Specifies how the profits and losses of a partnership or LLC treated as a partnership for tax purposes are divided among the partners or members. Allocations of profits and losses to the partners are necessary because a partnership is a pass-through entity for US federal income tax purposes (that is, the partnership generally does not pay an entity level tax because the partnership's profits and losses instead pass through to its partners, who report (and are generally taxed on) their respective share of those items on their own US federal income tax returns (whether distributed or not)). Allocations do not necessarily translate into an actual distribution of funds.

For more information on partnership allocations, see Standard Document, LLC Agreement (Multi-Member, Board-Managed) (Private Equity Buyout): Drafting Note: Allocation of Net Income and Net Loss and Article, Understanding Partnership Target Capital Accounts.