Partnerships and certain LLCs must file Form 1065 every year to report their income and expenses. Income and expenses reported on Form 1065 flow through to partners and are taxed on their tax return. While Form 1065 does not generate a tax liability, it is very important to complete it on time and accurately. The penalty for a late or incomplete Form 1065 is $205 per month times the number of partners in the partnership.
It is vital you have accurate information available when it’s time to file your partnership tax return. With QuickBooks, you can save time and stay organized by automatically generating reports, including the profit and loss accounts and balance sheets. Get started today with up to 50% off QuickBooks Online.
What Is Form 1065 & How Does It Work?
Form 1065 is the partnership tax return used by partnerships to report business income and expenses. Multimember limited liability companies (LLCs) not being taxed as S corporations also must file Form 1065. Income on Form 1065 is not taxed, but rather flows through to the partners. The Form 1065 is much easier to complete if you first understand the general flow of information.
Page 1 of the partnership tax return is similar to an income statement and shows all the partnership’s ordinary income and expenses for the year. Form 1065, Schedule K reports the total net ordinary income from page 1 along with any other special items of income and expenses for the year. All of the partnership-level income and expenses on Schedule K is then allocated to individual partners and reported on Schedule K-1s. Each partner receives a Schedule K-1 and uses it to determine their share of income and expenses to report on their individual returns.
Now that you understand the flow of information on the partnership tax return, here are Form 1065 instructions in eight steps:
1. Gather Information Needed to File Form 1065
Download Template: PDF | Word | Google Doc
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. We created a free Form 1065 checklist to help you gather this information.
The information and reports needed to prepare Form 1065 for a partnership include: READ MORE
2. Fill Out Form 1065 General Info Section
Now that you have financial statements and information about the partnership and the partners, let’s start 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 is reported at the top of Form 1065 includes:
- Name of the partnership
- Address of the partnership
- Principal business activity and business code
- Federal employer identification number (EIN)
- Date that the business started
- Accounting method
General information section at the top of Form 1065, U.S. Return of Partnership Income
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, should not be included on page 1 as they are 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 a yes/no response. These questions are very technical. You will 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: READ MORE
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 is 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 do not 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 purposes and for tax purposes. Any differences between the two methods are summarized on Schedule M-1. If you answered “Yes” to Schedule B, question 4, you do not need to complete Schedule M-1.
Some common book-tax differences include:
- The adjustment for 50% of meals
- Tax-exempt interest income
- Non-deductible expenses such as fines and penalties
Many people struggle with Schedule M-1, but in my 25 years of experience preparing and teaching this, I’ve developed a method. 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 to the beginning and ending capital accounts on line 21 of the Schedule L. Net income on line 3 should agree to the net income from line 1 of Schedule M-1.
Schedule M-2 (IRS Form 1065)
Form 1065 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 a husband & wife 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 an unincorporated 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 that 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 now have a good understanding of who is required to file Form 1065 and the information necessary to complete the form. You can download a Form 1065 from the IRS and complete it by hand, or save time by purchasing tax software that will prepare Form 1065 for you.
We recommend TurboTax Business to prepare Form 1065, partnership tax returns. QuickBooks Desktop users can automatically import their financial information to help complete page 1, Schedule K, and Schedule L of Form 1065.
anand singh
Nice information thanks I got to many things
Amanda Norman
Hi Ananda,
Glad you like the article.
Thanks for stopping by!
Mandy, Moderator
S Mollah
If I do not have any activities for LLC still I have to submit my form 1065 in time and if I don’t submit in time IRS can charge me penalty?
Amanda Norman
Hi S Mollah,
Unfortunately, we are unable to give tax advice. I recommend that you contact a tax professional to assist with your specific situation.
Thank you for reading and commenting.
Mandy, Moderator
Devvie Duke
Can an LLC S Corp be single member ownership?
Crystalynn Shelton
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.
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
Crystalynn Shelton
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.
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
Crystalynn Shelton
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