IRS Form 1065 is the U.S. Return of Partnership Income used to report each partners' share of income or loss of the business. No tax is calculated from or paid on Form 1065. It simply reports this information to the IRS. Tax liability is passed through to the members who then pay taxes on the income on their personal returns.
Limited Liability Companies (LLCs) can make an election with the IRS to be taxed as partnerships, and they would file Form 1065 in this case as well.
What Is IRS Form 1065?
IRS Form 1065 is an information return. It reports a partnership's income to the IRS, citing gains, losses, credits, and deductions. Form 1065 isn't used to calculate and remit taxes because partnerships pass their income, gains, losses, credits, and deductions through to their partners, who then claim their shares and pay tax on them on their own personal returns.
Who Uses IRS Form 1065?
Partnerships have specific tax reporting requirements that are different from other businesses. They use Form 1065 to prepare partnership taxes as part of a two-step process:
- The partnership as an entity must report income, gains and losses, and credits and deductions, just like other businesses.
- The partners aren't employees, so they don't receive Forms W-2 for their shares of income. Instead, the partnership provides each partner with a Schedule K-1, which reports that partner's share of income, credits, and deductions to be reported on their personal tax return.
Schedule K-1 provides information about the partnership and the partners, including taxable income of partners from passive activities, qualified dividends, net capital gains, and income from other activities.
In addition to partnership businesses, LLCs with multiple members should file Form 1065 as partnerships if they haven't elected to be taxed as a corporation or S corporation.
Where to Get Form 1065
The IRS provides Form 1065 on its website. The form is interactive, so you can complete it online. You can also download it and complete it, or you can print it out.
How to Fill Out Form 1065
You'll need a copy of your partnership agreement providing information on the distributions of shares or money to partners, as well as allocation of income and losses to partners. You'll also need a list of partners and their partnership type, either general or limited.
Completing Form 1065 can be a complicated process and it's usually recommended that partnerships enlist the services of a tax professional to see to this task. The partnership would still have to provide all this information to the professional.
The most important piece of information you'll need is information on distributions and contributions by partners for the tax year, including the total amount of all partner capital accounts at the beginning and the end of the year and increases and decreases, including distributions.
You'll need several year-end financial statements to prepare and file Form 1065, including a profit and loss or income statement showing your partnership net income or loss. This should include the specific sources of revenue, and all deductible expenses of the partnership/LLC for the year.
The profit and loss statement should also include a balance sheet for the partnership at the beginning and the end of the year. The beginning year balance sheet must match last year's end-of-year balance sheet.
You'll also want to gather together some additional data:
- Information about the partnership, including your Employer ID number, business code (NAICS code), and the date the partnership was started.
- The accounting method used by the partnership, which would be either cash or accrual. This information is important in figuring out when income and expenses should be recorded.
- Total gross receipts, returns, and allowances. Allowances include discounts and complimentary or free products and services.
You must report information on the value of your inventory at the start of the year if you sell products, as well as the cost of inventory purchased during the year.
Most business expenses are deductible, so it's important to list every expense, including:
- Salaries and wages of employees, but not partners
- Guaranteed payments to partners
- Repairs and maintenance expenses
- Taxes, licenses, permits, and fees paid by the partnership, not including federal income tax
- Interest paid
- Depreciation calculation for the year. Business assets like equipment and vehicles bought during the year need to meet IRS requirements to be depreciated.
- Retirement plans for partners and employees that may reduce income taxes due
- Employee benefit programs
Expenses on business assets such as equipment, property, or vehicles are typically depreciated over time versus taking the entire expense in the year the asset was acquired.
Can Form 1065 Be E-Filed?
Partnerships can use the Modified e-file (MeF) platform provided by the IRS to e-file their Forms 1065, as well as the Schedules K-1 they must provide to partners and the IRS. The Taxpayer Relief Act of 1997 requires that partnerships with more than 100 partners must e-file.
Where to Mail Form 1065
Mailing your Form 1065 to an IRS center remains an option for partnerships with 100 or fewer partners. The exact center and address depend on several factors, including your total asset value at the end of the tax year and the state where your business is principally located. The IRS provides a complete list of the appropriate addresses on its website.
- IRS Form 1065 is an information return that reports partnership income to the IRS.
- Form 1065 doesn’t calculate any tax that’s due because partnerships don’t pay their own taxes. Income, credits, and deductions are passed through to their partners to be reported and taxed on their own personal tax returns.
- Limited liability companies (LLCs) can make an election with the IRS to be taxed as partnerships, and they would be required to file Form 1065 if they do so.
- Completing Form 1065 can be somewhat complicated, so you might want to enlist the assistance of a tax professional to make sure you get it right.
NOTE: Taxes can be complex, especially for business partnerships or multi-member LLCs. Consider hiring a tax professional to make sure you're properly reporting your partnership's income and losses, as well as taking advantage of all qualified deductions.