Form 1065 - Information Return for Partnership

             A partnership itself is not responsible for paying income taxes.  The partnership is required to file an information return, Form 1065.  The return is used to report the profit or loss from the operation of the partnership business.  Form 1065 shows the names and addresses of the partners, as well as each partner’s distributive share of taxable income.  Limited liability companies that are treated as partnerships are also required to file Form 1065.  If, for the tax year, the partnership does not receive any income or have any expenses which would be treated as credits or deductions for federal income tax purposes, the partnership would not be required to file Form 1065 for that tax year.

            The first amount to be reported on Form 1065 is gross receipts or sales.  From this amount, any returns and allowances, and costs of goods sold, are subtracted, to arrive at gross profit.  Adjustments to gross profit include, when applicable, ordinary income or loss from other partnerships, estates, and trusts; net farm profit or loss; net gain or loss from Form 4797; and any other income or loss.  The grand total is total income or loss.  The next section of Form 1065 is for deductions.  These deductions are for ordinary and necessary costs of the business.  Some deductions listed on the Form 1065 are salaries and wages, guaranteed payments to partners, interest, rent, taxes and licenses, repairs and maintenance, depreciation, and employee benefit programs.  Total deductions are then subtracted from total income or loss to arrive at ordinary business income or loss.

             A very important part of Form 1065 is the Schedule K-1 that each partner receives.  The IRS receives a copy of all Schedules K-1 for the partnership.  Each partner uses his or her Schedule K-1 to report their share of the various items of income, expense, and deductions on their personal income tax return.  The partnership is considered a pass-through entity, since the income or loss is passed through to the individual partners.

             The partners are taxed on their share of the profit or loss of the partnership, even though the profits may not have been distributed.  The partner reports his or her share of income on Schedule E, and is normally liable for self-employment tax, depending on the dollar amount of the net earnings from self-employment.

             Since the Internal Revenue Service receives a copy of all Schedules K-1, they are able to match up the Schedules K-1 with the income tax returns of the partners to verify that each partner has reported their correct share of partnership income.

             Another important point to remember is that the Form 1065 must be signed by a general partner.  For an LLC being treated as a partnership, the Form 1065 must be signed by one of the members.

              If you need help with figuring out your income taxes, including which schedules you might need to file and which expenses are allowed as deductions, you are in the right place.  Try out the CPA search feature on this website to find a qualified professional in your area to assist you with all your tax and accounting needs.