Form 1065 is a US tax document for pass-through entities such as partnerships. It is used to report income, deductions, and other financial details to the Internal Revenue Service (IRS). If you’re part of a partnership or thinking about starting one, you’ll need to get familiar with Form 1065 in order to stay compliant with IRS rules and avoid costly mistakes.
Filing this form can be tricky, especially if you’re new to a partnership. That’s why we have created this guide at Remitly to explain who needs to file IRS Form 1065, how to file it, and the penalties for non-compliance.
Who needs to file Form 1065?
All domestic business partnerships headquartered in the US are required to file tax Form 1065 annually. This includes companies classified as partnerships with two or more members.
Types of entities required to file
| Type of entity | Description | Required to file Form 1065? |
| General Partnerships | Business with at least one other person or company, sharing control and splitting profits and losses. | Required to file. |
| Limited Partnerships (LPs) | Composed of general partners (who manage and have full liability) and limited partners (who invest and have limited liability). | Required to file. |
| Limited Liability Partnerships (LLPs) | Partnerships where some or all partners have limited liabilities. They’re treated like general partnerships for tax purposes. | Required to file. |
| Multi-Member Limited Liability Companies (LLCs) | LLCs, with two or more members, that have not elected to be taxed as a corporation. | Required to file unless taxed as a corporation. |
Special considerations for foreign partnerships
Foreign partnerships may be required to file Form 1065 if they do business in the United States or earn income from US sources.
Filing obligations
A foreign partnership needs to file IRS Form 1065 if:
- It conducts business in the US.
- It earns Effectively Connected Income (ECI) from US sources, even if it doesn’t have a physical presence in the US.
If a foreign partnership has any US partners, it has to include all US and foreign income and issue Schedule K-1s to the US partners. Even if it has no US partners, a foreign partnership must report income connected to US business activities.
Filing exceptions
There are two exceptions where foreign partnerships can avoid filing Form 1065:
Foreign partnerships with US partners
A foreign partnership with US partners is exempt from filing if all of the following conditions are met:
- It has no US-connected income (Effectively Connected Income) during the tax year.
- Its US-source income was $20,000 or less during the tax year.
- Less than 1% of any income, gains, losses, deductions, or credit was allocated to US partners during the tax year.
- The collaboration is not classified as a withholding foreign partnership under IRS rules.
Foreign partnership with no US partners and no Effectively Connected Income
A partnership is also exempt if it:
- Has no Effectively Connected Income during the year.
- Has no US partners at any point during the year.
- Is not a withholding foreign partnership but rather a domestic partnership.
- Properly files all required Forms 1042 and 1042-S.
- Ensures all tax liabilities from withholding obligations are fully satisfied.
Filing Form 1065 only for a tax election
If a foreign partnership files Form 1065 solely to make a specific tax election (such as amortizing organizational costs), it doesn’t need to complete the full return.
In these cases, the partnership only needs to:
- Provide its name, address, and EIN on the form’s first page.
- Include a statement referencing the applicable regulation (e.g., Reg. § 1.6031(a)-1(b)(5)), along with details of the election.
How to file Form 1065
Before you fill out the Form 1065, ensure you have the following documents and details ready:
- Profit and loss statement (P&L): Summarizes the partnership’s income and expenses for the tax year, including deductible expenses.
- Balance sheet: Provides a clear overview of the partnership’s assets, liabilities, and equity at the end of the tax year.
- Partner information: Includes each partner’s name, address, and tax identification number.
- Prior year’s Form 1065: Helps maintain consistency and provides a reference point for current-year reporting.
- Fixed asset details: Includes records of any purchases, sales, and depreciation of business-use assets during the tax year.
- Tax payment records: Includes documentation of estimated tax payments, withholdings, or any tax-related transactions.
- Total gross receipts: The total income earned by the partnership before deducting expenses.
- Cost of Goods Sold (COGS): Necessary if the business sells physical products, detailing the direct costs associated with producing and purchasing the items sold. Partnerships that produce, purchase, or sell inventory and whose total receipts exceed $250,000 need to complete Form 1125-A to report COGS.
