Form 1065 is the tax return used by partnerships to report business income and expenses. Multimember limited liability companies (LLCs) not being taxed as S corporations (S-corps) also must file Form 1065. While Form 1065 doesn’t generate a tax liability, it’s very important to complete it on time and accurately. The penalty for a late or incomplete Form 1065 is $210 per month times the number of partners in the partnership.
The first step is to gather all the information you’ll need to fill out Form 1065 (download checklist here). Then, you’ll fill out the general information and income and deduction sections of the form before completing Schedules B, K, L, M-1, and M-2 (found on pages 2–5). Lastly, each partner will need to fill out a Schedule K-1 reflecting their share of income, deductions, credits, and other items.
Download Form 1065 from the IRS and follow along with our steps.
1. Gather Information Needed to File Form 1065
Before preparing Form 1065, you 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. If you use an accounting program like QuickBooks, you can run a P&L report in a few minutes.
- Balance sheet statement: Summarizes the assets, liabilities, and owner’s equity as of the end of the tax year. You can run a balance sheet report easily if you use QuickBooks.
- Last year’s Form 1065: You will 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 will need to apply for one from the IRS before filing the partnership return.
- Business start date: You will 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.
- 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, restaurant, and accounting.
- Accounting method: Cash or accrual are the most common accounting methods. For more details, check out our guide on 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 number 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 actually 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.
2. Fill Out Form 1065 General Info Section
General information section at the top of Form 1065, United States Return of Partnership Income
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
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, Form 1065 includes only ordinary business income and deductions, the net of which then flows to Form 1065, Schedule K, line 1 (step 5). Investment income, such as dividends, interest, and rental activities, shouldn’t be included on page 1 as they’re 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.
The income and deductions section of IRS Form 1065 partnership return
4. Fill Out Form 1065 Schedule B
Schedule B, found on pages 2 and 3 of Form 1065, asks 28 questions that require yes/no responses. These questions are very technical. You’ll need to refer to the Form 1065 instructions for a detailed discussion of each question being asked.
Some tips for answering the questions on Schedule B:
- Question 2a asks if any entity, such as corporations or partnerships, owns 50% or more of the partnership.
- Question 2b asks if any individual or estate owns 50% or more of the partnership.
- Questions 3a and 3b ask if the partnership owns any corporations (3a) or partnerships (3b).
- If the partnership has bank or investment accounts in countries outside the US, pay particular attention to question 8.
- If any partners in your partnership are foreign nationals, pay attention to question 14. The partnership may need to withhold tax on income allocated to foreign partners.
5. Fill Out Form 1065 Schedule K
Schedule K is a summary of the partnership’s income, deductions, and credits for the year. The amounts shown on Schedule K will be allocated to each partner using Schedule K-1. Each partner will receive a Schedule K-1 so that they can include the income from the partnership on their personal 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 13.
Schedule K Income and Deductions (IRS Form 1065)
Amounts reported on lines 14 through 20 of Schedule K are informational and required to correctly calculate a partner’s liability on their individual tax return. It’s fine for amounts on lines 14 through 20 to also be included on page 1. For instance, foreign interest payments disclosed on line 16(i) should also be deducted as interest expense on page 1.
Schedule K, Lines 15 through 20 (Form 1065)
6. Fill Out Form 1065 Schedule L Balance Sheet
The purpose of Schedule L is to provide the IRS with the details of all assets, liabilities, and equity of the partnership as of the beginning and 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. If you answered “Yes” to question 4 on Schedule B, you don’t need to complete Schedule L.
Schedule L Balance Sheet (IRS Form 1065)
7. 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 Schedule M-1, line 1. Next, review the income and deductions you’ve reported on page 1 and Schedule K lines 2 through 13 and 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.
Schedule M-1 (IRS Form 1065)
8. 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 the Schedule L. Net income on line 3 should agree with the net income from line 1 of Schedule M-1.
Schedule M-2 (IRS Form 1065)
9. 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 will need to fill out for each Schedule K-1 will come from the Schedule K of Form 1065.
Beyond the ordinary business income or losses, Schedule K-1 also documents real estate income, bond interest, royalties and dividends, capital gains, foreign transactions, and any other payments received as part of your involvement in the partnership.
Form 1065 Schedule K-1
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.
Form 1065 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.
Do spouses have to file partnership 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, then you may elect to file two Schedule Cs under the rules for qualified joint ventures. Read this IRS page for more information.
Does each partner need to file a Form 1065?
The partnership or LLC files one Form 1065 for the year. That Form 1065 tallies up income, deductions, and credits for the year. It then allocates the income, deductions, and credits to each partner using Schedule K-1. Each partner uses Schedule K-1 to prepare his or her own personal tax return.
Can an LLC have a foreign partner?
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 tax on the income allocated to foreign partners. Foreign partners need a U.S. taxpayer identification number and need to file their own tax returns in the U.S.
Bottom Line
You should now have a good understanding of who is required to file Form 1065 and the information necessary to complete the form. 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.
While you’ll still need to read this guide to understand the information required and flow of the Form 1065, we recommend TaxAct to prepare your Form 1065, partnership tax return. We ranked it as the top small business tax software because of its ability to file individual and business returns including forms 1065, 1120, and 1120S. Not only will TaxAct help you prepare the return, but it’ll also allow you to file it electronically.
