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A partnership is an unincorporated business venture with two or more partners. It’s a pass-through entity, so it doesn't pay its own tax. Instead, it reports income and certain deductions to partners. The partners report the items on their personal returns.
Partnerships file a Form 1065, and each partner receives a Schedule K-1 from that return. Each partner then reports the information from the Schedule K-1 on his or her individual return.
A partner might be able to deduct a loss from a partnership. To do so, the deductible losses can’t be affected by either of these:
S corporations and C corporations
An S corporation usually doesn't pay its own tax. It passes income and deductions to the shareholders. S corporations are required to file Form 1120S, which will generate a Schedule K-1 for each owner. The individual owner then uses the Schedule K-1 to complete his or her individual return.
C corporations differ from S corporations in that:
The Schedule K-1 is a reporting document, like a W-2 or Form 1099-INT. It usually shows items like:
Schedules K-1 might also show some deductions and credits.
Income or loss is classified as passive income or nonpassive income. These classifications determine where you report your income or loss.
Passive-loss rules keep you from taking passive losses against ordinary income. Passive loss can only be used to offset passive income.
Passive income comes from a passive activity. There are two types of passive activities: