Which of the following statements is true regarding taxation in partnerships?

• A. Partnerships are exempt from all forms of taxation.
• B. Partnerships do not pay income tax; instead, profits and losses are passed through to the partners' individual tax returns.
• C. Partnerships are taxed at the corporate tax rate on their net income.
• D. Only the managing partner is responsible for paying taxes on the partnership's income.

Answer: (B)

Verified step by step guidance

1. Understand the concept of partnership taxation: Partnerships are considered 'pass-through' entities for tax purposes, meaning the partnership itself does not pay income tax. Instead, profits and losses are passed through to the individual partners, who report them on their personal tax returns.
2. Analyze the first statement: 'Partnerships are exempt from all forms of taxation.' This is incorrect because partnerships are not exempt from taxation entirely. While they do not pay income tax, they may still be subject to other forms of taxation, such as self-employment taxes for partners.
3. Evaluate the second statement: 'Partnerships do not pay income tax; instead, profits and losses are passed through to the partners' individual tax returns.' This is correct and aligns with the pass-through taxation concept explained earlier.
4. Review the third statement: 'Partnerships are taxed at the corporate tax rate on their net income.' This is incorrect because partnerships are not taxed as corporations. Corporate tax rates apply to entities classified as corporations, not partnerships.
5. Assess the fourth statement: 'Only the managing partner is responsible for paying taxes on the partnership's income.' This is incorrect because all partners are responsible for reporting their share of the partnership's income, gains, losses, deductions, and credits on their individual tax returns, not just the managing partner.