Written by Riley Adams, CPA • Reviewed by Miguel Burgos, CPAUpdated for Tax Year 2023 • September 5, 2024 6:11 AM
OVERVIEW
Form 1065 is the main federal partnership tax return. It’s an information return used by domestic and some foreign partnerships to declare profits, losses, deductions, and credits for their tax year.
Key Takeaways
• Form 1065 reports the business performance of partnerships to the IRS each tax year.
• Partnerships generally don’t pay taxes and use Form 1065 to prepare Schedule K-1s (and Schedule K-3s, where appropriate) to pass-through income and losses to partners.
• Partnerships must file Form 1065 by the 15th day of the 3rd month following the date its tax year ended.
What is Form 1065?
Form 1065, U.S. Return of Partnership Income, is the primary partnership tax return. It's an information return used by partnerships to provide a statement of financial performance and position to the IRS each tax year. The form includes information related to a partnership’s income and deductions, gains and losses, taxes and payments during the tax year. Partnerships use this form to prepare Schedule K-1s for each partner to pass through all income and deductions to owners.
Who is required to file Form 1065?
Domestic partnerships
All domestic business partnerships headquartered in the United States must file Form 1065 each year, including general partnerships, limited partnerships, and limited liability companies (LLCs) classified as partnerships with at least two members. If a partnership neither receives income nor incurs any expenses which would qualify it to claim deductions or tax credits, it doesn’t need to file Form 1065.
Like corporations and partnerships, religious or apostolic organizations exempt from income tax under Section 501(d) have to report how much taxable income they have with Form 1065. This income must be allocated to members as a dividend, whether distributed or not. The organization may use Form 1120, U.S. Corporation Income Tax Return, for this purpose
Foreign partnerships
When a foreign partnership earns gross income that is connected with a trade or business conducted within the United States (or has gross income derived from sources in the United States), it generally must file Form 1065 to report its income and how it'll be distributed to partners. This applies even if its principal place of business is outside the United States or all of its members are foreign persons. Foreign partnerships who are required to file Form 1065 are typically required to report all applicable foreign and US partnership items on Form 1065.
There are two exceptions for foreign partnerships needing to file Form 1065:
- Exception for foreign partnerships with US partners. The foreign partnership with US partners must meet all of the following criteria to qualify for an exception to filing Form 1065:
- The partnership had no U.S.-derived income from a trade or business during its tax year (also called effectively connected income);
- The partnership had US source income of $20,000 or less during its tax year;
- Less than 1% of any partnership item of income, gain, loss, deduction, or credit was allocable in the aggregate to direct US partners at any time during its tax year; and
- The partnership isn't a withholding foreign partnership as defined in Regulations section 1.1441-5(c)(2)(i).
- Exception for foreign partnerships with no US partners and no effectively connected income. A foreign partnership with US source income isn't required to file a return if it meets the following requirements:
- The partnership had no effectively connected income from a trade or business during its tax year;
- The partnership had no US partners at any time during its tax year;
- The partnership isn't a withholding foreign partnership as defined in Regulations section 1.1441-5(c)(2)(i);
- All required Forms 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons, and 1042-S, Foreign Person's U.S. Source Income Subject to Withholding, were filed by the partnership or another withholding agent as required by Regulations sections 1.1461-1(b) and (c); and
- The tax liability of each partner for amounts reportable under Regulations sections 1.1461-1(b) and (c) has been fully satisfied by the withholding of tax at the source.
In the event a foreign partnership files Form 1065 only to make an election (such as an election to amortize organization expenses in the US), it only needs to provide its name, address and Employer Identification Number (EIN) on page 1 of the form and attach a statement citing “Regulations section 1.6031(a)-1(b)(5)” and identifying the election being made. A foreign partnership filing Form 1065 solely to make an election must obtain an EIN if it doesn't already have one.
What is a pass-through entity?
There are several types of business structures, all of which are organized at the state level. (Designations like an S-corp aren’t strictly business structures; they're tax elections made on federal taxes.) That means business structure rules and regulations may vary by state, while some business structures are largely ignored at the federal level.
