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Publication 541, Partnerships Userid: CPM Schema: tipx Leadpct: 100% Pt. size: 8 Draft Ok to Print AH XSL/XML Fileid: … ons/P541/202103/A/XML/Cycle04/source (Init. & Date) _______ Page 1 of 17 11:51 - 12-Mar-2021 The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing. Publication 541 (Rev. March 2021) Contents Cat. No. 15071D Reminder .................... 1 Department of the Introduction .................. 1 Treasury Internal Partnerships Forming a Partnership ............ 2 Revenue Service Terminating a Partnership ......... 4 Exclusion From Partnership Rules .... 4 Partnership Return (Form 1065) ...... 4 Partnership Distributions .......... 4 Transactions Between Partnership and Partners ............... 7 Basis of Partner's Interest ......... 9 Disposition of Partner's Interest ..... 11 Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) ................ 13 Bipartisan Budget Act of 2015 (BBA) .................. 13 Index ..................... 17 Reminder Qualified Opportunity Investment. If you held a qualified investment in a qualified oppor- tunity fund (QOF) at any time during the year, you must file your return with Form 8997, Initial and Annual Statement of Qualified Opportunity Fund Investments, attached. See Form 8997 in- structions. Partnership representative. Under the cen- tralized partnership audit regime, partnerships are generally required to designate a partner- ship representative. See Role of Partnership Representative, later. Electing out of the centralized partnership audit regime. A partnership can elect out of the centralized partnership audit regime for a tax year if the partnership is an eligible partner- ship that year. See Electing Out of the Central- ized Partnership Audit Regime, later. Photographs of missing children. The Inter- nal Revenue Service is a proud partner with the National Center for Missing & Exploited Children® (NCMEC). Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678) if you rec- ognize a child. Introduction Get forms and other information faster and easier at: This publication provides supplemental federal • IRS.gov (English) • IRS.gov/Korean (한국어) income tax information for partnerships and • IRS.gov/Spanish (Español) • IRS.gov/Russian (Pусский) partners. It supplements the information provi- • IRS.gov/Chinese (中文) • IRS.gov/Vietnamese (Tiếng Việt) ded in the Instructions for Form 1065, U. S. Re- turn of Partnership Income, and the Partner's Mar 12, 2021 Page 2 of 17 Fileid: … ons/P541/202103/A/XML/Cycle04/source 11:51 - 12-Mar-2021 The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing. Instructions for Schedule K-1 (Form 1065). withholdable payments that it makes to a for- Generally, a partnership doesn't pay tax on its eign entity. See sections 1471 through 1474 of income but “passes through” any profits or los- the Internal Revenue Code. A partnership that Forming a Partnership ses to its partners. Partners must include part- has a duty to withhold but fails to withhold may nership items on their tax returns. be held liable for the tax, applicable penalties, The following sections contain general informa- For a discussion of business expenses a and interest. See section 1461 of the Internal tion about partnerships. partnership can deduct, see Pub. 535, Busi- Revenue Code. ness Expenses. Members of oil and gas part- For more information on withholding on non- Organizations Classified as nerships should read about the deduction for resident aliens and foreign entities, see Pub. depletion in chapter 9 of that publication. 515. Partnerships For tax years beginning before 2018, certain partnerships must have a tax matters partner Comments and suggestions. We welcome An unincorporated organization with two or (TMP) who is also a general partner. your comments about this publication and sug- more members is generally classified as a part- The TMP has been replaced with partner- gestions for future editions. nership for federal tax purposes if its members ship representative for partnership tax years be- You can send us comments through carry on a trade, business, financial operation, ginning after 2017. Each partnership must des- IRS.gov/FormComments. Or, you can write to or venture and divide its profits. However, a ignate a partnership representative unless the the Internal Revenue Service, Tax Forms and joint undertaking merely to share expenses is partnership has made a valid election out of the Publications, 1111 Constitution Ave. NW, not a partnership. For example, co-ownership of centralized partnership audit regime. See Des- IR-6526, Washington, DC 20224. property maintained and rented or leased is not a partnership unless the co-owners provide ignated partnership representative in the Form Although we can’t respond individually to services to the tenants. 