Generic selectors
Exact matches only
Search in title
Search in content
Search in posts
Search in pages

Understanding The 1065 Form

The IRS Form 1065, U.S. Return of Partnership Income, is the form used by business partnerships to file their yearly federal tax returns. On a Form 1065, partners will report their income, gains, losses, deductions, credits, and other information needed by the IRS. 

Who Needs to File Form 1065? 

All business partnerships must file Form 1065. A partnership is a legal entity type formed by two or more individuals who sign a partnership agreement to run a business as co-owners. A partnership agreement could define your entity as a general partnership, limited partnership, limited liability partnership, LLC, etc.

It’s important to note that all partnerships act as “pass-through” entities. This means profits and losses go directly through each partner, and each partner will enter their share of profits and losses on their personal tax returns. In other words, while all partnerships need to file a Form 1065 each year, there is no required tax payment associated with it. Instead, all tax payments take place when partners file their personal income tax returns.  

In some circumstances (i.e. having a verbal agreement to conduct business as a partnership), you will file the Form 1065 even if you’re not registered as a partnership. For instance, if you’re running a multi-member limited liability company (LLC) and you did not register to be taxed as a corporation, you will file taxes like a partnership using the Form 1065. 

Scalefactor eBook cover image

Prepare Your Business for Tax Time

Reduce the risk and get the tools you need.

Why Partnership Agreements Matter to 1065 Filings

When starting a business, partners will often work with a lawyer to draft their partnership agreement. In addition to outlining the entity type of the business, partnership agreements include information on some important details, like how decisions will be made within the company and how profits will be allocated to partners. 

It’s how profits and losses will be allocated that matters most come tax time, but there are many ways this can be sorted out. Most commonly, ownership will be divided based on the amounts each partner contributed to the business at the start.

For example, if two partners in a small business each contribute $100,000 to their business, they may agree to split profits (or possibly losses) 50/50. 

If one partner puts in $100,000 and the other only put in $25,000, they may opt for a 75/25 split instead. There are a number of factors beyond how much money is invested up front that can impact how profits are allocated, so partners should pay close attention when drafting the partnership agreement to make sure they’re comfortable with their allocation. 

That’s because when the year is over and it’s time to file the partnership tax return, they will only pay taxes on the profits allocated to them on their personal returns. 

Form 1065 Deadline

The deadline to submit Form 1065 falls on March 15 every year. If you file an extension, the due date moves to 6 months later, falling on September 15. If any of these days fall on a legal holiday or weekend, the deadlines will be moved to the following business day.  

Because partnerships are pass-through entities, partners will need to pay their individual tax obligations before the federal income tax due date on April 15. (Or they’ll need to file an extension on their personal returns as well.) 

How to file Form 1065?

In order to file Form 1065, you must have your year-end financial statements such as your profit and loss statement and balance sheet. You will also need to have your Employer Identification Number (EIN), business code (NAICS code), and partnership start date handy. 

Lastly, you will need to know your accounting method, gross receipts and returns, and any information that will help you calculate the cost of goods sold (i.e. inventory). 

In Form 1065, you will find a section titled ‘Schedule B,’ which asks for some additional information about your business. Additional tax forms will be included in the partnership return depending on your answers in Schedule B. These include Schedule L, Schedule M-1, and Schedule M-2. 

Source: Internal Revenue Service

Schedule L

Schedule L is where you’ll outline your balance sheets from the beginning of the tax year and the end of the tax year. The balance sheet is a snapshot of your business at both moments in time and will include information on all of your business assets, liabilities, and equity.  

Schedule M-1 

Schedule M-1 is where you will outline any income, expenses, or depreciation that you didn’t include on your return. This is so the IRS can reconcile the difference between what they recognize as taxable profits versus what your business records as its net income on the books. The IRS often calculates things differently than most partnerships, but don’t fear. This difference is normal and occurs frequently. But make sure to speak with your accountant if you have questions about it. 

Schedule M-2

Schedule M-2 is where partners will outline any earnings that have changed and not been accounted for. These could be changes in cash, stock, or property. 

You will need to complete Schedule M-2 after Schedule M-1 and Schedule L, as those two sections have pertinent information that will need to match with the information you provide in Schedule M-2. 

Schedule K-1

Lastly, when a business files Form 1065, each partner involved with the business must also complete Schedule K-1. This is where partners will report their share of income, deductions, and credits as well as any pertinent information about their partnership position in their personal tax return. 

Since Form 1065 doesn’t calculate your taxes owed, this form serves to capture that number. Schedule K-1 not only reflects your income and expenses, but it also asks for information such as real estate income, capital gains, foreign transactions, and any other payments potentially received due to the partnership.

Source: Internal Revenue Service

The most important line of the Schedule K-1 is often Line 1, or Ordinary Business Income (Loss). Partners who invested money into the business that year will only pay taxes on income that exceeds their initial investment. 

Depending on the number of partners involved in the business, it may take a tax preparer some time to create Schedule K-1s for each business. Businesses with many partners may consider filing for extensions in order to give themselves a better buffer. 

Where to File 1065s

When it comes time to put the Form 1065 in the mail, where you send the form depends on a few factors, which are outlined below. Your tax accountant will likely handle the filing on your behalf, but if you opt to do your taxes yourself, follow these guidelines to know where to send it.

Source: Internal Revenue Service

ScaleFactor’s tax calendar ensures you’ll never miss a tax deadline. Read more about how ScaleFactor can help you stay ahead of—and even file—your taxes here

Scalefactor eBook cover image

Prepare Your Business for Tax Time

Reduce the risk and get the tools you need.