Certified Lease & Finance Professional (CLFP) Class Practice Exam

Partnerships use pass-through taxation. The partnership itself does not pay income tax. Instead, the partnership’s income or losses are allocated to the partners based on their ownership interests (or as otherwise specified in the partnership agreement). Each partner reports their share on their own tax return and pays tax at their personal rates. The partnership files an informational return and issues Schedule K-1 to show each partner’s share. This allocation happens whether or not cash is distributed to the partners, so the tax liability follows the partners, not the entity. Because of this, income or losses are divided among the owners, which best describes how partnership tax liabilities are treated. It is not taxed as a separate entity, and it’s not limited to capital gains—ordinary income and losses can be allocated to the partners as well.