--- title: Are You Reporting More Income on Your Partnership Tax Return Than You Receive in Cash? description: CRR's Drew Mack discusses a puzzling situation that occurs when Partners report more income than they receive in cash. image: https://www.crradvisors.com/hubfs/AdobeStock_327333171.jpeg --- [Skip to content](https://www.crradvisors.com/blog/are-you-reporting-more-income-on-your-partnership-tax-return-than-you-receive-in-cash#main-content) [![CRR](https://www.crradvisors.com/hubfs/CRR.svg)Homepage](https://www.crradvisors.com) - [Home](https://www.crradvisors.com) - [Services](https://www.crradvisors.com/services) - [Audit & Assurance](https://www.crradvisors.com/services/accounting-auditing) - [Business Valuation](https://www.crradvisors.com/business-valuation) - [Client Accounting + Advisory Services](https://www.crradvisors.com/caas) - [Private Client Services](https://www.crradvisors.com/private-client-services) - [Tax for Businesses](https://www.crradvisors.com/tax-services-business) - [Tax for Individuals](https://www.crradvisors.com/tax-services-individual) - [Transaction Advisory](https://www.crradvisors.com/transaction-advisory-services) - [Industries](https://www.crradvisors.com/industries) - [Blog](https://www.crradvisors.com/blog) - [About Us](https://www.crradvisors.com/about-us) - [Team & Careers](https://www.crradvisors.com/about-us) - [CRR Charitable Foundation](https://www.crradvisors.com/crr-charitable-foundation) - [Contact](https://www.crradvisors.com/contact-us) - [Client Tools](https://www.crradvisors.com/client-portal) - [Home](https://www.crradvisors.com) - [Services](https://www.crradvisors.com/services) - [Audit & Assurance](https://www.crradvisors.com/services/accounting-auditing) - [Business Valuation](https://www.crradvisors.com/business-valuation) - [Client Accounting + Advisory Services](https://www.crradvisors.com/caas) - [Private Client Services](https://www.crradvisors.com/private-client-services) - [Tax for Businesses](https://www.crradvisors.com/tax-services-business) - [Tax for Individuals](https://www.crradvisors.com/tax-services-individual) - [Transaction Advisory](https://www.crradvisors.com/transaction-advisory-services) - [Industries](https://www.crradvisors.com/industries) - [Blog](https://www.crradvisors.com/blog) - [About Us](https://www.crradvisors.com/about-us) - [Team & Careers](https://www.crradvisors.com/about-us) - [CRR Charitable Foundation](https://www.crradvisors.com/crr-charitable-foundation) - [Contact](https://www.crradvisors.com/contact-us) - [Client Tools](https://www.crradvisors.com/client-portal) ![confused businessman](https://www.crradvisors.com/hs-fs/hubfs/AdobeStock_327333171.jpeg?width=6532&height=4355&name=AdobeStock_327333171.jpeg) Tax Business Advisory Small Business # Are You Reporting More Income on Your Partnership Tax Return Than You Receive in Cash? ![Andrew Mack](https://www.crradvisors.com/hs-fs/hubfs/Images/Company_Photos/Headshots/Mack_Andrew.jpg?width=48&height=48&name=Mack_Andrew.jpg) Andrew Mack July 14, 2022 Are you a partner in a business? You may have come across a puzzling situation. In a given year, you may be taxed on more partnership income than was distributed to you from the partnership in which you’re a partner. Why does this happen? It’s due to the way partnerships and partners are taxed. Unlike C corporations, partnerships aren’t subject to income tax. Instead, each partner is taxed on the partnership’s earnings — regardless of whether they are distributed. Similarly, if a partnership has a loss, the loss is passed through to the partners. (However, various rules may prevent a partner from currently using his or her share of a partnership’s loss to offset other income.) ###### **Pass through your share** While a partnership isn’t subject to income tax, it’s treated as a separate entity for purposes of determining its income, gains, losses, deductions, and credits. This makes it possible to pass through to partners their share of these items. An information return must be filed by a partnership. On Schedule K of Form 1065, the partnership separately identifies income, deductions, credits, and other items. This is so that each partner can properly treat items that are subject to limits or other rules that could affect their correct treatment at the partner’s level. Examples of such items include capital gains and losses, interest expense on investment debts and charitable contributions. Each partner gets a Schedule K-1 showing his or her share of partnership items. Basis and distribution rules ensure that partners aren’t taxed twice. A partner’s initial basis in his or her partnership interest (the determination of which varies depending on how the interest was acquired) is increased by his or her share of partnership taxable income. When that income is paid out to partners in cash, they aren’t taxed on the cash if they have sufficient basis. Instead, partners just reduce their basis by the amount of the distribution. If a cash distribution exceeds a partner’s basis, then the excess is taxed to the partner as a gain, which often is a capital gain. ###### **Illustrative example** Two people each contribute $10,000 to form a partnership. The partnership has $80,000 of taxable income in the first year, during which it makes no cash distributions to the two partners. Each of them reports $40,000 of taxable income from the partnership as shown on their K-1s. Each has a starting basis of $10,000, which is increased by $40,000 to $50,000. In the second year, the partnership breaks even (has zero taxable income) and distributes $40,000 to each of the two partners. The cash distributed to them is received tax-free. Each of them, however, must reduce the basis in his or her partnership interest from $50,000 to $10,000. ###### **More rules and limits** The example and details above are an overview and, therefore, don’t cover all the rules. For example, many other events require basis adjustments and there are a host of special rules covering noncash distributions, distributions of securities, liquidating distributions, and other matters. Do you have questions about your partnership tax return? Leave a comment below, or feel free to contact me directly. I’m happy to help! ## Share this post [mailto:https%3A%2F%2Fwww.crradvisors.com%2Fblog%2Fare-you-reporting-more-income-on-your-partnership-tax-return-than-you-receive-in-cash](mailto:https%3A%2F%2Fwww.crradvisors.com%2Fblog%2Fare-you-reporting-more-income-on-your-partnership-tax-return-than-you-receive-in-cash) ## Keep reading ### [![](https://www.crradvisors.com/hs-fs/hubfs/AdobeStock_808994683.jpeg?width=4823&height=2412&name=AdobeStock_808994683.jpeg) Transaction Advisory Banks Banking What the SBA's New Quality of Earnings Rule Means for Your Next Deal](https://www.crradvisors.com/blog/what-the-sbas-new-quality-of-earnings-rule-means-for-your-next-deal) ### [![Staffing agency employees having a team meeting](https://www.crradvisors.com/hs-fs/hubfs/AdobeStock_1876259626.jpeg?width=7936&height=5291&name=AdobeStock_1876259626.jpeg) Staffing Staffing Series Week 4: What Staffing Agency Owners Should Know About the Work Opportunity Tax Credit (WOTC)](https://www.crradvisors.com/blog/staffing-series-week-4-what-staffing-agency-owners-should-know-about-the-work-opportunity-tax-credit-wotc) [![CRR](https://www.crradvisors.com/hubfs/CRR.svg "CRR")](https://www.crradvisors.com) *"CRR" is the brand name under which CRR, LLP and Bridgepoint Alliance, LLC, doing business as CRR Advisors, offer professional services to its respective clients in an alternative practice structure in accordance with the AICPA Code of Professional Conduct and applicable laws, regulations, and professional standards. 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