A tax preparer must know how different entities report and pay taxes. One particularly complex group can be partnerships. They are complex because they generally don’t pay taxes. However, they use Form 1065 to report their business performance to the IRS each tax year and prepare Schedule K-1s for their partners. Form 1065 declares profits, losses, deductions, and credits. You will typically prepare this form for your clients with domestic partnerships, foreign partnerships earning income in the United States, and nonprofit religious organizations.
What is Form 1065?
Form 1065, US Return of Partnership Income, is an informational tax form filled out by partnerships to provide a financial performance and position statement, including profits, losses, deductions, and credits, to the IRS each tax year. A partnership doesn’t pay income taxes. Instead, any profit or loss is passed on to the partners using Schedule K-1, prepared for each partner using the information on Form 1065. The partners must report and pay taxes on their partnership income on their individual tax returns and pay income tax on their earnings. If you prepare Form 1065 for your clients, you must also prepare Schedule K-1 for each partner.
Which clients should I file Form 1065 for?
All your clients with partnerships must file Form 1065. Two or more people carrying a trade or business together qualify as a partnership in the eyes of the IRS. These can include:
- domestic partnerships
- general partnerships
- limited partnerships
- limited liability corporation (LLC)
- nonprofit religious organizations
- foreign partnerships
Domestic partnerships
All domestic business partnerships headquartered in the US must file Form 1065 annually. However, if a partnership does not receive income or incur expenses qualifying it to claim credits or deductions, it doesn’t need to file Form 1065.
Nonprofit religious organizations with a 501(d) classification also file as a partnership. They are responsible for showing that profits were given to their members as dividends.
Foreign partnerships
Foreign partnerships with income in the US must also file Form 1065.
When they earn gross income connected with a business or trade in the US, they must report that income and how it is distributed to any partners. However, if a partnership earns less than $20,000 or receives less than 1% of their income in the US, they may not have to file a 1065.
What is included in the client’s Form 1065?
When filing Form 1065 for your clients, have them gather the following items:
- their Employer Identification Number (EIN)
- the start dates for the business
- how many partners exist
- information about the partners
- the partner’s stake in the company by the percentage of ownership
- year-end financial statements
- a profit and loss statement that shows net income and revenue
- any deductible expenses
- a balance sheet for the beginning and end of the year
TaxSlayer Pro will help you input this information and allocate it to the right place on the form.
When and how to file a 1065 for your clients
Generally, Form 1065 must be filed by March 15th. This is the same date as the third month of the partnership’s tax year. Extensions are allowed to be filed using Form 7004. This provides the partnership with a six-month extension.
File Form 1065 with TaxSlayer Pro for a smooth experience. We will help you put the info in the right boxes to ensure you are filing the form correctly.
Are there penalties for failing to file a 1065 on behalf of clients?
As a tax preparer, you will not face any penalties yourself for not filing a form, but your clients will. If a partnership does not file Form 1065 by the deadline, it will face a late filing penalty. The penalty is typically $245 monthly (for a maximum of 12 months) not filed. This penalty is charged per partner who has not filed. You can request an extension for your clients who need more time to file to avoid this penalty.
If your partnership client fails to file and send Schedule K-1 to their partners by the deadline, they will also face a penalty. The IRS may impose a $330 penalty for each Schedule K-1 not filed. The maximum penalty is $3,987,000.
If your partnership client fails to file and receives a notice from the IRS, the partnership (or you as the tax preparer on their behalf) can send the IRS an explanation of why they were unable to file on time. The IRS can then determine if the reason for not filing a partnership tax return is sufficient and remove the penalty.
What’s the difference between Schedule K-1 and Form 1065?
Form 1065 is the first step in paying taxes on income earned by a partnership. Once you’ve prepared Form 1065 for your client, prepare Schedule K-1s for each partner. Each Schedule K-1 identifies the partner’s allocated profits and losses for the tax year. This form is sent to the partners and used to prepare their personal income tax returns. These two tax forms work in tandem with each other to successfully report and help partners pay taxes on any income or loss experienced by the partnership.
