A profile of partnerships and LLCs from a tax perspective
A partnership is not a taxpaying entity, but files an annual tax return, Form 1065, to report income, deductions, and other items. These items pass through to partners, who may be individuals, other partnerships, corporations, or other entities. Partners 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.) As in the case of sole proprietorships, tax statistics show that the number of partnerships (including limited liability companies that file tax returns as partnerships) is…or at least was…on the rise. For 2018 (the most recent year for statistics), there were 4,010,200 million partnerships (2.7% more than in 2017), representing nearly 27.5 million partners. They allocated over $1.7 trillion to their partners in 2018.
Here is some other interesting tax-related information about these filers:
- Limited liability companies (LLCs) in the U.S. accounted for the majority (70.4%) of all partnership returns. This is the 17th consecutive year that LLCs dominated the number of partnership returns filed. The number of LLC members grew to more than 13.4 million.
- Limited partnerships represented only 11.1% of all partnerships. Nonetheless, they reported the most profits (30% of all returns). The total number of limited partnerships has remained constant over the last 10 years.
- Total receipts (revenue) for filers increased by 7.7% from the previous year to $8.7 trillion.
- More than 90% of all partnership returns was filed electronically.
Which industries increased the most?
The number of returns in the finance and insurance industries increased by 2.7%. Overall, rental real estate and leasing increased 4.5%, although mini-warehouses and self-storage units grew by 46.6%.
Which industries do the best?
The finance and insurance sector accounted for both the largest amount reported ($999.9 billion) and the biggest change in pass-through dollars (a decrease of $119.1 billion). Increases in rental expenses, combined with less than expected rental income, caused a decrease in net rental income (the third decline in the last 10 years).
Why do these statistics matter?
With the potential for tax changes in the coming year, what impact will any changes have on the utilization of partnerships and limited liability companies? The Tax Cuts and Jobs Act of 2017 dramatically impacted the taxation of C corporations and owners of pass-through entities (i.e., partnerships and LLCs). Statistics here show that despite the cut in the corporate tax rate, partnerships and in particular LLCs, continued to be used by businesses as their entity choice.
It’s too soon to say what impact the pandemic will have on tax reporting of partnerships for 2020; it will be a couple of years before we see IRS statistics on 2020 partnership returns. Let’s hope that declines in the number of partnerships, partners, and revenue won’t be too bad and that any declines will be short-lived.