1065 instructions and Regulations section each comment received, we do appreciate your 301.6223-1. feedback and will consider your comments and The rules you must use to determine suggestions as we revise our tax forms, instruc- whether an organization is classified as a part- Withholding on foreign partner or firm. A tions, and publications. Do not send tax ques- nership changed for organizations formed after partnership that has foreign partners or en- tions, tax returns, or payments to the above ad- 1996. gages in certain transactions with foreign per- dress. sons may have one (or more) of the following Organizations formed after 1996. An organi- Getting answers to your tax questions. obligations. zation formed after 1996 is classified as a part- If you have a tax question not answered by this nership for federal tax purposes if it has two or Fixed or determinable annual or periodi­ publication or the How To Get Tax Help section more members and it is none of the following. cal (FDAP) income. A partnership may have at the end of this publication, go to the IRS In- An organization formed under a federal or to withhold tax on distributions to a foreign part- teractive Tax Assistant page at IRS.gov/ • state law that refers to it as incorporated or ner or a foreign partner’s distributive share Help/ITA where you can find topics by using the as a corporation, body corporate, or body when it earns income not effectively connected search feature or viewing the categories listed. with a U.S. trade or business. A partnership politic. may also have to withhold on payments to a for- Getting tax forms, instructions, and pub­ • An organization formed under a state law eign person of FDAP income not effectively lications. Visit IRS.gov/Forms to download that refers to it as a joint-stock company or connected with a U.S. trade or business. See current and prior-year forms, instructions, and joint-stock association. section 1441 or 1442 of the Internal Revenue publications. • An insurance company. Code. • Certain banks. Ordering tax forms, instructions, and • An organization wholly owned by a state, Withholding under the Foreign Invest­ publications. Go to IRS.gov/OrderForms to local, or foreign government. ment in Real Property Tax Act (FIRPTA). If a order current forms, instructions, and publica- • An organization specifically required to be partnership acquires a U.S. real property inter- tions; call 800-829-3676 to order prior-year taxed as a corporation by the Internal Rev- est from a foreign person or firm, the partner- forms and instructions. The IRS will process enue Code (for example, certain publicly ship may have to withhold tax on the amount it your order for forms and publications as soon traded partnerships). pays for the property (including cash, the fair as possible. Do not resubmit requests you’ve • Certain foreign organizations identified in market value of other property, and any as- already sent us. You can get forms and publica- section 301.7701-2(b)(8) of the regula- sumed liability). See section 1445 of the Internal tions faster online. tions. Revenue Code. • A tax-exempt organization. A real estate investment trust. Withholding on foreign partner’s effec­ Useful Items • You may want to see: An organization classified as a trust under tively connected taxable income (ECTI). If a • section 301.7701-4 of the regulations or partnership has income effectively connected otherwise subject to special treatment un- with a trade or business in the United States (in- Publication der the Internal Revenue Code. cluding gain on the disposition of a U.S. real 334 334 Tax Guide for Small Business Any other organization that elects to be property interest), it must withhold on the ECTI • classified as a corporation by filing Form allocable to its foreign partners. See section 505 505 Tax Withholding and Estimated Tax 8832. 1446(a) of the Internal Revenue Code. 515 515 Withholding of Tax on Nonresident Aliens and Foreign Entities For more information, see the Instructions for Withholding on foreign partner’s sale of Form 8832. a partnership interest. A purchaser of a part- 535 535 Business Expenses nership interest, which may include the partner- Limited liability company (LLC). An LLC ship itself, may have to withhold tax on the 537 537 Installment Sales is an entity formed under state law by filing arti- amount realized by a foreign partner on the sale cles of organization as an LLC. Unlike a part- 538 538 Accounting Periods and Methods for that partnership interest if the partnership is nership, none of the members of an LLC are engaged in a trade or business in the United 544 544 Sales and Other Dispositions of personally liable for its debts. However, if the States. See section 1446(f) of the Internal Rev- Assets LLC is an employer, an LLC member may be li- enue Code. able for employer related penalties. See Pub. 551 551 Basis of Assets 15, Employer’s Tax guide (Circular E), and Pub.
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