What happens if a partnership incurs a loss?

In the context of a partnership, when the partnership incurs a loss, the key aspect is how that loss affects the individual partners' tax situations. The correct answer highlights that partners can use the partnership's losses to offset income they have from other sources. This process occurs because partnerships are generally pass-through entities for tax purposes, meaning the income, deductions, and losses of the partnership pass through to the individual partners.

Each partner reports their share of the partnership's income, deductions, and losses on their personal tax returns. Therefore, if a partnership has a loss, each partner's share of that loss can be utilized to offset other income, thus reducing each partner's overall taxable income for that year. This helps to alleviate the tax burden on partners that may have other sources of income.

It’s important to note that while losses can be used to offset income, there may be restrictions based on the partner's basis in the partnership or potential at-risk rules that could limit the ability to fully utilize the losses.