerships are treated by a given state's code. If a partnership is treated as an entity, for example, then partnership accounting and partnership taxation might be different than if it is treated as an aggregate.