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If your small business is structured as a partnership, you will be dealing with Form 1065 every year. It is critical for you and your partners to understand this document so you don’t run afoul of the Internal Revenue Service.
IRS Form 1065 is formally known as the US Return of Partnership Income. It is used to report the income, losses, deductions, and other financial information for each partner in a partnership.
Importantly, no actual taxes are calculated or paid with this form. The form is used to report the partnership’s financial data to the IRS. Instead, the individual partners pay taxes on their personal filings.
Because partners are not employees, the partnership will send revenue and loss records to each partner on a Schedule K-1 form instead of Form W-2. Each partner then uses this information when filing their income taxes. The IRS uses Form 1065 to ensure accuracy.
In a partnership, profit and loss “pass through” to the partners, i.e., the partnership company does not pay income tax.
Form 1065 is necessary for domestic partnerships, which the IRS sees as any business partnership between 2 or more people where capital, labor, or expertise is contributed by each person and each person expects to share in the profits or losses of the business. Even if the partners have not signed a formal partnership agreement, the IRS sees the business as a domestic partnership if the company fits its definition.
Form 1065 can be used by businesses structured as limited liability companies (LLCs) that elect to be taxed as a partnership, meaning the company has not filled out forms with the IRS to be structured as a corporation or S corporation.
Additionally, you have to file Form 1065 if your company is a foreign partnership that derives any revenue from the United States.
Form 1065 is available online from the IRS and can be filled out online and electronically filed or sent through the mail. If your partnership is over 100 people, federal law states that you must file your report online.
This form is pretty complicated, which is why you probably want to consult a tax professional. Hiring outside help to handle your partnership’s tax situation is well worth it.
You will need an annual profit and loss statement for the company, as well as agreements regarding how profits and losses are to be split amongst partners. You will have to list all partners, as well as their contributions and distributions for the year.
The IRS deadline for Form 1065 is technically the 15th day of the 3rd month after the end of your company’s tax year unless it falls on a weekend or a holiday—then it will be the next day that is not a weekend or holiday. For companies using a calendar year, this will typically be March 15.
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