IRS Form 1065 is a tax document provided by the Internal Revenue Service (IRS). It is used to declare the profits, losses, deductions, and credits of a business partnership. An IRS Form 1065 is often combined with a Schedule K-1.
Business partnerships rely on the documents to remain in good standing with the IRS. Read on to learn more about the two IRS documents including how to complete and file.
IRS Form 1065
Form 1065: U.S. Return of Partnership Income is used by the IRS as an information return that reports your income, gains, losses, deductions, and credits related to a business partnership.
IRS Form 1065 is required by the agency because a business partnership entity does not pay tax on its income. Instead, the income “passes through” any profits or losses to its partners. As a result, partners must include financial responsibility on their tax returns.
Partnerships are different from corporations based on tax law. While most corporations are subject to double taxation because they must file a return for both the entity and on individual returns, a partnership is not held to the same standards.
Therefore, partnerships spend less time preparing and filing tax returns. They also generally pay far less in taxes.
Form 1065 presents the IRS with a snapshot of the company’s financial status within the last year. It clearly states the profits and losses of the entity, as well as deductions and credits.
In addition to IRS Form 1065, partnerships are responsible for filing individual Schedule K-1 documents. A Schedule K-1 is a document prepared by each partner related to the entity.
Since partnerships do not have to file a tax return for the entity (like a corporation does), the tax burden falls on each partner. Schedule K-1 reflects what each partner must report and pay in terms of taxes for their portions of income.
It is important to note that partners must pay income tax on their earnings regardless of how the earnings are distributed.
Who Needs to File a Form 1065 and Schedule K-1?
IRS Form 1065 and Schedule K-1 are filed by limited liability companies (LLCs), non-profits, religious organizations, and foreign partnerships with income in the United States.
All domestic partnerships must file Form 1065: U.S. Return of Partnership Income. The only exception is for foreign partnerships with income in the United States that earn less than $20,000, or for partnerships that receive less than one percent of their income in the country.
Religious organizations use Form 1065 to prove that profits were handed out to members as dividends, regardless of whether the dividends were distributed.
The United States defines a ‘partnership’ as two or more people who carry on a trade or business together. Consequently, every member of the partnership contributes funds, skills, labor, or property with the expectation that all partners will reap financial benefits and losses.
It is important to remember that Form 1065 does not determine the tax liability of a partnership. Rather, it is purely used as an official form to quickly outline all of the profits and losses of the entity.
How to File Form 1065 – Schedule K-1?
Form 1065 requires a significant amount of information about your partnership. It includes financial information like gross receipts or sales. Furthermore, deductions and operating expenses are outlined such as rent, employee wages, interest on business loans, and other costs.
The form also requires information about the partners related to the entity as well as their stake in the company (according to their percentage of ownership). You may need to reference a variety of other IRS documents like Form 4562: Depreciation and Amortization, Form 4797: Sale of Business Property, or Form 1125-A: Cost of Goods Sold.
Do not forget to attach a Schedule K-1 before submitting Form 1065. The due dates for IRS Form 1065 are March 16, 2020, for tax returns related to 2019. You may request an extension that could buy you time until September 15, 2020.
Get Help with Your Form 1065 – Schedule K-1
Levy & Associates is proud to represent numerous business partnerships and religious organizations. Contact us today to get help filling out and filing Form 1065 and Schedule K-1.
We can, and often help partnerships reduce taxes owed as a result of filing errors. Visit us at www.levytaxhelp.com, or dial 800-TAX-LEVY.