Keeping accurate and organized financial records year-round will make preparing Form 1065 go much more smoothly and reduce the risk of errors or missed deductions.
Step-by-step guide to completing Form 1065
The form may look complex at first glance, but it’s more manageable when broken down step by step:
Step 1: Provide general information (boxes A-K)
Start by entering the basic information at the top of the form:
- Partnership name, mailing address, and Employer Identification Number (EIN).
- The principal business activity, product/service, and business code (refer to the IRS instruction list at the bottom of Form 1065).
- The business start date and your total assets for the year.
- Choose your accounting method (cash, accrual, or other).
- Indicate how many Schedule K-1 forms you’ll attach.
- Indicate any additional forms attached (such as Schedule C, M-3, etc.), and specify whether this is an initial return, final return, or amended return.
Step 2: Report income and deductions (page 1, lines 1-30)
This section details your financials:
- Lines 1-8: Report all sources of income, such as gross receipts, cost of goods sold, returns, and allowances.
- Lines 9-21: Itemize deductible expenses like salaries, rent, utilities, taxes, and depreciation.
- Line 22: Calculate ordinary business income or loss.
- Lines 23-30: Indicate any tax payments, credits, balances due, or overpayments.
Step 3: Complete Schedule B (pages 2-3)
Answer a series of technical yes/no questions that help the IRS better understand your partnership’s structure and financial activities. These questions include:
- Partner ownership and changes.
- Debts, investments, and foreign accounts.
- Any additional forms like 5471, 1042, or 1099 that you’re required to file.
Step 4: Fill out Schedule K (page 4)
This is a partnership-level summary of the total tax items that will later be distributed among the partners. You must detail:
- All income, losses, deductions, and credits.
- Items related to foreign transactions, AMT, self-employment earnings, and more.
Step 5: Prepare Schedule K-1 (individual allocation)
Each partner receives a Schedule K-1, which reflects their share of:
- Profits and losses.
- Deductions, credits, and distributions.
Attach each Schedule K-1 to Form 1065 and send a copy to each partner so they can file their personal tax returns.
Step 6: Complete Schedules L, M-1, and M-2 (page 5)
- Schedule L (lines 1-22): Shows the partnership’s balance sheet as reported in your books. You’ll list assets, liabilities, and capital.
- Schedule M-1: Explains any differences between book income and tax income.
- Schedule M-2: Tracks changes in the partner’s capital accounts throughout the year, contributions, withdrawals, and net income/loss.
Note: If you answered “Yes” to Schedule B, Question 4, you may be exempt from completing Schedules L, M-1, and M-2.
Step 7: Review, sign, and file Form 1065
Carefully review the entire form and all attached schedules to detect any errors and inconsistencies. Sign and date the form. If a paid filer helped, consider including their information and signature. File it electronically or by mail, and ensure each partner receives a copy of their Schedule K-1.
Deadlines and filing procedures
Filing deadlines: For partnerships on a calendar year, Form 1065 is due by March 15 of the following year. For partnerships using a fiscal year, the deadline is the 15th day of the third month after the end of the tax year. If the 15th falls on a weekend or federal holiday, the deadline automatically shifts to the next business day.
Extensions: Partnerships can request a six-month extension by filing Form 7004, extending the deadline to September 15.
Filing methods: As of January 1, 2024, partnerships filing 10 or more returns during the tax year need to e-file Form 1065 and related forms.
Form 1065 penalties and compliance
If you fail to file Form 1065 on time, you may face penalties. Here’s what you need to know:
Penalties for late filing or mistakes
If a partnership doesn’t file Form 1065 on time, it may incur a penalty. The amount depends on the number of partners and how late the filing is.
For each month it’s late, a base penalty is charged and multiplied by the number of partners. For example, if a five-partner partnership files three months late, the penalty is five times the monthly fee, multiplied by three months. The longer the delay, the higher the penalty. Also, if the partnership fails to comply with electronic filing when required, there’s an additional penalty for each Schedule K-1.
IRS audits and staying compliant
The IRS audits partnerships under the Bipartisan Budget Act (BBA), which allows the IRS to collect any additional taxes directly from the partnership, not individual partners. To avoid audits and penalties, keep accurate records and file all required documents on time.
