Business partnerships file their federal income tax return in a different way from other business types. They use Internal Revenue Service (IRS) Form 1065 to file an information return, but the business doesn’t pay taxes from this return. Instead, the partners pay their share of the taxes on their personal returns.
Learn more about what Form 1065 is, who must file it, and a step-by-step process for filing, as well as when and where to send the return. Also learn how Form 1065 plays a role in Schedule K-1, which is used for your personal taxes.
- Form 1065 is the income tax return for partnerships.
- Form 1065 includes information about the partnership income, expenses, credits, and partnership distributions.
- The partnership’s federal income tax liability from Form 1065 is divided between the partners and is shown on their individual Schedule K-1 forms.
- Each partner includes Schedule K-1 information on their federal tax form 1040 to calculate their total income tax due.
What Is Form 1065?
Form 1065 is also used by limited liability companies (LLCs) with more than one member (owner) to file their federal income tax return. The partnership form is the default tax status of a multiple-member LLC, unless the business has elected to be taxed as a corporation or S corporation.
The partnership doesn’t report and pay income based on Form 1065. Instead, the partnership entity passes on income, expense, and other tax information to the individual partners. Each partner then pays their share of the taxes on their personal tax return. To give partners the information they need to report their taxes, each one receives a Schedule K-1 showing their share of each type of the partnership’s income, deductions, and tax credits. The partner then includes this income with other sources of income on their personal tax return.
Schedule K-1 comes in different forms, depending on the type of income being reported. Be sure you are using Schedule K-1 (Form 1065) to report individual partner income.
How Do I Prepare and File Form 1065?
Preparing and filing Form 1065 and Schedule K-1 is a two-step process: gathering information and completing the form.
Your first step is to gather information on all sources of income and documentation on expenses.
Some tax deductions and costs could need extra documentation. They include
- Cost of goods sold, if you sell products
- Business travel and driving expenses for partners and employees
- Costs for employees, including wages/salaries and benefit plans
- Depreciation and amortization for major partnership assets
You will also need detailed information on each partner’s share of the business at the beginning and end of the year.
Preparing a year-end income statement from your business accounting software helps your tax preparer save time in preparing Form 1065.
When and Where To File Form 1065
Form 1065 is due on the 15th day of the third month after the tax year ends; for Dec. 31 tax years, that would be March 15 of the following year. This date may change for a specific year if the due date is a weekend or holiday. In this case, the form is due the next business day.
You will also need to prepare Schedule K-1 for each partner, giving one part of the form to the individual and filing this form with the IRS along with Form 1065. This form must be given to individual partners on the same date as Form 1065: March 15 for calendar-year partnerships.
You can file Form 1065 using one of several methods:
- Electronic filing, using the IRS Modernized e-File program
- IRS-approved private delivery services to a specific IRS location
See the Instructions for Form 1065 for the mailing address, determined by the location of your partnership’s main office and your total assets.
Steps for Completing Form 1065
- Lines 1a-8: Enter different types of partnership income to get total income (loss) for the year on Line 8.
- Lines 9-22: Enter all types of deductions next. If some deductions aren’t listed, you can include them on an attached statement, entering the total deductions on Line 21, and total ordinary business income (loss) on line 22.
- Lines 23-30: Enter interest and other adjustments, taxes, and payments on adjustments on lines 23-26 to get a total balance due on line 27.
Schedule B is a section that requires information about the type of partnership or limited liability company. A domestic partnership is one formed in the U.S.; a foreign partnership is one formed outside U.S. federal or state law. It also includes questions about stock ownership, dealings with foreign financial institutions, and other situations.
The Schedule K section is the calculation of the different types of income, deductions, credits, foreign transactions, and other information to be divided between partners and reported on each partner’s Schedule K-1.
The Analysis of Net Income (Loss) section adjusts the partnership’s net income and losses for general partners and limited partners. General partners participate in the administration of the business, have the power to sign contracts and loans on behalf of the firm, and have personal liability for debts and obligations. Limited partners are passive investors who don’t participate in business management and have limited liability.
Schedule L breaks down the partnership’s balance sheet at the beginning and end of the year, for different types of assets, liabilities, and partner ownership accounts.
Schedule M reconciles income or loss on the partnership’s accounting system with the income or loss for the tax return. Schedule M-2 looks at the total of all partner accounts through the year.
Partners Report Income on Schedule K-1
After you prepare Form 1065 and find the totals for different kinds of income, you must separate out each partner’s share of that type of income (or loss). Schedule K-1 is the form used to show the part of the income the individual partner receives.
Information from Schedule K of Form 1065 is separated by type of income, deduction, credits, or other information. The lines on Schedule K-1 for each partner echo those on Schedule K.
Schedule K-1 lists all of the possible types of income for each partner, and each is added separately. For example, line 1 is for ordinary business income (loss), line two is for net real estate income (loss), and lines 6a, 6b, and 6c are for different types of dividends the partnership may give to a partner during the year.
Schedule K-1 also requires the partner to show:
- The partner’s percentage share of any profit, loss, or capital invested in the business at the beginning and the end of the year
- The partners share of liabilities at the beginning and end of the year
- The increases and decreases in the partner’s ownership account during the year
Getting Help with Form 1065 and Schedule K-1
Form 1065 requires many details. The information for individual partners on Schedule K-1 must be exact and it must follow the terms of your partnership agreement. The filing process involves several different forms and schedules to get from Form 1065 to a partner’s personal tax return on Form 1040.
Even with a simple partnership, this process can get complicated quickly. Get help from a licensed tax professional to make sure you are completing these forms correctly and giving partners the correct amount of taxable income.
Frequently Asked Questions (FAQs)
How does a K-1 loss affect my personal taxes?
A partner’s part of the loss of a partnership as shown on the K-1 statement may affect the partner’s personal taxes. You report your share of the partnership’s net operating loss (NOL) on Schedule E along with all other types of income, deductions, and tax credits to get your final tax amount due. You may be able to use your share of a partnership’s loss to offset other income on your tax return.
How is partnership income taxed?
Partnerships don’t pay tax on their income, but the individual partners do. Income from a partnership is calculated for the entire business for the year, then income, deductions, and credits are distributed among the partners according to their share of ownership, as agreed on in the partnership agreement.
Is partnership income considered self-employed income?
Partners in any type of partnership are self-employed as defined by the Internal Revenue Service (IRS) because they participate in a partnership business. If you are self-employed, your income from your partnership is subject to the Self-Employed Contributions Act (SECA) tax.
SECA tax is paid for Social Security and Medicare benefits, based on the partner’s net income from the partnership for the year. You must report SECA taxes if your business income is $400 or more for the year.