The generally favorable partnership federal income tax rules are a common reason for choosing to operate as a partnership with multiple partners instead of as a corporation with multiple shareholders. The most important partnership tax rules can be summarized as follows:
- You get pass-through taxation.
- You can deduct partnership losses (within limits).
- You may be eligible for the Section 199A tax deduction.
- You get a basis from partnership debts.
- You get a basic step-up for purchased interests.
- You can make tax-free asset transfers with the partnership.
- You can make special tax allocations.
Partnership taxation is not all good stuff. There are a few essential disadvantages and complications to consider:
- Exposure to self-employment tax
- Complicated Section 704(c) tax allocation rules
- Tricky disguised sale rules
- Unfavorable fringe benefit tax rules
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