Under current federal income tax law, an entity taxed as a partnership (which includes most domestic limited partnerships and domestic limited liability companies) does not pay federal income tax. Instead, partnership income is allocated to partners who must report and pay federal income tax on their shares of partnership income. The same is true if a partnership is audited and the IRS proposes adjustments to income of the partnership. The partners report adjustments on their own tax returns and pay any resulting tax. Tax-exempt investors, including government pension plans, generally pay no federal income tax on their income, which includes their shares of partnership income. Recent changes to the tax law will require partnerships to pay tax at the partnership level on certain audit adjustments to partnership income, and these changes may affect government pension plans that invest in partnerships.
Client Alert
