Distributions and taxation - Part 1
I keep thinking that if I could write the perfect treatise on how partnerships are taxed and how withdrawals are treated, that I could be done with the subject once and for all, and could merely refer readers to that perfect treatise . Alas, I fear it is not to be. Jerry Dressel has written exceptional articles on the subject which can be found on the NAIC web site, and still the questions keep pouring in. So I am going to, once again, devote a couple of articles to the subject based on specific questions received recently.
Readers can find more information on this subject at..........
Jerry's Best
IRS publication 541 on partnerships

And the following articles in trez_talk
Basically, a partnership tax return is informational. No tax is assessed at the partnership level. The information included in the return is passed on to the government and the partners so that each member's share of taxable income can be determined.
Club members (partners) are taxed on their share of the club's dividends, interest, and capital gains, whether or not these income items are distributed to the partners. Members are also allowed to claim a deduction for their share of partnership expenses. Since there is a limitation on this type of deduction (at the individual level), these expenses may not result in any benefit to an individual partner.
Distributions made to partners, whether in total or partial liquidation of the partnership interest, are not taxable to the partners unless cash distributed is in excess of the partner's basis in the partnership. See the following for more on partner's basis.
In the next article, we'll take up some specific examples provided by questions from incredulous readers <g>.
Rip West
Ridgway, CO