Form 1065 is used by partnerships and LLCs taxed as partnerships to report business income and expenses. Since a partnership is not a taxable entity, net earnings pass through to the partners. Form 1065 is necessary to report all income, deductions, and credits of the partnership for the tax year.
In this article, we will discuss what information and documents are required to complete Form 1065. In addition, we will provide you with an overview of what is required in each section of Form 1065.
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Required Information & Documents Needed to File Form 1065
Whether you do your own taxes using a tax software like TurboTax or hire a tax pro to do them for you, there are several pieces of information that you will need to complete Form 1065. Below you will find a list of items you should have available along with a brief description (click here to download this as a PDF):
- Profit and Loss Statement – This report summarizes your income and expenses for the tax year and calculates your bottom line net profit/loss. If you use an accounting program like QuickBooks, you can run a profit and loss report in just a few minutes.
- Balance sheet report – This report summarizes the assets, liabilities and owner’s equity as of the end of the tax year. Similar to the profit and loss statement, you can easily run a balance sheet report if you use QuickBooks.
- Employer Identification Number – This is your federal employer id number, also known as Tax ID. You must have a Tax ID to file Form 1065. For more info on how to apply for your EIN number, check out our guide.
- Start Date of Business – You will need to provide the date you started the business.
- Business Code Number – This code is provided by the IRS. Select the code that best describes your business from the professional activity code list provided by the IRS. Enter that code in this field.
- Principal Business Activity – Based on the business code that you select, indicate the industry that your business falls into (i.e. contract services, manufacturing, food).
- Principal Product or Service – Provide the primary product or service that you sell (i.e. plumbing services or jeans manufacturer).
- Accounting Method – Cash or accrual are the options for accounting methods. Most small businesses use the cash method of accounting. For more info, check out our guide.
- Number of Partners – Total number of partners in the business.
- 1099 Reporting Requirements – If you hired an independent contractor during the year and paid them $600 or more, you must report this on Form 1065. To learn more about 1099 reporting, check out our guide.
- Distributions of Profits Made to Partners – Any payments made out of the business to partners as part of their share of income. This does not include payments made to partners based on an agreed-upon salary.
Form 1065 – Overview of Primary Sections & How to Fill Out
There are seven primary sections of Form 1065. Below, you will find a snapshot of each section, along with a brief overview of the information required to complete that section of the form.
Form 1065 – General Info Section
This section requires basic business information that will help the IRS identify your business. In addition to business name and address, some of the info that you will need to include here are:
- Accounting method
- Principal business activity and business code
- Tax Id (EIN) number
- Date you started the business.
Form 1065 – Income and Expenses Section
The purpose of this section is to calculate the business income/loss for the tax year. To do so, you need to provide details about your income and expenses. Most of this information will come directly from your profit and loss report that we discussed in the previous section. If you use accounting software like QuickBooks, run this report and use it to complete this section.
Form 1065 – Schedule B (Other Information)
This section of the form includes 22 questions that require a yes/no response. Most of the questions are primarily centered around the type of individuals or entities (i.e corporations, partnerships) that have a direct or indirect interest of 50% or more in the partnership. In addition, any direct or indirect interest the business has in another partnership must be disclosed in this section as well. This applies to all foreign and domestic interests.
Form 1065 – Schedule B – Question 6 A thru D
NOTE: Question 6 does not pertain to foreign/domestic interests. There are 4 parts to this question and if you can answer “No” to all four questions, then you are not required to complete Schedule L, Schedule M-2, or Schedule M-3 of Form 1065.
Form 1065 – Schedule K (Partners’ Distributive Share Items)
Schedule K is a summary of all the partners’ share of income, credits, and deductions generated by the partnership for the tax year. Most of the info on this Schedule will come from the Income and Expenses section of Form 1065. The information from this part of Form 1065 will be used to complete Schedule K-1. Schedule K-1 shows each partner’s share of the partnership income, deductions, and credits. Each partner will receive a Schedule K-1, so that they can include any income or loss on their personal tax returns.
Form 1065 – Schedule L (Balance Sheet per Books)
The purpose of this section is to provide the IRS with the details of all assets, liabilities, and equity of the business as of the end of the tax year. If you use an accounting program like QuickBooks Online, this information will come directly from your Balance Sheet report.
Schedule M-1- Reconciliation of Income (Loss) per Books with Income (Loss) per Return
As discussed previously, do not complete Schedule M-1 if you answered no to all four parts of question 6 in Schedule B. In general, there will be some differences between what a corporation reports on financial statements as profit vs. what a corporation’s actual taxable profit is. This is primarily due to the fact that there are some income and expense items that may be reportable for book purposes but not deductible for tax purposes and vice versa.
For example, you may record depreciation on your books using the double declining balance (DDB) method of depreciation. However, the DDB method is not acceptable for tax purposes, so you use the MACRS method of depreciation to calculate your depreciation tax deduction. The purpose of this schedule is inform the IRS of these type of differences by reconciling them here.
To learn more about depreciation, check out our depreciation guide.
Form 1065 – Schedule M-2 (Analysis of Partners’ Capital Accounts)
Similar to Schedule M-1, you do not have to complete Schedule M-2 if you answer no to all four parts of question 6 in Schedule B. The purpose of this schedule is to compute what the net retained earnings balance is for the business at the end of the tax year. This information lets you know how much money you have in the business that is available to use.
The Bottom Line
After reading this article, you should have a pretty good idea of who is required to complete Form 1065, what information and documentation you should have handy, and how to complete the primary sections of Form 1065.