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 and reported on their personal tax return. Form 1065 is necessary to report all partnership income, deductions, and credits for the tax year.
You can download Form 1065 and complete it manually. However, we recommend that you use a tax software like TurboTax instead. By using TurboTax, you can be sure that you will get all of the tax deductions that you qualify for, and the software will complete Form 1065 for you. Start your returns for free and pay only when you file.
Here are the 8 steps needed to complete Form 1065:
1. Gather Information 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 IRS Form 1065. Below you will find a list of items you should have available along with a brief description (click here to download this list 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 on employee identification numbers.
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 on the cash vs accrual method.
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 on Form 1099.
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.
If you’re not using an accounting software, you’re probably spending a lot of time trying to manage your books. With QuickBooks, you can save time and stay organized by automatically generating reports including the profit and loss accounts and balance sheets. Get started with up to 50% off QuickBooks Online.
2. Fill Out 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 that we mentioned above includes:
- Accounting method
- Principal business activity and business code
- Tax Id (EIN) number
- Date you started the business.
3. Complete 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, read this article on how to prepare a profit and loss statement and use it to complete this section.
4. Fill Out Form 1065 IRS Schedule B
IRS Schedule B 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 6A – 6D
There are 4 parts to this question and if you can answer “Yes” to all four questions, then you are not required to complete Schedule L, Schedule M-2, or Schedule M-3 of Form 1065. NOTE: Question 6 does not pertain to foreign/domestic interests.
5. Complete Form 1065 IRS Schedule K
IRS 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 IRS Schedule K-1. IRS 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.
6. Fill Out IRS Form 1065 Schedule L
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.
7. Complete IRS Form 1065 Schedule M-1
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.a corporation’s actual taxable profit. 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 to inform the IRS of these type of differences by reconciling them here. To learn more about depreciation, check out our depreciation guide.
8. Fill Out Form 1065 Schedule M-2
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 IRS 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.
Form 1065 Due Dates
Effective January 1, 2016, Form 1065 – Partnership Tax Return is due on the 15th of the third month following the business’ year end. For a calendar year business, the due date is March 15. If the due date does not fall on a normal business day (Mon – Fri), the due date is the following business day.
The Bottom Line
After reading this article, you should have a pretty good idea of who is required to complete Form 1065. This includes knowing what information and documentation you should have handy. You can now manually fill out IRS Form 1065
However, you can also use TurboTax to complete your tax return this year. TurboTax will search for all of the deductions that you qualify for, complete all of the necessary calculations to complete Form 1065 for you. Take TurboTax for a free 30-day test drive to see for yourself.
Devvie Duke
Can an LLC S Corp be single member ownership?
Hi Devvie, good question. I know that you can be a single member LLC but I don’t believe you can be a single-member S Corp. I believe an S Corp requires at least 2 or more people. I recommend that you contact a tax professional who can definitely answer this question better than I can. Check out our National Bookkeeper directory to see if there is a local expert in your area.
Best,
Crystalynn Shelton, CPA
Tim Lindley
I am working on a final year Form 1065 for a real estate business.
1 – Is it ok to have a negative balance for the capital balances on the Schedule L
2 – Is it ok to have a balance on bottom of M-1 the difference between M-1 and Analysis of Net Income
Hi Tim,
Unfortunately I am not familiar enough with this form to give you an answer to your questions. However, what I will say is that these figures should be directly from your balance sheet and income statements. If you are confident that those numbers are accurate and what you are putting on Form 1065 matches those figures you should be ok. However, my advice to you is to find a tax preparer who can review this form for you and make sure it is correct. We’ve got a bookkeeper directory that includes a number of bookkeeping firms that do tax prep work. Here is the link to the directory.
Directory:https://fitsmallbusiness.com/reviews/bookkeepers/
All the Best-
Crystalynn Shelton, CPA
Param
I have a question – We have started a LLC in October 2017 to flip houses. The project is still going and I have a Cash basis business – should I need to file a $0 tax return for 2017?
A small house was bought in October 2017 and repairs are still going and would sell the same in 2018.
Please advice, Thank you
Hi Param, congrats on your house flipping business! Unfortunately I am not able to give you tax advice. I recommend that you find a tax professional that can assess your particular situation.
Best-
Crystalynn Shelton
Linda Colloton
Thanks for the easy, helpful information! Would you mind looking over the section “Form 1065 – Schedule B – Question 6 A thru D”. It should read if you can answer “Yes” to the questions then you don’t need to fill out the schedules. “No” would mean you make more than $250k and etc. Just thought that might clear up some possible confusion.
Linda, thanks so much for the feedback! It’s amazing how one word can make all the difference. I appreciate you taking the time out to inform me of this error.
Thank you for reading!
Crystalynn