Have you recently formed a partnership and heard the term “Form 1065” tossed around? Not sure about Form 1065 instructions, or who’s required to file? Failing to follow the protocol for IRS Form 1065 could land you in some hot water with the government, so keep reading to learn the ins and outs of this critical document to safeguard your new business’s success.
What is Form 1065?
Form 1065 is otherwise known as a “Partnership Tax Return” or “Return of Partnership Income”. It’s used to report a partnership’s income, gains, losses, deductions, credits, and pertinent financial information. Although a partnership does not pay taxes on its income, it does “pass through” any profits or losses to its partners, meaning individual partners must include their partnership items on their personal tax or information returns using Form 1040 or its equivalent.
The Definition of a Partnership
Not sure if your small business constitutes a partnership and uncertain as to whether or not you need to file tax Form 1065? The IRS defines a partnership as relationship between two or more people who join to carry on a trade or business. As opposed to a sole proprietorship, each member of a partnership contributes money, property, labor, and/or skill with the expectation to share in the profits and losses.
There are several different types of partnerships, including:
- General partnerships
- Limited partnerships
- Limited liability partnerships
Note that the term “partnership” may also include a syndicate, group, pool, joint venture, or any unincorporated organization through which business is carried on (that is not, under regulations imposed section 701, considered a corporation, trust, estate, or sole proprietorship). Additionally, Limited Liability Companies (LLCs) that are classified as partnerships for federal tax purposes are also required to file a Partnership Tax Return using Form 1065.
How to File Form 1065
Aside from a few exceptions, all domestic partnerships are required to file a Partnership Tax Return. The Form 1065 instructions can be a bit confusing, as partners are required to pass on the information on Form 1065 to his or her own return using Schedule K-1 Forms. If you determine you’re required to file IRS Form 1065, it could be in your best interest to receive professional help filing taxes to ensure accuracy and prevent errors from occurring.
If you decide to file a Partnership Tax Return independently, be sure to follow the Form 1065 instructions closely:
- Identify the name of your partnership, your Employer Identification Number (or Tax ID), and the number of partners in your business. You’ll also need to note the start dates of your business, and report whether your business uses the cash or accrual method of accounting.
- Gather all of your partnership’s important year-end financial statements. Necessary documents for Form 1065 include a profit/loss statement which shows net income and revenues, a list of the partnerships deductible expenses, and a balance sheet for the fiscal year. If you’re not diligently tracking this information, now is a good time to consider a small business accounting service.
You may also be required to report additional information on your Partnership Tax Return, such as contract work costing over $600 in which Form 1099 was filed. You’ll need to note whether any portion of profits were paid out to owners beyond their standard salary. Be sure to carefully follow along line by line, paying particular attention to the Form 1065 instructions.
Additional Documents Required for Form 1065
The instructions for Form 1065 include a two-part process. After filling out the initial tax Form 1065, each partner is then required to report their share of partnership income on their personal tax return using a Schedule K-1 Form. This form is used to calculate what your partnership owes by assigned its income, losses, dividends, and capital gains directly to the partners.
Most of the information necessary to complete your Schedule K-1 can be found in the “Income and Expenses” section of Form 1065. Beyond ordinary profits and losses, you may also need to report any guaranteed payments such as real estate income, bond interest, royalties, and foreign transactions that you might have received due to your involvement in the partnership.
Be sure to double check the Form 1065 instructions to make sure you’re not also required to submit addition documents such as Schedule L, Schedule M-1, or Schedule M-2.
Form 1065 Due Date
Generally speaking, a domestic partnership must file IRS Form 1065 by the 15th day of the 3rd month following the date its tax year ended. For example, the due date for Form 1065 in the 2017 tax year was March 15, 2018. If you missed the deadline for your Partnership Tax Return, you’re still able to file an extension for the 2017 tax year up until September 15, 2018 using Form 7004.
If your partnership has over 100 partners, you’ll be required to submit Form 1065 via an electronic filing method. Other partnerships have the option to file Form 1065 electronically or by mail, with the exception of a few circumstances (such as bankruptcy returns and returns with pre-computed penalty and interest). If you choose to file Form 1065 by mail, be sure to use specific private delivery services designated by the IRS which meet the “timely mailing as timely filing/paying” rule.
Late Filing Penalty for Form 1065
If you fail to file Form 1065 and do not file an extension, you may incur a late penalty of $200 for each month or part of a month (for a maximum of 12 months) the failure continues, multiplied by the total number of persons who were partners in the partnership during any part of the partnership’s tax year for which the return is due. You may also receive the same penalty if your Partnership Tax Return is missing any of the information required.
Instead of making a mistake following Form 1065 instructions, trust the professionals at Community Tax to file on your behalf. We offer tax filing services for both small business owners and personal individuals who want to maximize their tax return. Contact us today to see how we can help.