Help and additional resources
The IRS offers detailed instructions for Form 1065, including how to file electronically and how to manage potential penalties. If your partnership has more than 100 partners and doesn’t file electronically, you can request penalty relief by writing to the IRS.
If you want to opt out of the BBA audit process, the IRS provides specific steps for doing so. Refer to the Form 1065 instructions for full details.
Importance of Schedule K-1 in Form 1065
Schedule K-1 is issued by partnerships to each partner and details that partner’s share of the partnership’s financial activities. This includes types of taxable income such as ordinary business income, interest, and dividends. Partners use the K-1 to accurately report their share of the partnership’s taxable income on their individual income tax return.
How partners use K-1 information for personal tax returns
Partners use information from the K-1 to report their share of the partnership’s income, deductions, and credits on their personal tax returns (Form 1040).
Each item on the K-1 aligns with a specific line on the tax return, so accurate reporting is essential for compliance with tax laws. The process is similar to how S corporations use Form 1120-S, which also issues Schedule K-1s to shareholders.
Common mistakes and how to avoid them
Common Schedule K-1 errors include:
Late issuance
Partnerships are generally expected to provide Schedule K-1s to partners before the tax filing deadline. Delays can make it challenging for partners to file their US returns on time.
If issuing K-1s on time isn’t possible, filing Form 7004 can extend the deadline for Form 1065. This gives the partnership and its partners more time to prepare and file accurately.
Mismatched information
If the numbers on Form 1065 don’t match what’s reported on each partner’s Schedule K-1s, the IRS may scrutinize your return.
To avoid discrepancies, make sure the totals on Form 1065 align with the K-1s. Using tax software or working with a CPA can help ensure everything adds up correctly.
Incorrect reporting
Mislabeling income types—such as treating capital gains as ordinary income—or omitting deductions and credits can result in incorrect tax returns, which can lead to unwanted scrutiny from the IRS. Be sure to double-check how income is labeled and keep records to support the information you provide.
If you discover a mistake after filing, you can correct it by submitting an amended return using Form 1065-X.
Practical tips for smooth filing
Here are a few ways to stay on top of your Form 1065 filing:
Maintain accurate records
Keep detailed records of all financial transactions, including income, expenses, and partner distributions.
Understand your business structure
Be clear on your partnership type (e.g., general partnership, LLC, etc.) as it affects filing requirements.
Consult tax professionals
Work with accountants or tax advisors familiar with partnership taxation to navigate complex scenarios and ensure compliance.
Understanding and properly filing Form 1065 is advisable for any business partnership operating in or connected to the US. Whether you’re just starting out or have been in business for years, staying on top of the filing requirements can help you avoid costly penalties and keep your partnership running smoothly.
FAQs
Who files a 1065 tax return?
If you operate a partnership, such as a general or limited partnership or multi-member LLC, you’ll need to file Form 1065. This form reports the business income, expenses, and other financial details.
Who must file Form 1065 Schedule M-3?
Form M-3 is filed by partnerships or S corporations with $10 million or more in assets. It’s used to explain the differences between the income reported on the company’s financial statements and the income reported on its tax return.
Who is required to file F-1065?
Form F-1065 is used by foreign partnerships (non-US partnerships) that do business in the United States and earn income effectively connected to that business. Form F-1065 reports income, deductions, and the allocations to US partners.
What form reports a partner’s share of income from the partnership?
Schedule K-1 (Form 1065) shows each partner’s share of the partnership’s income, deductions, and credits. The partnership gives this form to each partner, who then uses it to report their share on their personal tax return.
What is the purpose of K-3?
Schedule K-3 is an add-on to Schedule K-1. It gives additional details for partnerships with foreign income or taxes paid to other countries. If a partner has international tax obligations, Schedule K-3 helps ensure that information is reported accurately on their tax return.
What type of entity is a partner?
A partner can be an individual, a corporation, an LLC, or another type of legal entity. Partners may be involved in different ways—some may actively manage the business, while others may act as investors with limited involvement.