ALBUQUERQUE, N.M. — Partnerships and S corporations are called pass-through entities or flow-through entities because they essentially serve as a conduit for reporting income and loss to their owners. The entity files a return but reports each owner’s share of income and loss on a schedule K-1.
Losses that pass through from such an entity may not be claimed on the owner’s return if the owner lacks tax basis in their interest. Pass through entity tax returns are information returns. The returns show the IRS the operations of the entity and also show the owners’ shares of each reported item.
The pass-through entity’s return should then be informative. Each owner needs to know how to report their share of the income or loss reported by the entity. The IRS also thinks the return should be informative.
Sometimes IRS may want to know information that the owners do not consider important. In 2008 partnership returns added questions to identify aggressive tax-deferred like-kind exchanges using strategies commonly called “drop and swap” or “swap and drop.”