Most people dread tax season; it’s complicated, stressful, and extremely time consuming. But while no one likes to think about the subject of taxes, it’s a part of life, so it’s our team’s goal at MCDA CCG to eliminate as much of the confusion and burden as we can.
If your business is a partnership or LLC, you need this guide to IRS Form 1065, one of the most important annual tax forms to complete for the IRS.
What is IRS Form 1065?
Form 1065 is an informational tax return filed annually to report the income, gains, losses, deductions and credits from the operation of a partnership. Partnerships and LLCs are pass through entities, meaning that profits and losses pass through directly to the partners or LLC members, where they then report and pay taxes on their share of the business income on their personal tax return.
Because the business itself does not pay income tax, the individual and LLC members complete a Schedule K-1 to report their share of the businesses profits and losses and then file this form with their personal tax return.
Who Files Form 1065?
The following must annually file form 1065:
- Domestic Partnerships
- LLCs classified as partnerships for tax purposes
- 501(d) nonprofit religious organizations
- Foreign partnerships who had gross incomes derived from a source or sources within the U.S.
Where to Find Form 1065
You can find the 1065 tax form on the IRS website.
(Keep in mind that if your partnership has more than 100 partners, the IRS requires you to file Form 1065 electronically. Other partnerships may be able to file by mail, in any case, always refer to your qualified tax advisor.)
When to File Form 1065
Form 1065 must be filed by the 15th day of the third month following the date the tax year ended. You can find more information on tax year here: Calendar Year vs. Fiscal Year: Everything You Need to Know
Meaning that if you’re filing IRS Form for the 2021 calendar year, the deadline is March 15, 2022.
More important March deadlines can be found here: Important Tax Deadlines for Business Owners March 2022
How to Fill Out Form 1065
1.Gather Financial Documents and IRS Forms
The information you need to prepare depends on the specifics and circumstances of your operations. Generally, however, the most important financial documents are those that reflect financial performance – P&L, Balance Sheet, Cost of Goods Sold, etc.
(Since there are numerous variables involved in this process, we highly encourage you to work with a business accountant or tax advisor.)
2.Fill in IRS Form 1065 A-K
In essence, the first section consists of boxes lettered A through K and is essentially the general information section.
Here, you will fill in:
Your tax year
Name of partnership and mailing address
A-C: Fill in your principal business activity, product or service, and business code number.
(To find this information, refer to the list at the bottom of the Form 1065 instructions.)
D: Fill in your Employer Identification Number (EIN)
E: Fill in the date your business started
F: Fill in the total assets of your partnership at year end.
G & H: Check what type of return this is and the accounting method your business uses.
I: Check how many partners or LLC members you’ll be attaching to the form (Every partner or LLC member must complete a Schedule K-1)
J: Some situations require you to complete a Schedule C or M-3. If this is the case for you, you will check that those forms are attached in this section.
3. Fill in the Remainder of the IRS Form
These boxes are numbered 1-30 and are broken up into categories: Income, Deductions and Tax and Payment. You will need your financial information here.
1-7: In order to record your total income in box 8
9-20: In order to record your total deductions in box 21.
22: Subtract box 21 from box 8 to fill in your ordinary business income loss
23-26: To record your total balance due in box 27
28: To record any prepayments you’ve made for taxes applicable to boxes 23-26
29: Amount owed if box 28 is smaller than box 27
30: Overpayment if box 28 is larger than box 27
When you reach the end of page 1, sign and date the form once you have completed and reviewed everything. If you have a tax preparer complete this, they will fill in the box that says, “Paid Preparer Use Only.” Lastly, if you authorize the IRS to contact this professional, check “yes” in the box to the right, if not, check “no”.
4.Fill in IRS Form 1065 Schedule B
Schedule B consists of 29 line items and has the header “Other Information” where it asks technical questions regarding your partnership
1: Indicate your business entity type
The remainder of the first 10 questions ask for information about:
- Ownership percentages of the partnership
- Partnership debt
- Partnership inconvenient in foreign financial accounts
- Partnership investments
Since the answers to these questions will vary, have all financial information organized, on hand, with a tax professional nearby.
The Schedule B section continues onto page 3 with lines 11-25 and consists of yes or no questions.
These questions cover a variety of topics:
- Partnership Property
- Foreign Partners with the partnerships
- Other tax obligations
5.Complete IRS Form 1065 Schedule K
Schedule K of Form 1065 is different from Schedule K-1, where form 1065 is a summary schedule of all the partners’ share of the partnership’s income, credits, etc., and a K-1 shows each partner’s separate share. A copy of each partners K-1 should be submitted with Form 1065
For Schedule K, you will need to fill in boxed numbered 1-21:
1-11: Complete to calculate income loss
12-13: Complete to calculate deductions
14: Complete to record net earnings loss from self-employment
15: Complete to record any applicable credits
16: Complete to record any foreign transactions
17: Complete to record alternative minimum tax, or AMT, items
18-21: Complete to record additional income and expenses.
6. Complete IRS Form 1065 Schedule L
Schedule L is labeled as “Balance Sheets per Books” and takes up the rest of page 5.
According to the IRS Form’s instructions, you don’t have to fill out Schedule L or the remaining Schedules M-1 and M-2 if you answered year to question 4 in Schedule B.
If you do need to complete Schedule L, you will need to fill out lines 1-22 and record your partnerships assets liabilities and capital.
7. Complete IRS Form 1065 Schedule M-1
This section explains any differences between the partnership’s net income on its financial statements and the partnerships net income on the tax returns.
8. Complete IRS Form 1065 Schedule M-2
The last section of Form 1065, reflects the changes in the partners’ capital accounts
Time to Review! (Almost there, keep going!)
Once you’ve filled in all five pages, thoroughly review the document with a certified accountant, CPA, or other tax profession to ensure everything is correct. Then sign and date the document and file it via your preferred method.
If you have made this far, we congratulate you! There’s a lot of detail involved in Form 1065, (or any form involved with a business for that matter), but hopefully this post helps to provide basic understanding of what it’s asking of you. And as always, remember that tax rules are complex, can change over time and vary by location and industry. It’s always in your best interest to consult with a tax advisor or CPA for guidance specific to your situation.
It’s a complicated process prone to many dangerous mistakes, so you want to make sure that you do everything in your power you can to ease the process as much as you can. A smooth tax season starts with the right adviser, one with a high level of expertise and industry wide experience. Let one of our MCDA CCG team of financial consultants be that someone.
No matter how unique and complex your situation, we can assure your satisfaction. As we continue to pass deadlines and near the end of the season, you have no more time to waste. Give our office – headquartered in Placentia, Orange County, California- a call! ((657) 258-0577)
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QuickBooks Online Tips for Small Businesses: Chart of Accounts Organization