Introduction

This publication explains how the income tax law applies to partnerships and to partners. Generally, a partnership does not pay tax on its income but "passes through" any profits or losses to its partners. Partners must include partnership items on their tax returns.

For a discussion of business expenses a partnership can deduct, see Publication 535. Members of oil and gas partnerships should read about the deduction for depletion in chapter 10 of that publication.

Certain partnerships must have a tax matters partner (TMP) who is also a general partner. For information on the rules for designating a TMP, see the instructions for Schedule B of Form 1065 and section 301.6231(a)(7)-1 of the regulations.

Many rules in this publication do not apply to partnerships that file Form 1065-B, U.S. Return of Income for Electing Large Partnerships. For the rules that apply to these partnerships, see the instructions for Form 1065-B. However, the partners of electing large partnerships can use the rules in this publication except as otherwise noted.

Withholding on foreign partner or firm. If a partnership acquires a U.S. real property interest from a foreign person or firm, the partnership may have to withhold tax on the amount it pays for the property (including cash, the fair market value of other property, and any assumed liability). If a partnership has income effectively connected with a trade or business in the United States, it must withhold on the income allocable to its foreign partners. A partnership may have to withhold tax on a foreign partner's distributive share of fixed or determinable income not effectively connected with a U.S. trade or business. A partnership that fails to withhold may be held liable for the tax, applicable penalties, and interest. For more information, see Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities.

Comments and suggestions. We welcome your comments about this publication and your suggestions for future editions.

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Internal Revenue Service
Technical Publications Branch
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