In a partnership, what is the tax treatment of ordinary losses?

• A. The losses pass through to the partners.
• B. Income is taxed to the partnership.
• C. Partnership income is taxed in the year of receipt by the partnership.
• D. Retained earnings defer income recognition.

Answer: (A)

Partnerships are pass-through tax entities, so the business itself doesn’t pay income tax on its profits or losses. Instead, each partner reports their share of the partnership’s ordinary losses on their own tax return. Those losses reduce the partner’s taxable income to the extent of their basis (and at-risk amount), with any unused amount potentially carried forward. The partnership itself files an informational return and each partner gets a Schedule K-1 showing their share of the loss. This flowing-through of losses to the partners is why ordinary losses are treated as passing through, rather than being taxed at the entity level.