The first step to completing your Form 1065 is to gather all the information you’ll need. Then, you’ll fill out the form’s sections for general information and income and deductions before filling out Schedules B, K, L, M-1, and M-2 (found on pages 2–5). Lastly, you’ll complete a Schedule K-1 for each partner that shows their share of income, deductions, credits, and more.
We’ll show you how to complete Form 1065 for your partnership using ABC Company’s balance sheet and income statement below.
Step 1: Gather Information Needed to File Form 1065
Download IRS Form 1065. You’ll need financial statements for the tax year, information for each of the partners, and in-depth details about fixed assets and tax payments. Our free Form 1065 checklist will help you gather this information.
The information and reports needed to prepare Form 1065 for a partnership include:
- Profit and loss (P&L) statement: Summarizes the partnership’s income and expenses for the tax year and calculates the bottom line net P&L.
- Balance sheet statement: Summarizes the assets, liabilities, and owner’s equity as of the end of the tax year.
- Last year’s Form 1065: You’ll need to refer to last year’s partnership return when preparing this year’s return.
- Employer identification number (EIN): This is your federal EIN, also known as a taxpayer identification number. If this is the first return for a new partnership, you’ll need to apply for one from the IRS before filing the partnership return. Our guide on how to get an EIN will help you through the process.
- Business start date: You’ll need to provide the date you started the business.
- Principal business activity code: This numeric code represents the principal line of business the partnership is engaged in. Select the code that best describes your partnership from the list provided in the Form 1065 Instructions from the IRS.
- Principal business activity: This is a short description of the nature of the partnership’s business activity. Examples include manufacturing, retail, food service, and professional services.
- Principal product or service: This is a short description of the primary product or service the partnership offers. Examples include toys, restaurants, and accounting.
- Accounting method: Cash or accrual are the most common accounting methods. For more details, check out our comparison of the cash vs accrual method.
- Number of partners: Total number of partners in the business.
- Partners’ information: For each partner, you’ll need their name, address, taxpayer identification number, the amount of capital they invested during the year, and a signed Form W-9 or Form W-8BEN.
- Distributions made to partners: You’ll need reports showing the amount of payments to each partner, whether those payments are classified as guaranteed payments or as distributions of profit, and any federal or state tax withheld on these payments.
- Form 1099 reporting requirements: You’ll need to know if the partnership is required to issue any Forms 1099 and whether the partnership issued them. For more details, check out our guide to Form 1099 reporting.
- Fixed asset purchases: You’ll need a report showing the date and amount for each purchase of a fixed asset, such as machinery, equipment, computers, furniture, or buildings. You’ll also need to know the date each asset was placed in service for business use.
- Fixed asset sales: If any fixed assets were sold during the period, you’ll need the date of sale, sales proceeds, and to identify from the list of fixed assets exactly which asset was sold.
If you use an accounting program like QuickBooks, you can run P&L and balance sheet reports in a few minutes. Read our review of QuickBooks Online to learn about how the solution can help your business. However, if you already use it and just need guidance, check out our tutorials:
- How To Run a Profit and Loss (P&L) Report or Income Statement in QuickBooks Online
- How To Create a Balance Sheet in QuickBooks Online
Step 2: Fill Out Form 1065 General Info Section
Now that you have financial statements and information about the partnership and the partners, let’s begin preparing the partnership tax return, starting at the top of Form 1065. The top portion of Form 1065 asks for general information about the partnership, such as the name, address, and type of business the partnership operates.
Information that’s reported at the top of Form 1065 includes:
- Name of the partnership
- Address of the partnership
- Principal business activity and business code
- Federal EIN
- Date that the business started
- Accounting method
Step 3: Fill Out Form 1065 Income & Deductions Section
Page 1 of Form 1065 reports the business income and deductions of the partnership. The purpose of this section is to calculate the net ordinary business income (or loss) for the tax year. Details about income and expenses will come from the partnership’s profit and loss statement.
