how does "pass through" income work in a partnership LLC?

[Lucas Amuchastegui]

Hey BP, These will likely be silly questions but I'm a noobie having a little trouble finding answers online. we plan on hiring a CPA, but I'd love to understand some of the basics. My brother and I are 50-50 owners in an LLC that buys and holds real estate (currently at 2 properties). We are both married and all 4 of us have regular w2 jobs. For 2018 taxes, I understand that the LLC will need to file it's own return. 1) if the LLC shows net earnings, would we just split that amount 50-50 as a distribution and add it to our personal taxable incomes? Do we have any option of leaving money in the LLC and not taking any distribution, and would that affect how we pay taxes? 2) If the LLC sustains a loss over the year, would we each be able to write off half that loss from our taxable income? if so, would we only be able to do that if we itemize? 3) we both would not have enough deductions in our personal lives to surpass the 24k standard deduction. The LLC still itemizes all its expenses and finds a net profit/loss anyway, and then that passes through to the owners, right? if we had plans to make charitable contributions to our church, would we do well to do that through the LLC so that we could write it off, and then still take the standard deduction? again, probably very silly questions, but if you can't ask the BP family, who can you ask?! would love any side tips anyone would care to give thanks for all the help. I could never have even gotten started without you all! Luke

[Natalie Kolodij]

Hi Lucas

So the Partnership will file it's own partnership tax return, form 1065. That return is basically a summary on all the income/expenses/ allocations to each partner Electra. 

THEN from that form a K-1 is generated for each partner. Think of this kind of like how your w-2 is a summary of all your earnings and income tax withholding for your job....the K-1 will be the summary of all your income and deductions from the partnership. 

Then that K-1 will be entered on each of your personal 1040 tax returns, and it's on your personal return that the tax is paid. 

1065 (Summary of the business)----> Creates K-1s ---> (Summary for each partner that gets inputted on the 1040, similarly to a w-2)---> 1040 - your personal tax return reports your portion of everything from the K-1 and pays taxes at your personal level.