Flow Entity Partnerships
For flow-through entities such as partnerships, how do the tax laws use partners' basis adjustments to prevent double taxation of partner income?
According to Rands (1996), there are several different avenues which are used to prevent double taxation for partnerships. The most notable include: S corporations, LLCs and limited partnerships. These areas enable for the flow through income depending upon the type and structure that is utilized (Rands, 1996).
An S corporation has the same benefits as a traditional corporation. This means that it is considered to be a separate legal entity under the law. However, what makes it different is the income that is received is passed through to each of the partners. They will report this as ordinary income on their individual tax returns. The company does not pay anything on the amount that it passes through to each partner. Under the law, this is considered to be flow through income. Once this takes place, is the point that each partner is liable for their percentage of the overall amount that is received (Rands, 1996).
Limited liability companies (i.e. LLCs) are set up with a maximum number of partners. They will report the...
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