Filing taxes is a major headache for many business owners, even though it’s a necessary part of the financial cycle every year. Partnerships – limited liability partnerships, limited partnerships, general partnerships – have their own designated forms they must file in conjunction with their broader initial return and final return.
Among the most important of these is the 1065 Form. New business owners starting out or who haven’t gone through a complete tax year with their business yet may not know what this form is, what it does, or whether it applies to their business enterprise.
Not to worry – this page will break down exactly what Form 1065 is, who it applies to, and even how to file it at the end of your fiscal end of the year. Let’s dive in!
Form 1065 Explained
In a nutshell, Form 1065, also formally called US Return of Partnership Income, is a specialized tax document only issued by the Internal Revenue Service. This form is used to declare the net gains and losses and the deductions and tax credits of an existing general partnership.
In other words, it’s one of the most important net income forms that a business partnership must file at the end of their fiscal year in order to adhere to tax regulations.
What Does Form 1065 Do?
Form 1065 is vital, so the IRS understands how your company’s financial status progresses until the end of the tax year. With this form, and in conjunction with other tax forms, the IRS can create a complete picture of your business’s financial activities and determine whether it owes you money or if you owe the IRS extra taxes.
No matter what your general partner or limited partnership does, you must file a Form 1065 if you legally operate in the US. You must also pay income tax on your earnings no matter where you earned that money or where it was distributed.
In addition to a Form 1065, all business partnerships or limited partners in the US have to file a completed Schedule K-1 form.
Who Has to File Form 1065?
Simply put, any domestic partnership in the US. A partnership is a specific kind of company distinct from things like sole proprietorships, limited liability companies, and more.
- Sole proprietorships are companies that only include one major member. While they may technically have some other employees, this is not usually the case.
- Partnerships are small companies that include two or more people who do business or trade together.
- Technically, partnerships can be LLCs as well as partnerships. But LLCs are usually companies that are larger than partnerships but less complex or massive than corporations.
In a partnership, at least two people actively contribute to a business. Accordingly, both or all partners reap economic benefits and are also held liable for any losses the company may incur.
What if Your Partnership Is Foreign-Based?
According to the IRS, if you have a foreign partnership and some of your income comes from the US, you may be required to file a Form 1065. Per 2018 tax codes, if your foreign partnership gets less than $20,000 or less than 1% of your total income in the US, you may not have to file.
What if Your Partnership Is a Religious/Nonprofit Organization?
Unfortunately, you still have to file Form 1065 if your partnership counts as a religious organization or a nonprofit organization.
Partnership Agreements and 1065 Forms
When you create a partnership with one or more other partners, you will most likely work with a lawyer, so you draft an effective and legally binding partnership agreement. The partnership agreement is sort of like the Constitution or rules document for your partnership. It outlines the rules and responsibilities for participating members and breaks down how any profits and losses will be allocated to partnership members.
This form is very important for when you file your Form 1065. That’s because the profits and losses section of a partnership agreement breaks down what each partner is responsible for, which is necessary information for your 1065 filing.
Say that there are two partners in a small business. They each contribute $100,000 to the business and split all of their profits and losses by a ratio of 50/50. This information will be held on the partnership agreement and can be easily transferred to the 1065 form when the partners file taxes at the end of the fiscal year.
Where and How to File Form 1065
Ensuring that you file taxes on time is vital if you want to avoid being heavily fined by the IRS, plus avoid having to deal with other major penalties. For all partnerships, the Form 1065 deadline is March 15. You can file for an extension, which moves the due date up to six months later, or September 15. As with all other tax forms, if the dates fall on a legal holiday or a weekend day, the deadlines are moved to the next available business day.
Furthermore, the IRS classifies all partnerships as pass-through entities. This means every partner has to pay their individual tax obligations before the overall federal income tax due date: April 15.
Now let’s break down how you can file Form 1065 step-by-step.
Gather all of your year-end financial statements, including your balance sheet and profit and loss statement. You’ll also need other information like your EIN/Employer Identification Number and partnership start date.
Make sure that you know the accounting method your company uses and gather any appropriate receipts and returns. Fill in this information where it is indicated on your Form 1065.
Other than that, you may need information from the following forms to complete your Form 1065:
- Form 4562, Depreciation and Amortization
- Form 4797, Sale of Business Property
- Form 8918, Material Advisor Disclosure Statement
- Form 1099s issued by your partnership
- Form 114, Report of Foreign Bank and Financial Accounts Disclosure Statement
- Form 3520, Annual Return to Report Transactions with Foreign Trusts Receipt of Certain Foreign Gifts
- Form 1125-A, Costs of Goods Sold
Locate Schedule B on your Form 1065. This last for more information about your business. Depending on your answer, you may need to include additional tax forms in your overall tax return.
Step 3 – Schedule L
Here, outline the balance sheets for your business from the beginning of your tax year to the end. This gives the IRS a financial snapshot of your business.
Step 4 – Schedule M-1
Now fill in this section, which outlines the income, expenses, and depreciation that may not have been included on your base tax return. The IRS will use this information to reconcile any differences and to ensure that it doesn’t count certain profits as taxable when they shouldn’t be.
Step Five – Schedule M-2
Here, a business’s partners must outline the earnings that have changed or not otherwise been accounted for. For example, any changes in your stock or property must be written here.
Complete this section after the above two sections since everything needs to match before moving on.
Step Six – Schedule K-1
Whether it is two or more, every partner involved in your business must complete this section of the tax return.
In this section, every partner reports their share of any income, deductions, and credits. They may also indicate any relevant information about their position in the partnership as recorded on their tax return.
Of all the lines in this section, the most important is Line 1, which indicates the ordinary business income loss. If a partner invested any money into the business, they only need to pay taxes on income that exceeds the initial investment amount.
Step Seven – File Your Form 1065
Once you’ve accurately filled out all the relevant information on your Form 1065, you can send the form to the IRS. If you use a tax accountant, they can probably file it for you (and should know where to do so already).
Alternatively, if you opt to do so yourself, you can either mail your Form 1065 to the IRS or scan it and email it electronically.
As you can see, Form 1065 is a major part of a complete tax return for any principal business activity. Not only is it important so you can understand the financial health of your company at the end of every fiscal year, but it’s also important to make sure that the IRS doesn’t overtax your business. Smaller businesses that can’t afford penalties should make sure that they don’t record anything incorrectly to avoid being fined.
Do you need help with your taxes or want to know more about how to file taxes properly as a small business owner? Luckily, Seek Capital’s blog has more than one guide on just these very issues. Alternatively, contact one of our financial experts today and get personalized assistance for your business!