How is a partnership's income generally taxed?

In a partnership, the income is generally taxed through a mechanism known as "pass-through taxation." This means that the income earned by the partnership is not taxed at the partnership level. Instead, the profits and losses are passed through directly to the individual partners, who then report this income on their personal tax returns. Consequently, the partners pay taxes on their share of the partnership's income at their respective individual tax rates.

This system provides several advantages, including avoiding the double taxation that can occur in corporations, where income is taxed at the corporate level before being distributed to shareholders as dividends, which are then taxed again at the individual level. By allowing income to flow directly to the partners, partnerships simplify the tax process and often result in a lower overall tax burden for the partners.

Understanding this taxation method helps clarify why the other options are not correct. A partnership's income is not taxed as corporate income, nor is it subjected to a flat tax rate. While partnerships do not face federal taxation as an entity, they are not entirely tax-exempt; rather, the income is treated in a manner that allows for individual taxation based on each partner's tax rate.