What is Form 1065? A Preparer's Guide to Partnership Taxes

If you own or are part of a business partnership in the United States, you may have heard of Form 1065. This form is an important tax document that helps the government understand how much money the partnership makes and how it is shared among partners. But what exactly is Form 1065, who needs to file it, and why is it important? In this blog, we will explain everything you need to know about this form in simple terms.

Understanding Form 1065

Form 1065 is called the "U.S. Return of Partnership Income." It is a tax form that partnerships must file with the Internal Revenue Service (IRS). A partnership is a business structure where two or more people own and operate a business together. Unlike corporations, partnerships do not pay income taxes directly. Instead, the profits and losses "pass through" to the individual partners, who report them on their personal tax returns.

The purpose of Form 1065 is to report the income, deductions, gains, and losses of a partnership to the IRS. Even though partnerships do not pay taxes themselves, they must still file this form to show how much money they made and how it was divided among partners. This ensures transparency in financial dealings and allows the IRS to track income more effectively.

Who Needs to File Form 1065?

Any business that operates as a partnership must file Form 1065 every year. This includes:

• General partnerships (where all partners share responsibility for the business)
• Limited partnerships (where some partners have limited roles and responsibilities)
• Limited liability partnerships (LLPs)
• Limited liability companies (LLCs) that are taxed as partnerships

Even if the partnership does not make any money during the year, it still needs to file Form 1065. This rule ensures that the IRS has a complete record of the partnership's activities and prevents tax evasion.

What Information is Required on Form 1065?

Form 1065 has several sections that ask for different types of information about the partnership. Here are some key parts of the form:

1. General Information

The first part of Form 1065 asks for basic details about the partnership, including:

• Name and address of the partnership
• Employer Identification Number (EIN)
• Type of business activity
• Date the business started
• Total number of partners

2. Income and Deductions

This section reports the partnership’s financial activities, such as:

• Total income: The total amount of revenue earned from business activities
• Deductions: These include costs such as rent, salaries, office supplies, and business travel expenses that reduce taxable income
• Net profit or loss: The final amount left after all deductions are subtracted from the income

Properly categorizing deductions is crucial to avoiding IRS scrutiny. Keeping receipts and records can help support claimed deductions if the IRS audits the partnership.

3. Schedule K and Schedule K-1

The Schedule K section of Form 1065 summarizes the financial details for the entire partnership. However, each partner receives an additional form called Schedule K-1. This form breaks down each partner’s share of:

• Income
• Deductions
• Credits

Partners use Schedule K-1 to report their portion of the business’s income on their personal tax returns. Without this form, partners may struggle to properly complete their individual tax filings.

4. Balance Sheet Information

The form also includes sections for the partnership’s balance sheet, which is a summary of the business’s financial standing. It includes:

• Assets (cash, property, equipment, accounts receivable)
• Liabilities (loans, outstanding expenses, and accounts payable)

This balance sheet helps the IRS assess the financial health and stability of the partnership.

5. Other Important Details

Apart from reporting income and expenses, Form 1065 may include other details such as:

• Foreign transactions: If the partnership engages in international business, foreign income and taxes must be reported
• Tax credits and deductions: Special tax benefits that the partnership may qualify for, such as research credits
• Partner ownership details: Changes in ownership percentages, new partners, or partners leaving the business

When is Form 1065 Due?

The deadline for filing Form 1065 is usually March 15 of each year. If the partnership’s tax year does not follow the calendar year, the form is due by the 15th day of the third month after the end of the tax year.
If a partnership needs more time to file, it can request an extension by submitting Form 7004. This gives the partnership an extra six months to complete and file Form 1065, extending the deadline to September 15.

What Happens if You Don't File Form 1065?

Failing to file Form 1065 on time can lead to penalties from the IRS. As of recent years, the penalty for not filing is $220 per partner per month for up to 12 months. For example, if a partnership with four partners files its Form 1065 three months late, the total penalty would be $2,640 (4 partners x $220 x 3 months).
Additionally, failure to file on time can cause delays in issuing Schedule K-1 to partners, which may result in partners filing their own taxes late and facing individual penalties.

How to File Form 1065?

Partnerships can file Form 1065 electronically or by mail. The IRS encourages electronic filing because it is faster and more accurate. However, partnerships with fewer than 100 partners can choose to file a paper form if they prefer.

To file electronically, partnerships can use:

• The IRS's e-file system
• An approved tax software provider

Many businesses hire a tax professional to ensure accuracy and compliance with IRS regulations.

Common Mistakes to Avoid When Filing Form 1065

Filing Form 1065 can be complex, and mistakes can lead to delays or penalties. Here are some common errors to avoid:

• Not filing on time: Missing the deadline can result in penalties.
• Incorrect partner information: Ensure the names, addresses, and Social Security Numbers (SSNs) or EINs of all partners are correct.
• Errors in income and deduction reporting: Double-check that all financial information is accurate.
• Forgetting to include Schedule K-1: Each partner must receive their Schedule K-1 to report their income correctly.
• Not keeping proper records: The IRS may request documents to verify the information on Form 1065, so it is important to maintain detailed financial records.

Additional Tips for Partnerships

Work with a Tax Professional: A certified accountant or tax preparer can help ensure accuracy and compliance.
Use Accounting Software: Programs like QuickBooks or Xero help keep financial records organized.
Keep Up with Tax Law Changes: The IRS updates tax rules periodically, so staying informed helps to avoid surprises.
Understand State Tax Requirements: Some states have additional tax filing requirements for partnerships.
Plan Ahead for Tax Season: Maintaining organized records throughout the year simplifies tax filing and reduces stress.

Ensure Compliance with Form 1065

Form 1065 is a crucial tax document for partnerships in the United States, ensuring that business income is reported correctly and that each partner fulfills their tax obligations. Filing accurately and on time helps businesses avoid penalties and keeps financial records in good standing.
If you need professional assistance in preparing and filing Form 1065, Global FPO is here to help. With a team of experienced tax professionals, Global FPO offers expert guidance, ensuring that your partnership remains compliant with IRS regulations. Its services streamline the tax filing process, reducing errors and helping businesses focus on growth. Don't leave your tax filings to chance—partner with Global FPO for reliable and hassle-free tax solutions.

FAQs

1. Who needs to file Form 1065?
Any business classified as a partnership, including general partnerships, limited partnerships, LLPs, and LLCs taxed as partnerships, must file Form 1065 with the IRS annually.

2. What happens if Form 1065 is not filed on time?
The IRS imposes a penalty of $220 per partner per month, up to 12 months, for late filing. Delays can also affect partners’ ability to file their personal tax returns on time.

3. Do partnerships pay taxes on Form 1065?
No, partnerships do not pay income taxes at the business level. Instead, profits and losses "pass through" to partners, who report their share on their individual tax returns.

4. Can Form 1065 be filed electronically?
Yes, partnerships can e-file Form 1065 using IRS-approved tax software or with the help of a tax professional. The IRS encourages e-filing for accuracy and faster processing.

5. How can Global FPO help with Form 1065?
Global FPO provides expert tax preparation and advisory services, helping partnerships file Form 1065 correctly, avoid penalties, and stay compliant with IRS regulations. Their team ensures a smooth tax filing experience, allowing businesses to focus on growth.