...business has income from sources in the United States must file an annual information return, Form 1065, U.S. Partnership Return of Income, or Form 1065-B, U.S. Return of Income for Electing Large Partnerships, with the Internal Revenue Service. A partnership does not pay tax on its income but "passes through" any profits and losses to its partners, who must include those profits and losses on their tax returns. The following are highlights from the 2005 partnership study:

* For 2005, the number of partnerships increased 8.5 percent, from 2,546,877 for 2004 to 2,763,625 for 2005. (1) Since 1995, the number of partnerships has increased at an average annual rate of 5.7 percent (Figures A and B).

* The number of partners increased by 4.2 percent, from 15,556,553 for 2004 to 16,211,908 for 2005. The number of partners has increased 4 of the last 5 years (Figures A and B).

* Total net income (loss) increased by 42.0 percent, from $384.7 billion for 2004 to $546.2 billion for 2005 (Figures A and C). Partnerships classified in the finance and insurance sector accounted for $61.9 billion of the $161.5-billion increase for all partnerships (Figure D). The information and real estate and rental and leasing sectors reported the next largest increases, $19.7 billion and $17.8 billion, respectively (Figure D). For 2005, for the first time in a decade, all sectors except for nature of business not allocable reported an increase for total net income (loss). The last time all sectors reported an increase was for the period 1995 to 1996. The component of total net income (loss) with the largest increase was ordinary business income (loss), which climbed $102.5 billion, followed by interest income which increased $45.8 billion. The only decrease was from net rental real estate income (loss), which decreased $10.0 billion (Figure C and Tables 1 and 2). (See the "Explanation of Selected Terms" section for the definition of total net income (loss).)

* Total receipts increased 23.1 percent, from $3.7 trillion in 2004 to $4.6 trillion in 2005 (Figure D). Together, the finance and insurance, real estate and rental and leasing, manufacturing, and wholesale sectors reported 65.8 percent of the overall increase. The finance and insurance sector increased 40.7 percent to $863.6 billion, the real estate and rental and leasing sector increased 39.1 percent to $499.3 billion, the manufacturing sector increased 14.5 percent to $730.3 billion, and the wholesale sector increased 22.5 percent to $445.0 billion. For 2005, for the first time since the period 1999 to 2000, all sectors reported an increase for total receipts. (See the "Explanation of Selected Terms" section for the definition of total receipts.) Business receipts, the largest component of total receipts, also reported the largest increase. Business receipts increased $461.2 billion to $3.3 trillion for 2004 (Table 7). The next largest increases were reported by net long-term capital gain and net section 1231 gain. Net long-term capital gain increased by $93.4 billion to $301.2 billion, and net section 1231 gain nearly doubled for the second consecutive year, increasing $87.7 billion to $194.7 billion. (See the "Explanation of Selected Terms" section for the definition of business receipts.)

* Total assets of partnerships reporting balance sheets increased 18.3 percent, from $11.6 trillion for 2004 to $13.7 trillion for 2005 (Figure D). Together, the finance and insurance, and real estate and rental and leasing sectors accounted for 84.6 percent of the overall increase in total assets for all partnerships. The finance and insurance sector reported 55.8 percent of the total assets for all partnerships, followed by the real estate and rental and leasing sector, which reported 22.6 percent. (Figure E). However, 25.6 percent of all partnerships--generally those with total assets of less than $600,000 and total receipts of less than $250,000--were not required to file a balance sheet with their returns. (2) Table 3 presents data by industry and by profit status for the 2,058,001 partnerships (74.5 percent of all partnerships) that did file balance sheets.

* For the first time since 1997, all sectors reported positive total income (loss) minus total deductions available for allocation (Table 5). Also, for only the second time since NAICS data were first published for 1998, the information sector reported positive total income (loss) minus total deductions available for allocation. Tax Year 2004 was the first time. Together, partnerships classified in the finance and insurance, and real estate and rental and leasing sectors accounted for 69.2 percent of the total income (loss) minus total deductions available for allocation for all partnerships.

* For the third consecutive year, individuals who were limited partners received the largest portion of income (loss) allocated to partners. For 2005, individual limited partners received $231.4 billion of the $1,022.2-billion income (loss) allocated to all partners (Table 5). Prior to 2003, individual general partners were the largest category since allocated income by type of partner was first reported on tax returns in 1988. In addition, for 2005, total income (loss) allocated to four additional groups also surpassed the $83.1 billion income (loss) allocated to individual general partners: corporate limited partners received $198.1 billion; partnership limited partners received $194.2 billion; nominee and other limited partners received $96.4 billion; and corporate general partners received $89.2 billion.

* Tax Form Changes--The Schedule K, Partners' Distributive Share Items, and Schedule K-1, Partner's Share of Income, Deductions, Credits, etc., was revised for 2005. Although Line 13b, Deductions related to portfolio income, was removed for 2005, the money amounts from that line are included on Line 13d, Other deductions (Table 5).

* Tax Law Changes--The Energy Policy Act of 2005 revised and/or added several new credits that affect partnerships. These new credits include, but are not limited to, the following: Energy Efficient Home Credit (Form 8908); Alternative Motor Vehicle Credit (Form 8910); Alternative Fuel Vehicle Refueling Property Credit (Form 8911); Qualified Advanced Coal Project Credit (Form 3468); Qualifying Gasification Project Credit (Form 3468). Also, Tax Relief Acts for Hurricanes Katrina, Rita, and Wilma increased the rehabilitation credit for qualified buildings located in the Gulf opportunity zones for the hurricanes and added the following new credits: the employee retention credits; the Hurricane Katrina Housing Credit (Form 5884-A) and the Gulf Bond Credit (Form 8912). The maximum section 179 expense deduction on line 1, Form 4562, Depreciation and Amortization, was also increased.

Allocations to Partners

Partnerships are not taxed directly. Instead, their income, credits, and deductions flow through to the partners for inclusion on the partners' own tax returns. Partners may be individuals, corporations, other partnerships, tax-exempt organizations, nominees, or other legal entities. Table 5 presents data on the different types of partnership income (or losses) and deductions allocated to partners for selected industrial groups. These data were obtained from Schedule K, Partners' Distributive Share Items, of the partnership return, which reports amounts for each component by type of partner.

For 2005, all partnerships reported a total of $1,225.6 billion for total income (loss) available for allocation, before deductions (Table 5). For separately stated deductions (such as contributions and interest investment expense), all partnerships reported a total of $176.7 billion. The difference between total income (loss) and total deductions resulted in $1,048.9 billion of total income (loss) minus total deductions available for allocation to partners. Of this amount, $1,022.2 billion were identified as allocated by type of partner. The difference between the total income (loss) minus total deductions available for allocation and income (loss) allocated to partners was due to some partnerships failing to report allocations, by type of partner, on their returns as originally filed (Table 5).

For 2005, total income (loss) minus total deductions available for allocation increased $366.4 billion to $1,048.9 billion. The largest increases were reported by the finance and insurance sector and the real estate and rental and leasing sector. The finance and insurance sector increased $165.2 billion to $470.5 billion. The real estate and rental and leasing sector increased $100.4 billion to $255.5 billion.

Partners classified in the finance and insurance sector received $470.5 billion of the $1,022.2-billion total income (loss) minus total deductions available for allocation reported for all partnerships, the largest share received by any sector (Table 5). The next largest shares were received by the real estate and rental and leasing industry sector and the professional, scientific, and technical services sector, $255.5 billion and $80.1 billion, respectively.

Partners classified as individuals or corporations were again the principal categories of income (loss) recipients...

NOTE: All illustrations and photos have been removed from this article.



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