What are the tax advantages of a partnership?
Small business partnerships do not face double taxation, because partnerships pass their net profits through to the partners without first being taxed. Partnerships have the ability to make special allocations. A special allocation gives a partner more than his or her share of an item such as depreciation. Though the rules are complex, and an allocation has to have “substantial economic effect” (simply put, it can’t be done just for tax reasons), a special allocation is a valuable planning tool for business partnerships. But it is complex, and expert advice is recommended. Generally, property can be transferred into and out of a partnership tax free, while contributions to a corporation are often taxable, and property distributions from a corporation are often subject to tax. Partnership liquidations are not subject to two levels of tax. C corporation liquidations are.
