According to the Tax Foundation, over two million US-based businesses are considered partnerships. Having a business partner can be appealing, especially if you share similar goals and values (not to mention the benefit of getting to divvy up some responsibilities). It’s also a leap of faith: along the way, you may discover that you have some different philosophies and ideas on hiring, budgets, or managing the books — and you’ll need to work together to make decisions that move your business forward.
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Fast facts about Form 1065
- Form 1065 is a tax return form specifically designed for partnerships.
- Form 1065 is used to report a partnership’s income, deductions, gains, losses, and other important details to the IRS.
- Partnerships use Form 1065 to also prepare the required Schedule K-1 for each partner, in order to pass through all income and deductions to owners.
- All domestic business partnerships headquartered in the U.S. are required to file Form 1065 annually. This includes general partnerships, limited partnerships, and limited liability companies classified as partnerships that have two or more members.
But no matter what you and your business partner decide is the best path to grow your company, one thing you’ll need to be on the same page about is Form 1065. But what is Form 1065 and when should you use it? If your business falls into the partnership category, this document is one that the IRS expects you to complete and file so they have a record of your business’s profits and losses each year.
Let’s get into more details on Form 1065, the schedules that need to be completed, and how to file one, so you can get back to running your business.
Form 1065 PDF download
Above is a fillable form you can complete and submit.
What is Form 1065 and what is it used for?
First and foremost, if your business is structured as a partnership, you’ll be required to complete IRS Form 1065. Also known as a U.S. Return of Partnership Income, IRS Form 1065 is an information return that’s used to report partnership income and losses for the year. Because a partnership does not pay taxes directly but instead passes tax liability onto the partners, IRS Form 1065 is used for informational purposes only.
To explain this a bit more, we spoke with Peggy James, a certified public accountant with over 15 years of experience helping businesses.
Do 1065 partnerships pay taxes?
Taxes are not assessed at the partnership level. Instead, the partnership files an informational return called Form 1065 to report partnership activity such as income, expenses, gains, and losses. These taxable items are then passed through to each partner based on their percentage ownership in the partnership.
— Peggy James, Certified Public Accountant (CPA)
For example, a partnership with two partners each of whom owns 50% of the business will be responsible for taxes on 50% of the partnership’s net business income. These items are reported to each partner on Schedule K-1 of Form 1065.
Next, let’s talk more about who files this form.
Who is required to file Form 1065?
All businesses that are structured as a partnership must complete and submit Form 1065. This includes general partnerships, limited partnerships, or limited liability partnerships (LLC). Individuals who identify as self-employed or sole proprietors are off the hook and are not responsible for completing this paperwork.
Next, let’s talk about how filing gets completed and deadlines to be aware of.
How do you file IRS Form 1065 and when is it due?
The method you’ll use to file Form 1065 depends on the size of your business. If your partnership has more than 100 partners, the form must be filed online. However, other partnerships can file by mail.If you mail your form, the IRS lists out regional offices so you know where to send it, depending on where your company is located.
Be sure to mark your calendar, as Form 1065 and all related schedules are due by the 15th day of the third month following the end of your tax year. For example, if your partnership uses a standard calendar year, Form 1065 would be due by March 15 of the following year.
Does every LLC have to file a 1065?
Single member LLCs do not file Form 1065 because they are considered sole proprietors for tax purposes unless they have elected to be taxed as another entity type such as an S corporation. Multi-member LLCs typically file Form 1065 to report partnership activities unless they have elected to be taxed as a corporation.
— Peggy James, Certified Public Accountant (CPA)
Where do you start with Form 1065?
Page one of Form 1065 requires some basics; you’ll add details such as the name of your partnership, the principal business activity, address, your EIN, and the date the business opened its doors. If there have been any changes since you last filed Form 1065 — such as a name or address change — there are some additional fields that need to be filled out to make these updates.
Next, there’s a section to record items that pertain to the partnership, broken out as income, deductions, tax, and payments. Once all details have been listed, there’s a spot for your signature. You can see these details in the form below:
Next, let’s talk about a section of the form the IRS is likely most interested in seeing at tax time.
What is Schedule B?
Next, comes a section called Schedule B, which is designated for “Other Information” on pages two and three. This section includes 29 line items and asks technical questions about your partnership. The main purpose of Schedule B is to provide Uncle Sam with information about how all the partners in a business contribute and share their ownership.
For example, this section is used to provide additional information about the partnership’s capital, such as partners’ contributions and ownership percentages. It consists of a series of questions that help the IRS gather more details about the partnership’s structure and financial aspects.
Later in this article, we’ll pay special attention to question four that appears on Schedule B, as your answers can have some special implications. For now, below are screenshots of what you can expect to be asked (and need to answer).
This section also requires providing information about your business entity type, how the partnership is divided, and any investments the partnership possesses (both foreign and domestic). There are also questions about whether or not the partnership made payments that would require a 1099 to be filed.
Because the questions throughout Schedule B are very specific, it can be helpful to work with a certified public accountant or tax professional to ensure all information is provided correctly.
Though the partnership as a whole is not subject to income tax, each partner is liable for tax on their share of the partnership income that’s generated. Every partner must include their shares on their tax returns.
Complete Schedule K
The next portion of Form 1065 that needs to be filled out is called Schedule K, also known as the Partners’ Distributive Share Items. This information is a summary schedule of all the partners’ shares of the partnership’s income, credits, deductions, etc. All partnerships are required to complete Schedule K. Why is this important? It represents the total amount of taxable items that will be passed through to the partners.
While Schedule K provides a summary of each partner’s shares, it is not how Uncle Sam understands what each partner has earned. That’s why schedule K-1 exists.
