As a small business owner, you are responsible for organizing, filing, and paying your taxes. If you own a partnership or LLC, you must complete an IRS Form 1065. Also known as the U.S. Return of Partnership, IRS Form 1065 is how you’ll report your business finances to the IRS.
Regardless of if you’re a new small business owner or have owned a small business for years, the IRS Form 1065 can be tricky to understand. The good news is we’ve created this handy guide to answer some of the questions you may have and teach you how to fill out the form properly.
What Is Form 1065: U.S. Return of Partnership Income?
Essentially, Form 1065 is an informational form you’ll use to report the business income, gains, losses, income deductions, and credits from your operations. As the owner of a partnership or LLC, you’ll need to submit this form to the IRS every year.
However, you won’t use this form to calculate or pay taxes on your income. Here’s why: A partnership is a pass-through entity that reports its financial information so that partners can enter their share of it on their personal tax returns. As a pass-through entity, you fill out IRS form 2553 so you only have to pay taxes on your partnership’s income at your own individual income tax rates.
Therefore, you and the members of your LLC will be required to complete a Schedule K-1 form to report your share of profits and losses. You’ll file the Schedule K-1 with your personal tax return. Keep reading for more details on Schedule K-1.
Why You’d Want to File a Form 1065
You won’t owe any taxes on an IRS 1065 Form. So, why is it important? By filing a Form 1065, the IRS can verify that you and your partners have paid their taxes correctly. It’s an essential part of being a small business owner and must be completed if you’d like to avoid tax issues down the road.
Who Can File IRS Form 1065?
Since IRS Form 1065 is a business-entity form, you must complete every taxable year if you are a:
- Domestic partnership: According to the IRS, a domestic partnership is a “relationship between two or more persons who join to carry on a business with each person contributing property, money, or skill.”
- LLC: If your LLC has been classified as a partnership and you have not filed a Form 2553 to be treated as a corporation, you’re on the hook for an IRS Form 1065.
- 501(d): You likely have a 501(d) if your non-profit organization is religious or apostolic.
- Foreign partnership: If your business is foreign but you earn more than $20,000 in annual gross income from U.S. sources, you must fill out a 1065 Form.
IRS Form 1065 Instructions
If you’re wondering how to file a Form 1065, you’re in luck because we’ll give you step-by-step instructions. Before we get started, however, you should know that IRS Form 1065 is a five page document that you can fill out online or by hand. It will ask you for a variety of information from several financial and tax documents. Without further ado, here are the filing instructions.
Collect Relevant Documents
First off, you’ll need to gather a number of important financial and tax documents. Some of these may include a profit and loss statement, balance sheet, deductible expenses, and cost of goods sold. Tax forms such as W2s, W3s, FUTA tax return, Form 114, Form 720, Form 940, and Form 941 may be necessary as well. The nature of your business will dictate the particular documents you need.
Fill in Boxes A Through J
Once you have all the documents handy, it’ll be time to fill out boxes A through J, which are located on the very top of 1065 Form. These boxes will ask you for the following information.
- Principal business activity, principal product or service, and business code number. The instructions at the bottom of the IRS Form 1065 will help you fill out these details.
- Employer Identification Number (EIN).
- Date your business started.
- Total assets as shown by your books.
- Type of tax return.
- Accounting method.
- The amount of Schedule K-1s you’re attaching. (We’ll discuss Schedule K-1 below.)
Complete the Remainder of Page 1
After you’ve filled out boxes A through J, you’ll need to complete the rest of the boxes on page 1. You’ll find that these boxes are separated into three categories: Income, Deductions, and Tax and Payment. To fill them out appropriately, you’ll need to use the financial and tax documents you gathered.
Fill Out Schedule B
On the second page, you’ll notice Schedule B. The goal of Schedule B is to provide details on the technicalities of your business. You’ll answer the questions on this page with “yes” or “no.” These questions will ask for detailed information on things likes like ownership percentages, partnership debts, partnership investments, and foreign partners. Schedule B will continue onto page 3.
Complete Schedule K
Schedule K will be on page 4 of 1065 Form. It’s a summary that reveals each partner’s share of the partnership’s income, credit and deduction. You should note that Schedule K is not the same as Schedule K-1, which we’ll go over below.
Fill Out the Remaining Sections
Next, you’ll need to fill out the remaining sections of 1065 form which include:
The purpose of Schedule K-1 is to reveal each partner’s separate share. While your partnership or LLC will only require one Form 1065, each member of your entity must complete their own Schedule K-1. By doing so, they’ll be able to file with the IRS Form 1065 and their personal tax returns.
You’ll be able to find most of the information you’ll need to fill out Schedule K-1 from the Income and Expenses section of IRS Form 1065. In addition to business income or losses, Schedule K-1 will ask you to report any fringe benefits, capital gains, bond interest, real estate income, dividends, or other guaranteed payments you may have earned.
Schedule L is what you’ll use to show that your balance sheets match your books and records. You’ll fill out numbers 1 to 22 and record your assets, liabilities, and capital. In the event there are discrepancies between your balance sheet and books and records, you’ll need to clearly explain them. Schedule L will help the IRS understand the financial state of your partnership.
It’s important to note that if the answer to all four questions in part 6 of Schedule B on Form 1065 is “Yes,” you will not be required to fill out Schedule L.
Schedule M-1 will allow you to explain any differences you may have between your bookkeeping income and tax return income. Guaranteed payments, tax-exempt interest, and depreciation may all lead to these changes. Keep in mind that you’ll have to file Schedule M-1 even if there are no differences between your book income and reported income.
The last section you may fill out on a 1065 Form is Schedule M-2. On, Schedule-M2, you’ll inform the IRS of any changes to you or your partner’s capital accounts (or your equity). Make sure these amounts equal the total amounts you reported on item L of every partner’s Schedule K-1. You won’t have to fill out Schedule M-2 if you answered “yes,” to all four questions in part 6 of Schedule B.
Review and File with the IRS
Once you’ve completed the entire 1065 Form, take the time to carefully review it. When you confirm that it’s good to go, submit it online or by mail by the deadline. Make sure you attach any required forms like Form 1040 Schedule F, Form 8825, Form 1125-A, and Form 8941.
Filing Deadline for Form 1065: U.S. Return of Partnership Income?
You must file Form 1065 on the 15th day of the third month after the date the tax year ended. In the event the due date falls on a Saturday, Sunday, or holiday, you’ll have to file by the next day that isn’t a Saturday, Sunday, or holiday.
So, if you need to file IRS Form 1065 for the 2019 tax year, your deadline will be March 16, 2020. The only reason it won’t be on the 15th is because that date falls on a Sunday. It is in your best interest to start the process as early as you can so that you have plenty of time to complete the form before the deadline.
If you do not file the IRS Form 1065 on time, you’ll face a penalty. The penalty is $210 for each month or part of a month (for a maximum of 12 months) the failure to file the form 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 for.
You can avoid this penalty if you file for a six month extension and turn in your form by September 15, 2020.
Final Word: IRS Form 1065
There’s no denying that filling out an IRS Form 1065 is a time-consuming and tedious endeavor. Fortunately, there are resources at your disposal to make it easier. It’s a good idea to invest in an accounting software and tax software that can help you organize your information. In addition, you’ll find it worthwhile to hire a tax professional who can guide you through every aspect of this complex process.
This article was originally written on December 30, 2019.