One of the two types of business structures the IRS recognizes is a pass-through entity (the other is a C corporation). Pass-through entities have a name that clearly explains its purpose: they pass along all of their income to their owners to be taxed as the owners' income.
Pass-through entity structures include sole proprietorships, partnerships, and S corporations. In addition to these business types, there are Limited Liability Companies or LLCs, which are one of the most popular business structures. Despite their popularity, the IRS mostly ignores LLCs for tax purposes. The formation of business structures is controlled at the state level and the IRS has chosen not to create a separate tax structure for LLC taxes.
Instead, LLCs have choices on how they are to be taxed. These include being taxed as a Sole proprietorship (one owner), partnership (multiple owners), S corporation (one or more owners) or C corporation (one or more owners).
Do pass-through entities pay taxes?
While state rules vary, pass-through entities generally don't pay taxes. All income is passed through to owners on Schedule K-1 to report on their individual income tax returns. Pass-through entities don't pay the federal corporate income tax—only C corporations are subject to this taxation.
Do partners need to file a Form 1065?
The partnership must file one Form 1065 to represent the tax details of the business for the tax year. This partnership tax return is then used to prepare each Schedule K-1 for the partners to claim their share of the business’s income and loss on their individual tax returns.
Schedule K-1 vs. Form 1065
Form 1065 is the first step for paying taxes on income earned by the partnership. Once you’ve prepared Form 1065, Schedule K-1s are prepared for each partner. Each Schedule K-1 identifies each partner’s allocated profits and losses for the total of the reporting period. Each partner’s Schedule K-1 is sent to the partner and used to prepare their personal income tax return.
When is Form 1065 required?
Generally, a required domestic partnership (or a foreign partnership which doesn’t meet either exception for filing a partnership tax return) must file Form 1065 by the 15th day of the 3rd month following the date its tax year ended as shown at the top of the Form 1065. If the partnership is a calendar year partnership (January to December), the due date is March 15. If, however, the tax year runs during a different period, say July to June, Form 1065 is required to be filed by September 15.
If the due date falls on a Saturday, Sunday, or legal holiday in the District of Columbia or the state in which you file your return, the IRS allows you to file your return by the next day that isn't a Saturday, Sunday, or legal holiday.
Can you file an extension to file Form 1065 later?
If you need more time to file Form 1065, you may request an extension through filing Form 7004, Application for Automatic Extension of Time To File Certain Business Income Tax, Information, and Other Returns. Doing so will grant you a 6-month extension to file your partnership tax return.
Of special note, filing Form 7004 doesn't extend the time to pay any taxes due. Therefore, you must estimate how much each partner should report in taxable income and partners must pay taxes on this applicable amount.
What happens if you don’t file Form 1065?
You want to file your partnership’s Form 1065 if you meet the minimum filing requirements. Failing to file your form on time will result in penalties.
If you file your return late, for the 2023 tax year, the IRS will assess a penalty equal to $220 for each month of part of a month (for a maximum of 12 months) the failure to file continues, multiplied the total number of persons who were partners in the partnership during any part of the partnership’s tax year for which the return is due. If the partnership fails to file the return and receives a notice about the penalty from the IRS, the partnership can send the IRS an explanation of why it failed to file. The IRS will evaluate and determine if the explanation meets reasonable-cause criteria for not filing a partnership tax return. The same penalty applies for failing to file a return that shows all the information required, unless such failure is due to reasonable cause.
If the partnership fails to furnish a Schedule K-1 (and K-3, if applicable) to a partner when due, this can also result in a penalty. For each failure in the 2023 tax year, a $290 penalty may be imposed for each Schedule K-1 (and K-3, if applicable) for which a failure occurs. The maximum penalty is $3,532,500 for all such failures during the 2023 tax year. If the partnership intentionally disregards the need to report correct information, each $290 penalty is increased to $580 or, if greater, 10% of the aggregate amount of items required to be reported. There's no limit to the amount of the penalty in the case of intentional disregard.
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