A partnership is a business conducted by two or more people agreeing to share profits or losses from the business. General Partnership, Limited Liability Partnership, Limited Partnership, and Limited Liability Company are the most commonly used types for the formation of partnerships. Income from the partnership is taxable once only as it is considered the personal income of the partners, due to this reason people choose partnerships over corporations for legalizing the business to save partnership taxes. Publication 541 of the IRS provides comprehensive information regarding the definition of the partnership, formation of the partnership, distributions, partner’s interest, and dissolution of the partnership.
Reporting of Partnership Income
All types of partnership firms are required to file a partnership tax return to report their income and losses including foreign partnerships and non-profit religious organizations. Even if the partnership firm is not paying any tax and income is passed to partners, then also they have to file a return on yearly basis. The partner’s share of income is filed in the K-1 schedule instead of a W-2 form used for an employee.
Annual partnership tax return in the USA: Form 1065
Tax Form 1065 is used for filing an annual return with the IRS. In this form, firms have to report their profits and losses, credits, deductions, etc. Form 1065 is available on the IRS website, can be filled out online by using tax software or we can take a print and fill it out by hand. The deadline for filing a partnership return is March 15. If you are not able to file it within the deadline, you can file Form 7004 to receive an extension of 6 months before March 15.
Who needs to File Form 1065?
- Every domestic partnership Firm unless income, expenses, deduction, and credits taken for the year is zero.
- The partnership is a Limited liability company.
- A religious or apostolic organization is exempt under section 501(d)
- Foreign Partnership conducting a trade or business in the United States.
How to Fill Form 1065?
- Information required to file Form 1065.
Gather all the information required to fill the Form 1065. You can also keep a copy of last year’s partnership tax return in hand to fill out the details about your business. The general details required by the form are revenue generated, other income, salary, other business expenses, etc. Financial statements generated at the year-end by the accountant will help to fill in these details.
Line A-K is general information regarding the partnership Firm.
- First, you have to enter the beginning and end of the tax year at the top of Form 1065.
- The name of the firm and mailing address is required to fill out basic information in the form.
- Line A-D: Fill in the principal business activity, product or service, and business activity number available at the end of the instruction sheet of Form 1065. Fill in your business tax ID number in line D.
- Line E-F: The business start date is the date of incorporation of the business. The total assets will be based on the accounting method you use for a business so, preparing financial statements before filing a return is essential.
- Line G-H: This line indicates the type of return you are filing with the IRS and the type of accounting method you are using to file this return.
- Line I-J: You need to write a number of the K-1 schedule attached in Line I and tick the box in Line J if you are attaching Schedule C or M-3.
Fill in the Income, Deductions, and Tax Payment boxes.
- Line 1a to 8 is in the income box. You have to write revenue generated by the firm and the cost of goods sold by attaching form 1125-A. You have to also attach the statements and schedule if you are having other income or losses from other firms, estates, or from farming and mention it in lines 4 to 8.
- Line 9 to 21 is in the deduction box. These are the general business expenses allowed as deductions by the IRS. It includes salary, payments to partners, repairs, rent, taxes, depreciation, and other deductions. IRS instruction sheet provides the list of expenses that are allowed as a deduction.
- Line 23 to 30 is in the tax payment box. Here, you have to write the tax payments you have done for the tax year, any interest if it is accrued, and the total balance due. Line 29 is the amount you owe to the IRS. That means this much tax you still have to pay. Line 30 is for the overpayment of the tax. You can choose to get a refund or can adjust the amount with your next year’s tax liability.
- Schedule B has 29 lines in total. It is the “other information” section regarding the partnership firm and ownership. Most of the questions are answered as yes or no in the checkbox and if some of them are yes, you need to write additional information in the given table.
- The First question is regarding the type of entity of partnership. Question 2 to 10 is about the percentage of owners in partnership, debt involvement, foreign involvement in the partnership, investments done by the partnership, etc. You need to read it carefully before answering each question.
- Line 11-29 is asking about foreign partners, properties of partnership, tax obligations under various forms, and transfer of partnership. In some cases, if the answer is yes, then additional attachments of supporting forms and schedules are required.
- Schedule K is about the partner’s share of income, contributions, deductions, credits, and distributions in the business.
- It is reflecting all of the partner’s information and for an individual share of income, K-1 schedules should be attached.
- Line 1 to 11 is about the income of partners including business, rental, dividend, interest, long-term capital gain, and short-term capital gain.
- Line 12 and 13 is about the partner’s contribution to the business.
- Line 14 is for reporting self-employment income from farming or non farming activities of partners.
- If you have rental credits, then you have to report them to Line 15.
- Line 16 is for reporting international taxation.
- If you are availing of the alternative minimum tax exemption then you have to report into Line 17.
- In Line 18 to 20, you have to report exempt income and expenses, investment income and expenses, and distribution of other properties if any.
- Schedule L is a balance sheet of the firm. You have to provide the details of the liabilities and assets of the firm.
- In schedule B, if you have answered yes in question 4 then you have the option not to fill schedules L, M-1, and M-3.
- You have to write totals of the liabilities and assets in the balance sheet and attach the statement of other liabilities, investments, and other assets with Form 1065.
- You will need financial statements and depreciation schedules to fill schedule L.
- There can be differences between the partnership’s net income in the financial statements and the partnership’s income reflected in Form 1065 due to depreciation, exempted income, and nondeductible expenses. It is like a reconciliation statement between the tax return and books.
- It is the last section of Form 1065. It is an analysis statement of the partner’s capital account. It is a summary statement regarding the partner’s capital contribution, distribution, other increases, and decreases.
- Each partner’s income and losses are reported separately on Schedule K-1. So, the number of schedules k-1 will be equal to the number of partners.
- Schedule K-1 will not help to calculate the taxes of the partnership firm. It will help the partners to file their individual income tax returns.
- Partner’s Capital investment, the share of liability, and ownership percentage at the beginning of the year and end of the year are reported in Schedule K-1.
- The firm also has to report any increase or decrease in ownership in Schedule K-1.
- The main objective of schedule K is to report the individual partner’s income, losses, distributions, credits, and other gains or losses,
- When the firm is not paying tax, It is issued to pass the tax liability to stakeholders before March 15.
Filing of Form 1065
Form 1065 must be filed by 15th of March every year, unless, you are opting for an extension. You must attach all five pages, Schedule K-1, and other forms if required. After filling all the information, sign and date the form to file it with the IRS. You can follow the below instructions if you are filing via registered mail
Filing Form 1065 is quite complicated due to questions regarding business and financial information. A lot of calculations are required for the owner’s share, and tax liability for manual filing. Hence, taxpayers generally prefer a third party for the filing of tax returns.
At NimbleFinCorp, we have a dedicated team of professionals who can help you to prepare and file your return within the deadlines. We are here so you don’t have to do guesswork while preparing your books and return. Get started with free consulting.