Partnership and S Corporations
What is a partnership?
A partnership is an association of two or more people to carry on a business for a profit as
co-owners and share in the profits and expenses for the business. The partnership does not pay income taxes but
instead passes through a share of income to each partner based on the partner's percentage ownership of the
What is an S corporation?
An S corporation generally does not pay corporate income tax. The income is instead taxed to the
shareholders based on the percentage of stock each shareholder owns. Losses from an S corporation may be limited by
the at-risk and passive loss limitations discussed under Limits on Rental losses.
An information return, Form 1065, US Return of Partnership Income,
reports the partnership' s income, deductions, gains, losses, etc. to the IRS. If you are a partner, your share of
income, losses, deductions, etc. is reported to you on Schedule K-1 (Form 1065), Partner's Share of Income,
Deductions, Credits, etc.
You figure your income or loss from the partnership in Part II of Schedule E and report the net
income (or loss) on line 17 of Form 1040. Ordinary income you receive from a partnership may be self employment
income and subject to self employment tax.
A similar information return, Form 1120S, US Income Tax Return for an S Corporation is filed for
an S corporation. Schedule K-1 (Form 1120S), Shareholder's Share of Income, Deductions, Credits, etc. reports your
pro rata share of the corporation's income, deductions, credits etc. Figure your net income or loss in Part II of
Schedule E and report the total on line 17 of Form 1040.
Do not file either Schedule K-1 with your individual return. The corporation or partnership has
already filed a copy with the IRS. Keep them with your records.