Is partnership income taxable?

Pass-through treatment

The Partnership Income section of Publication 525 begins by saying a partnership generally is not a taxable entity. Instead, the income, gains, losses, deductions and credits of the partnership are passed through to the partners based on each partner’s distributive share. For more detail the publication points to Publication 541.

The distributive share is taxed even if not distributed

Your distributive share of partnership income, gains, losses, deductions or credits is generally based on the partnership agreement, and you must report it on your return whether or not the partnership actually distributes it to you. That is the main surprise for new partners: a partner whose share of profit is $30,000 can owe tax on $30,000 even if the partnership kept all the cash for operations. The reverse also holds, in that a cash distribution is not itself the taxable event.

The partnership agreement usually covers the distribution of profits, losses and other items. If the agreement does not say how a specific item of gain or loss is shared, or the stated allocation does not have substantial economic effect, your share is figured according to your interest in the partnership.

Losses are limited to your basis

Your distributive share of partnership losses is limited to the adjusted basis of your partnership interest at the end of the partnership year in which the losses took place. The calculator above shows this: enter a negative income figure and a basis smaller than your share of the loss, and it reports how much exceeds basis. The publication gives no worked basis example in this section, so the arithmetic on this page is a direct application of the stated limit, not a reproduction of an IRS example.

Form 1065 and Schedule K-1

Although a partnership generally pays no tax, it must file an information return on Form 1065 showing the results of its operations for the tax year and the items passed through to partners. You should receive from each partnership you belong to a copy of Schedule K-1 (Form 1065) showing your share of income, deductions, credits and tax preference items. Keep it for your records; do not attach it to Form 1040 or 1040-SR unless specifically required. In many cases the K-1 tells you where to report an item of income on your individual return.

Where the items go on your return

You must generally report partnership items on your individual return the same way they are reported on the partnership return. If the partnership had a capital gain, you report your share as explained in the Instructions for Schedule D (Form 1040). Your share of partnership ordinary income is reported on Schedule E (Form 1040).

Spouses: qualified joint ventures

If you and your spouse each materially participate as the only members of a jointly owned and operated business and you file a joint return, you can make a joint election to be treated as a qualified joint venture (QJV) instead of a partnership. To make the election you divide all items of income, gain, loss, deduction and credit between you and your spouse according to your respective interests. The individual return instructions say how to make the election and which schedules to file.

S corporations compared

The publication treats S corporations in the next section. In most cases an S corporation does not pay tax on its income; income, losses, deductions and credits pass through to shareholders in proportion to their shares and are reported on Schedule K-1 (Form 1120-S), with the corporation filing Form 1120-S. The items generally keep the same character as if you had realized or incurred them personally. S corporation distributions are in most cases a nontaxable return of stock basis, though part may be taxable as a dividend or capital gain, or both.

Worked example

You own 25% of a two-year-old partnership that earns $160,000. Your distributive share is $40,000, reported on Schedule E even if you took out only $10,000 in cash. If instead the partnership lost $200,000, your 25% share is a $50,000 loss, but with an adjusted basis of $30,000 only $30,000 of it is allowed this year, leaving $20,000 above basis. This page covers Publication 525 (2025) only; self-employment tax on partnership income is not covered here.

Related Publication 525 topics

More from the same IRS publication: Are royalties taxable income?, Is restricted stock taxable income?, Is forgiven debt taxable income?.

Sources

• IRS Publication 525, Taxable and Nontaxable Income (2025): the “Partnership Income” section and the sections it cross-references. Read November 2, 2026.

Edition read: Publication 525 (2025), for use in preparing 2025 returns. Dollar limits and dates in this publication are for 2025; check the current publication and form instructions for your tax year. This page summarizes the publication and does not replace it.