How to File Form 1065 for a Partnership
All the Information You Need for Your LLC or Partnership
Partnerships have specific tax reporting requirements that are different from other businesses. Partnership taxes are a two-step process: The partnership must report its income, and the partners must report and pay taxes on their share of that income
If you are the person responsible for income taxes for a partnership, you probably already have a tax preparer to help you with this return. Or maybe you are planning to use a tax preparation software program that has a partner version. In either case, it's a good idea to gather up the documents you need to prepare this partnership tax return.
Having these documents before you begin lessens the work and time (and money) spent on a tax preparer, and it reduces the hassle of stopping and starting your return — first, a brief overview of a partnership tax return, then a list of documents you need.
How Partnerships File Federal Income Taxes: Form 1065
Form 1065 is the US Return of Partnership Income. Form 1065 is used by partnerships and multiple-member Limited Liability Companies (LLCs) to report federal income taxes. No tax is calculated or paid from Form 1065. The partners or LLC members pay any tax due. A multiple-member LLC is taxed as a partnership.
A partnership pays income tax through the returns of its partners, allocating a share of income or loss to each partner according to the terms of the partnership agreement. The partnership files an information return on Form 1065, then gives each partner Schedule K-1 showing his or her share of income/loss for the year.
Information for Multiple-Member LLCs Filing as Partnerships
If your business is an LLC with multiple members, and you have not elected to be taxed as a corporation or S corporation, you'll be filing taxes as a partnership. From the standpoint of the IRS, you are filing your business tax return as a partnership.
Documents Needed for Your Partnership Tax Return and Schedule K-1 Forms
To start your preparation for filing Form 1065, you need several year-end financial statements. Give your tax preparer a P&L (profit and loss, or income) statement, showing your partnership net income (or loss) including the specific sources of revenue, and all deductible expenses of the partnership/LLC for the year and 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.
Before you take your partnership tax information to a tax preparer, gather together the following information:
Information about the partnership, including the Employer ID number, business code (NAICS code), and the date the partnership was started.
The accounting method used by the partnership: 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 (free) products and services.
If you sell products, you need to provide information for calculating the cost of goods sold. This information includes the value of inventory at the beginning and end of the year, and the cost of inventory purchased during the year, plus other components of inventory.
Information on Expenses of the Partnership
Most business expenses are deductible, so it's important to include 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 business 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
Information on Your Business Assets
You need to provide information on your business asset records, including business vehicles, for depreciation purposes.
Information Needed for Schedule K-1 Forms
Schedule K-1 provides information about the partnership and the partners, including taxable income of partners from passive activities and other activities, qualified dividends, net capital gains, and income from other activities.
Before preparing this form, your tax preparer needs a copy of your partnership agreement to provide information on the distributions of shares or money to partners, and allocation of income/loss to partners.
You also need a list of partners and their partnership type (general or limited).
The most important piece of information you 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).