“Coming together is a beginning, staying together is progress, and working together is success.” ~ Henry Ford
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.)
What do these tax statistics show?
Recently released tax statistics show that the number of partnerships, including limited liability companies that file tax returns as partnerships, are doing just fine. These statistics are for 2020, the most recent year for statistics.
- There were 4,280,690 million partnerships (12% more than in 2019), representing more than 28.2 million partners. They allocated over $1.9 trillion to their partners in 2020.
- Limited liability companies (LLCs) in the U.S. accounted for the majority (70.6%) of all partnership returns. This is the 19th consecutive year that LLCs dominated the number of partnership returns filed. LLCs were responsible for 25.5% of overall profits for partnerships, an increase of 23.1% over 2019.
- Limited partnerships represented only 10.5% of all partnerships. Nonetheless, they reported 28% of the profits and had the largest share of partners (34.9%).
- Total receipts (revenue) for filers increased by 14.7% from the previous year to $9.3 trillion.
- Total assets increased 19.8 percent between 2019 and 2020, from $36.0 trillion to $43.2 trillion
- More than 91% of all partnership returns were filed electronically.
Which industries dominated?
The finance and insurance sector accounted for more than half of all partnerships for both 2020 (50.1%) and 2019 (50.8%), and it made up almost a third of all partners for 2020 (33.2%) and 2019 (32.7%). While partnerships in this sector accounted for just over half of all partnerships, they reported less than a fourth (20.6%) of total assets, only 8.9% of total receipts, and just 1.7% percent of total net income (loss) for 2020.
Which industries declined?
The real estate and rental and leasing sector had the largest decrease in profits—from $760.6 billion in 2019 to $760.1 billion in 2020. But this is only a 0.1% decrease.
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.
It’s great to see the growth of partnerships, so I hate to end on a sour note. But partnerships should be prepared for an increased audit rate. In recent years, the audit rate has been very minimal. But that could change, especially for large partnerships, given 2 factors:
- More IRS agents hired to perform audits
- New IRS program—Large Partnership Compliance Program—designed to select large partnerships for audit
Will any changes to audit rates for partnerships impact entity choice? Not likely, but we’ll have to see.