The IRS Form 1065, U.S. Return of Partnership Income, is the form used by business partnerships to file their yearly 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 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 LLC and you did not register to be taxed as a corporation, you will file taxes like a partnership using the Form 1065.
Form 1065 Deadline
The deadline to submit Form 1065 falls on March 15 every year. If you file an extension, the deadline 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.
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 schedules 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.
Schedule L is where you’ll outline your balance sheet from the beginning of the tax year and the end of the tax year. This balance sheet will include all of your business assets, liabilities, and capital.
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. This difference is completely normal, as the IRS often calculates things differently than most partnerships.
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 fill out 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.
Lastly, when a business files Form 1065, each partner involved with the business must also file a 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.