Page 1 of Form 1065 includes only ordinary business income and deductions, the net of which flows to Schedule K, line 1 of Form 1065 (Step 5). Dividends, interest, and rental income from investments shouldn’t be reported on page 1. Instead, they should be reported directly on Schedule K. Including them on both page 1 and Schedule K would double-count them.
Special tax deductions, such as Section 179, are also shown directly on Schedule K instead of Page 1. Briefly skip ahead to step 5, and review the income and deductions included separately on Schedule K lines 2 through 13 to ensure you don’t also include them on page 1.
Step 4: Fill Out Form 1065 Schedule B
Schedule B, found on pages 2 and 3 of Form 1065, asks 29 questions that require yes-or-no responses (question 29 of 30 is reserved for future use). You’ll need to look at the instructions for Form 1065 because these questions are quite technical.
One of the most important questions on Schedule B is question #4. Your answer to this question will determine if you need to fill out Schedules L, M-1, and M-2, Item F on Page 1 of Form 1065, or Item L on Schedule K-1.
Let’s look at this question and see if it applies to our tax return:
4. Does the partnership satisfy all four of the following conditions? Yes/No
a. The partnership’s total receipts for the tax year were less than $250,000.
b. The partnership’s total assets at the end of the tax year were less than $1 million.
c. K-1s are filed with the return and given to the partners on or before the deadline for the partnership return, including any extensions.
d. The partnership isn’t filing and isn’t required to file Schedule M-3.
If “yes,” then the partnership isn’t required to complete Schedules L, M-1, and M-2; item F on page 1 of Form 1065; or item L on Schedule K-1. Our sample corporation answers “yes” to this question—however, for illustrative purposes, we’re going to complete those schedules.
Step 5: Fill Out Form 1065 Schedule K
The partnership’s income, deductions, and credits for the year are all listed on Schedule K. The amounts shown on Schedule K will be allocated to each partner using Schedule K-1. Each partner will get a Schedule K-1 so that they can report their share of the partnership’s income on their own tax returns.
Line 1 of Schedule K reports the ordinary business income or loss from page 1. Lines 2 through 13 report other items of income and deductions. Be careful not to report any income or deduction on both page 1 and lines 2 through 11.
Lines 14 through 21 of Schedule K are for informational purposes and are needed to figure out how much a partner has to pay on their individual tax return. It’s fine for amounts on lines 14 through 21 to also be included on page 1. For example, foreign interest payments listed on line 16(i) should also be deducted as an interest expense on page 1.
Step 6: Fill Out Form 1065 Schedule L Balance Sheet
Schedule L is used to give the IRS information about all of the partnership’s assets, debts, and equity at the beginning and end of the tax year. If you use an accounting program, this information will come directly from your balance sheet report. If you answered “Yes” to question 4 on Schedule B, you don’t need to complete Schedule L.
Since our sample partnership meets all of the requirements of Schedule B, Question 4, it’s unnecessary for the partnership to fill out Schedule L. However, we’ll complete Schedule L as it confirms all the income and deduction information has been entered and return balances.
Step 7: Complete Analysis of Net Income (Loss) per Return
Lines 1 and 2 at the top of page 5 summarize the income and loss shown on Schedule K. It then separates the income or loss by partner type. Our example partnership has all general, individual partners, so the entire income is shown on both line 1 and line 2a, column ii.
Step 8: Fill Out Form 1065 Schedule M-1
The purpose of Schedule M-1 is to show any differences in how income and expenses are reported for bookkeeping and tax purposes. Any differences between the two methods are summarized on Schedule M-1. If you answered “Yes” to Schedule B, question 4, you don’t need to complete Schedule M-1.
Some common book-tax differences include:
- The adjustment for any nondeductible meals
- Tax-exempt interest income
- Non-deductible expenses such as fines, penalties, or entertainment
The best way to tackle Schedule M-1 is to first review your profit and loss statement and enter the net income on Line 1 of Schedule M-1. Next, review the income and deductions you’ve reported on page 1 and Schedule K lines 2 through 13, and then enter the net of those amounts on Schedule M-1, Line 9.
