What Is IRS Publication 541?

IRS Publication 541 is a document issued by the Internal Revenue Service (IRS) that explains tax laws and regulations related to partnerships. A partnership is a type of business that typically does not pay corporate income tax, but passes on that income to the owners, or partners, of the business. 

Key Takeaways

  • Publication 541 is a document published by the Internal Revenue Service (IRS) that provides tax information for partners and partnerships.
  • Partnerships are one of the main types of corporate organization in the United States.
  • It is a type of business that typically does not pay corporate income tax, but passes on that income to the owners, or partners, of the business. 
  • Publication 541 includes information for those who wish to form or terminate a partnership, and how to treat income produced by one.
  • It also has sections dedicated to partnership distributions, transactions between the partnership and its partners, disposition of a partner’s interest, and more.

How IRS Publication 541 Works

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 organization 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 have formed an organization after 1996 with two or more members that produce income, this organization will be 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, it’s owned by a state or foreign government, it’s a tax-exempt organization or it’s a real estate investment trust.

Terminating a Partnership and 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.