A partnership must file an annual information return to report its income, losses, gains, and deductions, but a partnership does not pay any income tax. Instead, each partner pays taxes on his or her share of the partnership’s taxable income, even if no funds were distributed to the partners from the partnership. The partners may agree to a particular allocation of the partnership’s income for tax purposes as long as this allocation reflects the reality of the business. Conversely, if the partnership operates at a loss, each partner states a portion of that loss on his or her individual tax return.
Filing the annual information return late or not filing it at all will lead to the imposition of substantial penalties based on the number of partners in the partnership. Partnerships must also provide copies of Schedule K-1 to each partner and the failure to do so will result in monetary penalties. Criminal penalties can also be imposed for willful failure to file or tax fraud/tax evasion. The penalties are assessed against the partnership but each partner is individually liable to the extent the partner is liable for partnership debts.