What is Schedule K-1 and how do you fill it out?
Each partner in a business partnership is responsible for reporting their own income, losses, dividends, and capital gains. So, once Form 1065 is completed, each partner will then need to complete what’s called Schedule K-1, which is used to prepare their own individual tax return.
The K-1 is prepared for each partner and used to identify the partner’s allocated profits and losses for the total reporting period. The reason why it’s important for the partner to receive a K-1 is because the information is used to prepare their personal income tax return.
Partnerships and LLCs are pass-through entities, where any profits or losses pass directly to the partners or LLC members. Individual partners report and pay taxes on their share of the business income on their personal tax returns using Schedule K-1 and then file this form with their personal tax returns, IRS Form 1040.
The partnership or LLC then files a single IRS Form 1065, but the business does not pay the income tax.
Keep in mind
Attach a copy of each partner’s Schedule K-1 to Form 1065 which is filed with the IRS.
Analysis of Net Income (Loss) per Return
According to IRS guidelines, this section changes the net income and loss of the partnership for general partners and limited partners. For each type of partner listed, enter the portion of the amount shown on line 1 that was allocated to that type of partner (specifically in sections 2a and 2b).
To complete this section of Form 1065, the partnership should follow IRS guidelines regarding classification of general and limited partners, including:
- General partners help run the business, can sign contracts and loans on behalf of the company, and are personally responsible for any debts or obligations.
- On the other hand, limited partners are passive investors who do not take part in running the business and whose liability is limited.
What is Schedule L and when should you complete it?
Schedule L – Balance sheets per books — located on page five — is where you need to provide detailed information about business assets, liabilities, and capital. However, if you answer yes to all of the following questions in question four of Schedule B – Form 1065, you do not have to complete Schedule L:
Does the partnership satisfy all four of the following conditions?
- The partnership’s total receipts for the tax year were less than $250,000
- The partnership’s total assets at the end of the tax year were less than $1 million.
- Schedules K-1 are filed with the return and furnished to the partners on or before the due date (including extensions) for the partnership return.
- The partnership is not filing and is not required to file Schedule M-3.
On the flipside, if you answer no to any of the four questions listed above, you’ll need to file Schedule L. For reference, you can view the image below to see the information required to complete Schedule L:
What is Schedule M-1 and when should you complete it?
Schedule M-1 Reconciliation of Income (Loss) per Books With Income (Loss) per Return is… a big name, we know. In short, this is used to reconcile the income that your business partnership reports on its tax returns with the income reported in your accounting records. Like Schedule L, the Schedule M-1 is only required if you did NOT answer yes to all four parts of question four of Schedule B (above). Even if there is no difference between your financial statements and your return, if you answered no to any questions, you will need to complete Schedule M-1.
What is schedule M-2 and when should you complete it?
Last but not least on Form 1065 is the Schedule M-2 Analysis of Partners’ Capital Accounts. This form is used to report what caused changes that may have occurred with partners’ capital accounts. The information you provide here is used by the IRS to help verify the accuracy of your tax reports. Changes to capital accounts should ideally be consistent with the income reporting and the balance sheet (Schedule L).
Similar to schedules L and M-1, Schedule M-2 is only required to be completed if you did not answer yes to all parts of question 4 on the Schedule B, above. Schedule M-2 requires you to enter beginning capital contributed throughout the year, as well as, distribution amounts.
If you’re ever in doubt, be sure to visit the IRS website for more information or additional information on Form 1065 or required schedules. Given how much information goes into getting Form 1065 completed, it can be helpful to ask a bookkeeper or accounting professional for personalized assistance if you have questions.
Other 1065 form considerations
For those thinking of forming a partnership, here’s more information to think about.
Can you file a 1065 without an EIN?
A federal employer identification number (EIN) is required when filing Form 1065.
What happens if you don’t file Form 1065?
Ignoring this paperwork can lead to some undesirable outcomes. Penalties may be assessed for failing to file Form 1065 before the deadline. The IRS charges a late filing penalty starting at $265 per month if the return is late for up to 12 months. The IRS also charges a penalty of $310 for failing to furnish Schedule K-1 to each partner.
Final thoughts on Form 1065
For those who may bring an idea to life with their significant other, once more, we caught up with CPA Peggy James for her insights.
“When a married couple goes into business together, they may not realize that the business is considered a partnership for tax purposes and would therefore be required to file Form 1065.”
— Peggy James, CPA
There are a few exceptions; one is for a married couple that lives in a community property state, and another is for a partnership that elects to be treated as a qualified joint venture under IRS rules. In the latter case, it may be possible for the business to avoid filing Form 1065 and instead report the business income on the couple’s personal tax return.
That said, Peggy points out that if you’re ever unsure about what your obligations are, it’s always makes good business sense to seek professional advice. “Note that the IRS has specific rules about what qualifies as a joint venture as well as how to elect to be treated as one,” she says. “It’s a good idea to consult a tax professional for guidance in either of these scenarios.”
What is Form 1065? Partnerships should prioritize it
Forming a partnership with a trusted colleague who has similar business goals can be an exciting prospect. Just remember that it’s important to keep Form 1065 — and the deadlines — somewhere on your task list to ensure that you and your business partner get these forms filed on time.
No matter which direction you head in, we wish you the best of luck as your business scales!
Please note all material in this article is for educational purposes only and does not constitute tax or legal advice. You should always contact a qualified tax, legal or financial professional, in your area for comprehensive tax or legal advice.
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Jon Davis is the Sr. Content Marketing Manager at OnPay. He has over 15 years of experience writing for small and growing businesses. Jon lives and works in Atlanta.