How Partnerships Are Taxed in South Carolina
The filing considerations for business owners
on February 5, 2020
Updated on August 4, 2022
Partnerships are among the most common types of business structures in South Carolina. When tax time comes around, it is imperative that all members of a partnership know how to properly file their taxes—both individually and on behalf of the partnership. As a partnership is a pass-through entity, this can sometimes be confusing. Here, you will find an overview of how business partnerships are taxed in South Carolina.
Partnerships are Taxed as Pass-Through Entities
The first thing you need to know is that business partnerships—along with sole proprietorships and limited liability companies (LLCs)—are taxed as pass-through entities. As explained by the Tax Policy Center, a pass-through entity is not subject to the U.S corporate income taxes or any other form of entity-level taxation. Instead, the profits are “passed through” the partnership, directly to the business owner(s). Members (owners) of the partnership will then pay taxes on their earnings as part of their individual income taxes.
South Carolina Partnerships Must File Form 1065
Although a partnership is taxed as a pass-through entity, the business entity itself still has to file a tax return. If you own a general partnership in South Carolina, it is imperative that you file your business return before the relevant deadline. Partnership tax returns are filed using Form 1065. Essentially, Form 1065 is used to provide information to the Internal Revenue Service (IRS). No taxes are paid through this form. Though, financial information pertaining to revenue, expenses, profits, and deductions must be included. Among other things, Form 1065 will:
Report the business income of the partnership;
List all deductions for business expenses;
Determine the net income, when accounting for allowable deductions/credits; and
Calculate the total taxes due.
Business Partners Should Include a Schedule K-1 With their Individual Return
When filing their personal income taxes, each business partner should include a Schedule K-1 with their return. Through a Schedule K-1, an individual taxpayer must clearly identify their allocated profits and losses from the partnership during the course of the reporting period. It is crucial that you and your business partners provide consistent information to the IRS and the South Carolina Department of Revenue when filing your taxes. Failure to do so could raise serious red flags.
Partnerships and Self Employment Taxes
Notably, business partners in South Carolina must pay self-employment tax. Using line 14 of Schedule K-1, a member of a partnership should report applicable self-employment income. The self-employment tax due will be added to other tax liability.
For business partners, preparing a tax return can be a complicated matter. If you have any specific questions or concerns about partnerships and taxation, contact an experienced South Carolina tax attorney for guidance. Your attorney will be able to review your situation and help protect your financial interests.
If you want more information on this area of tax law, see our tax overview.