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A partnership is not a taxable business entity. Although it generally pays no tax on its income, it must file a tax return with the government on Form 1065, U.S. Partnership Return of Income. As part of the Form 1065, it will include a Schedule K-1 for each partner showing his or her share of all partnership tax items. The partner then must report these items on the appropriate line of his or her tax return, generally in Part II of Schedule E.
A limited liability company (LLC) is a business structure allowed by state law. The federal government does not recognize an LLC as a classification for federal tax purposes. An LLC business entity must file a tax return as a corporation, partnership or sole proprietorship. If you are a member of an LLC that files as a partnership, you will receive a Schedule K-1. As with any other partnership's K-1, you will transfer the amounts from the K-1 to the appropriate schedules and lines on your Form 1040. If the LLC has elected S Corporation status, you will receive a Schedule K-1, which is handled exactly as the partnership K-1 is handled. If the LLC has only one member, and has not elected to be treated as a corporation, it doesn't exist for federal income tax purposes - there is no Form K-1; you simply report all the relevant tax items directly on your Form 1040.
S corporations may have to pay some tax in certain circumstances. For the most part, however, they follow the partnership pattern of passing through most items of income, deductions, credit, etc., to the shareholders through a K-1 form. The shareholders report these items on their own Form 1040, generally in Part II of Schedule E.
Passive activities. If you own a partnership, LLC or S corporation interest that is classified as a passive activity and you have losses for the year, you will have to complete Form 8582, Passive Activity Loss Limitations, to compute your allowable passive losses. Generally passive losses are allowed only to the extent that you have passive income for the year. Any amounts that are disallowed are generally deductible in full in the year you dispose of the activity. For more information, see IRS Publication 925, Passive Activity and At-Risk Rules, which can be obtained for free by calling 1-800-TAX-FORM or by accessing the IRS website.