Table of Contents

IRS Publication 541: Essential Tax Information for Partnerships

By

Alice Zhang

Updated January 19, 2026

IRS Publication 541 — Investopedia / Paige McLaughlin

Key Takeaways

IRS Publication 541 provides tax guidance for partners and partnerships in the U.S.
Partnerships pass income to partners, who are responsible for taxes on their share.
The document covers forming, terminating, and managing income for partnerships.
Partnerships typically avoid corporate income tax, unlike other business structures.
Termination occurs by ceasing activities or transferring the majority interest to a partner.

Investopedia Answers

What Is IRS Publication 541?

IRS Publication 541 is an Internal Revenue Service (IRS) document that explains tax laws and rules for partnerships, including distributions, transactions, and the tax responsibilities that flow through to partners.

It is useful for business owners and entities involved in a partnership, or planning to form or end one, since partnership tax obligations can get complex. Readers who need detailed guidance on how partnerships are taxed can use Publication 541 as a reference.

Role and Functions of IRS Publication 541

IRS Publication 541 is an important document for those overseeing the tax obligations of U.S.-based partnerships. It explains rules for business owners to follow who wish to form partnerships or terminate a partnership, and how to treat various income that is produced by the partnership.

It also has sections dedicated to partnership distributions, transactions between the partnership and its partners, disposition of a partner’s interest, and the 1982 Tax Equity and Fiscal Responsibility Act.

Partnerships are one of the main types of corporate organizations in the United States. According to IRS Publication 541, “An unincorporated organization with two or more members is generally classified as a partnership for federal tax purposes if its members carry on a trade, business, financial operation, or venture and divide its profits.”

If you formed an organization after 1996 with two or more members that produce income, this organization is considered a partnership unless it has been incorporated as some other type of company, like an S corporation or an LLC.

The IRS will also decline to treat your organization as a partnership if the organization is an insurance company, owned by a state or foreign government, a tax-exempt organization, or a real estate investment trust.

Guidelines for Terminating a Partnership in IRS Publication 541

IRS Publication 541 stipulates the rules and regulations regarding the termination of a partnership. If you are a member of a partnership and wish to terminate it, there are two ways of doing so.

The first is that the partnership must cease all activities, with none of its previous activities being carried on by members of the partnership. The second way is for more than 50% of the interest in a partnership to be sold off to an original partner so that a single owner owns a controlling interest in the partnership.

The tax year for a partnership ends the date the partnership is terminated. If the partnership is terminated before what would have been the end of the partnership’s tax year, then a short-period form must be filed to the IRS. This form 1065 must be submitted to the government by the 15th day of the third month following the date of termination.

Are Partnership Distributions Taxed as Ordinary Income?

Partnerships are pass-through entities, meaning that income and losses are passed to the partners, who are then responsible for any taxes, which are calculated as ordinary income. Partners are not taxed on distributions because they pay taxes on their share of partnership income. If they take distributions that exceed their net share, then they would be liable for taxes.

How Much Income Can a Small Business Make Without Paying Taxes?

Generally, self-employed individuals/businesses can make up to $400 without having to pay income taxes. Beyond that amount, they will be liable for taxes. Ensure that your business is set up correctly and that you are paying the right amount of taxes.

Do You Have to File a Partnership Return if There Is No Activity?

Generally, if your partnership did not earn any income, then you do not need to file a return; however, if there are any credits and deductions that you want to take advantage of, then you will have to file a return.

The Bottom Line

Partnerships can be complex, since income passes through to the owners who handle the taxes rather than the entity itself. IRS Publication 541 serves as a guide to the tax rules for partnerships, including how to manage pass-through income, partnership information, and partnership termination.

Article Sources

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Internal Revenue Service. "Publication 541."
Internal Revenue Service. "Topic no. 554, Self-Employment Tax."

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