Compare the profit and loss statement and tax return income line-by-line to determine all differences. These differences must be shown on Schedule M-1, lines 2 through 9. For instance, if depreciation expense on the profit and loss statement is greater than depreciation expense on page 1 of Form 1065, then the difference must be reported on Schedule M-1, line 4.
Even though our sample partnership meets all the requirements for Schedule B, Question 4, and this schedule isn’t needed, we’ll still fill it out to show how important it’s to keep track of all your income and expenses to gain a better understanding of your tax liability.
Step 9: Fill Out Form 1065 Schedule M-2
The purpose of Schedule M-2 is to show changes to the partners’ capital account for the year and to calculate the ending balance. Remember, if you answered “Yes” to question 4 on Schedule B, you don’t have to complete Schedule M-2.
The beginning and ending capital accounts (lines 1 and 9) should agree with the beginning and ending capital accounts on line 21 of Schedule L. Net income on line 3 should agree with the net income on line 1 of Schedule M-1.
Step 10: Fill Out Form 1065 Schedule K-1 For Each Partner
Schedule K-1 is prepared by a partnership as part of their tax return. After filing Form 1065, each partner is provided a Schedule K-1 by the partnership. The K-1 reflects the partner’s share of income, deductions, credits, and other items that a partner will need to report on their individual tax return. The information you’ll need to fill out for each Schedule K-1 will come from Schedule K of Form 1065.
Schedule K-1 consists of more than just ordinary business income or losses. It also shows income from real estate, interest on bonds, royalties and dividends, capital gains, foreign transactions, and any other payments you received as part of your partnership.
Tips to help you prepare your Schedule K-1 include:
- Amounts should total to Schedule K: The amounts in Part III of Schedule K-1 are an allocation of amounts from Schedule K. Therefore, each line item totaled across all Schedule K-1s must equal the amount from Schedule K.
- Furnish Schedule K-1 by due date: The partnership needs to distribute a Schedule K-1 to each partner by the filing deadline (March 15, or September 15 with an extension.)
- Amounts flow from Schedule K-1 to Form 1040: Partners take the amounts shown on their Schedule K-1 and report them on their personal tax return.
- Pass-through nature: This allocation process is how partnership income, deductions, and credits pass through to the partners’ personal tax returns.
Form 1065 Partnership Return Due Dates
The deadline to file Form 1065 is March 15 for calendar year partnerships. A six-month extension to September 15 is available, but keep in mind that the partners can’t file their individual returns until the Form 1065 is filed. Deadlines falling on weekends or holidays move to the following business day. For fiscal year partnerships, Form 1065 is due on the 15th day of the third month following the fiscal year-end.
Frequently Asked Questions (FAQs)
We’ve discussed how to prepare partnership tax returns using Form 1065. Below, we answer some common questions that come up about preparing partnership tax returns.
If you formed a limited liability company or other business entity with the state, then you will need to file Form 1065. However, if you have a general partnership and both spouses own and operate the business, you may elect to file two Schedule Cs under the rules for qualified joint ventures. Read IRS’s Election for Married Couples Unincorporated Businesses for more information.
No, the partnership or limited liability company (LLC) files one Form 1065 for the year. That Form 1065 tallies up income, deductions, and credits for the year. Then, it allocates the income, deductions, and credits to each partner using Schedule K-1. Each partner uses Schedule K-1 to prepare their own personal tax return.
Yes, LLCs and partnerships can have foreign partners. There are some additional tax responsibilities, though. The LLC or partnership will need to withhold federal and state taxes on the income allocated to foreign partners. Foreign partners need a United States taxpayer identification number (TIN) and need to file their own tax returns in the US.
You should now have a good idea of who needs to file Form 1065 and what kind of information is needed to fill it out. You can download Form 1065 from the IRS and complete it by hand or save time by purchasing tax software that will prepare Form 1065 for you.