In what circumstance can a partner report their distributive share of income?

The rationale behind the correct choice is that a partner is required to report their distributive share of income on their personal tax return, which is determined by the specific tax treatment applicable to their business structure. This means that a partner’s income reporting aligns with the tax rates relevant to the type of business they are involved in, whether it be a partnership, sole proprietorship, or another structure.

Partners in a partnership typically report their share of income, deductions, and credits via Schedule K-1 form, which details their portion of the partnership's taxable income. The income is subject to personal tax rates on the partner's individual tax return, reflecting the structure of the business.

In contrast, other options are less accurate. The first suggests that only individuals can be partners, which is misleading because entities, including LLCs or corporations, can also hold partnership interests. The second choice is incorrect as it limits partners to only being S corporations, which misrepresents the nature of partnerships. Finally, the last option is misleading because avoiding distribution does not exempt a partner from reporting or paying taxes on their distributive share of income; tax liability arises based on ownership and not actual distributions.