“I can do things you cannot, you can do things I cannot; together we can do great things.” — Mother Teresa
When two or more parties come together with the intention of making a profit, a partnership is formed. A partnership is not a taxpaying entity, but files an annual tax return, Form 1065, to report income, deductions, and other items. The same is true for a limited liability company (LLC) with two or more members; it also files a partnership return. Income, deductions, and other items pass through to partners and LLC members, who may be individuals, other partnerships, corporations, or other entities. Partners and LLC members report their allocable share of these items on their own tax returns. (Partnerships only become taxpayers if they’re audited under the centralized audit regime and adjustments are handled at the entity level.) Recently released tax statistics show that the number of partnerships, including limited liability companies that file tax returns as partnerships, are on the upswing.
Highlights of recent statistics on partnership returns
These statistics are for 2023, the most recent year for statistics.
- There were 4,50,186 million partnerships (1.7% more than in 2022). The number of partnerships has grown at an average annual rate of 2.9% over the period 2014-2023. Partnerships classified as limited liability companies (LLCs) accounted for most of this growth.
- Partnerships with fewer than three partners made up more than half (59.7%) of all partnerships.
- The number of partners increased 5% for 2023 (from 28,797,574 in the prior year to 30,239,463).
- Partnerships passed through to owners $ 2,558.0 billion in total income, which is a 34.3% decrease from 2022. They allocated over $3.8 trillion to their partners in 2022.
- Limited liability companies (LLCs) in the U.S. accounted for the majority (72.7%) of all partnership returns for 2023.
- Limited partnerships represented only 9.7% of all partnerships in 2023, although the number of partners in these entities increased 12.6%. Nonetheless, limited partnerships reported 32.8% of the profits and more than one third (34.2%) of total partners.
- Partnerships passed through $2,099.4 billion in total income (loss) minus total deductions available for allocation to their partners. This was a 17.9% decline from 2022.
- Total assets increased 9.1% between 2022 and 2023, from $52.5 trillion to $57.3 trillion.
- Receipts totaled $12.0 trillion for 2023, down 4.4% from the amount reported for 2022. Pass-through income (loss) decreased 17.9% to $2.1 trillion for 2023 (down from $2.6 trillion for 2022).
Which industries dominated?
Real estate and rental and leasing accounted for approximately half of all partnerships and about one third (32.8%) of all partners. But the finance and insurance sector reported the largest shares of total income (loss) minus total deductions or pass-through income (loss) (59.9%), total assets (58.8%), and total receipts (25.0%) for 2023. Other key findings:
- Increases in rental income expenses were the cause of a decrease in net rental income (loss).
- Schedule M-3 (Form 1065) provides details about the difference between financial accounting net income and tax accounting net income. For 2023, partnerships that filed a Schedule M-3 reported $2,470.4 billion in reconciled income (loss) per income statement, $816.2 billion in temporary differences, $39.6 billion in permanent differences, and $1,692.2 billion in reconciled income (loss) per tax return.
Electronic filing
Partnerships were first able to file returns electronically in 1986 and were required to do so for tax year 2000 if they had more than 100 employees. Electronic filing was optional for partnerships with 100 or fewer employees. In 2023, 4.4 million partnerships (95.8%) filed electronically. This is 2.7% more than in 2022. What’s more, 98.1% of all partners filed electronically.
Why do these statistics matter?
Even though C corporations are taxed at the highly favorable flat tax rate of 21%, many businesses continue to operate as pass-through entities, including partnerships and LLCs. There does not seem to be any shift away from this status, but going forward, you never know.
Final thought
Partnerships, and especially LLCs, are viable options when choosing a form of entity for a business. Be sure to understand the legal, tax, financial, and personal ramifications before you enter into such a business arrangement.
More about tax statistics and partnerships can be found in this list of blogs.
