How to Fill Out Form 1065 for Your Partnership LLC

Filing taxes for a partnership LLC requires submitting Form 1065, which reports the business’s income, deductions, and other financial details to the IRS. While the form itself doesn’t determine tax liability—since partnerships pass profits and losses to their partners—it is essential for compliance. Errors or omissions can lead to penalties or delays. Completing Form 1065 correctly requires gathering accurate financial information, properly reporting income and expenses, and ensuring each partner’s share is allocated correctly.

Eligibility to File

A partnership LLC must file Form 1065 if it has two or more members and is classified as a partnership for tax purposes. The IRS automatically treats multi-member LLCs as partnerships unless they elect corporate taxation by filing Form 8832. Single-member LLCs are disregarded entities and report income on Schedule C of Form 1040.

The requirement to file applies even if the partnership had no income during the tax year. Failure to submit Form 1065 on time results in penalties of $220 per partner per month, up to 12 months. A four-member LLC missing the deadline by three months would owe $2,640 in penalties.

Some small partnerships may be exempt under IRS Revenue Procedure 84-35, which applies to domestic partnerships with 10 or fewer partners, provided all are individuals, estates, or C corporations. However, this exemption is not automatic, and the IRS may request documentation.

Gathering Financial Details

Before completing Form 1065, partnerships must compile financial records, including a general ledger tracking income, expenses, assets, and liabilities. A well-maintained ledger simplifies reconciliation and ensures financial statements align with tax reporting.

Partnerships using accrual accounting recognize income when earned and expenses when incurred, while cash-basis partnerships report transactions when money changes hands. The chosen method must remain consistent unless the IRS approves a change.

Bank statements, credit card records, and receipts should be reviewed to verify all revenue and expenditures. Payroll reports are essential if the partnership has employees, as wages and payroll taxes must be accurately reported. Estimated tax payments should be documented to ensure proper credit is applied.

Loan agreements and debt schedules must be examined for interest deductions. Depreciation schedules should be updated based on IRS guidelines in Publication 946. Partnerships that own real estate may also need to factor in cost recovery deductions under the Modified Accelerated Cost Recovery System (MACRS).

Filling Out the Core Sections

Once financial records are in order, the next step is completing Form 1065. The form captures the partnership’s identifying details, income, deductions, and how profits or losses are allocated among partners. Accuracy is critical to ensure compliance and avoid penalties.

Partnership Details

The first section requires basic information, including the partnership’s name, address, and Employer Identification Number (EIN). If the partnership lacks an EIN, it must apply using Form SS-4.

The partnership must list its principal business activity, using the appropriate North American Industry Classification System (NAICS) code. Selecting the correct code helps the IRS compare financial data across similar businesses. The form also asks for the partnership’s accounting method—cash, accrual, or another approved method. A change from the previous year must be disclosed and may require IRS approval.

Publicly traded partnerships (PTPs) must be identified, as they are subject to different tax rules under Internal Revenue Code Section 469, which governs passive activity losses. Partnerships with foreign partners or international transactions may need to file additional forms, such as Form 8804 for withholding tax on foreign partners’ income.

Income and Deductions

The income section reports total revenue, including gross receipts from sales, services, rentals, and other earnings. If the partnership sells goods, it must calculate the cost of goods sold (COGS) using Schedule A. The formula for COGS is:

Beginning Inventory + Purchases – Ending Inventory = COGS

Deductions reduce taxable income and must be categorized correctly. Common deductions include rent, utilities, salaries, employee benefits, and business insurance. Interest expenses on loans are deductible under Internal Revenue Code Section 163, though limitations apply if the partnership’s average annual gross receipts exceed $29 million (as of 2024). Depreciation and amortization expenses are reported on Form 4562, which must be attached if claimed.

Retirement plan contributions for employees, such as SEP IRAs or SIMPLE IRAs, are deductible. However, contributions for partners are reported on Schedule K-1. Startup costs up to $5,000 may be deducted in the first year, with the remainder amortized over 15 years under Internal Revenue Code Section 195.

Partner Allocations

Partnerships do not pay income tax at the entity level; profits and losses are passed through to partners based on their ownership percentages or partnership agreement terms. These allocations must be reported accurately to ensure correct tax payments.

The partnership agreement typically outlines how income, deductions, and credits are distributed. Special allocations—where certain partners receive different shares than their ownership percentage—must meet the “substantial economic effect” test under IRS regulations. If the IRS determines an allocation lacks economic substance, it may reallocate income based on ownership percentages.

Guaranteed payments to partners, compensating them for services or capital contributions, are reported separately from ordinary income. These payments are deductible by the partnership but taxable to the recipient as self-employment income. If a partner contributed property instead of cash, the tax basis of that property affects their share of income and deductions. Partnerships must track each partner’s capital account, reflecting contributions, withdrawals, and earnings. The IRS now requires capital accounts to be reported using the tax basis method for consistency in gain and loss calculations.

Schedule K-1 Distribution

After completing Form 1065, the partnership must generate a Schedule K-1 for each partner, detailing their share of income, deductions, credits, and other tax items. Partners use this document to report earnings on their individual tax returns. Allocations follow the partnership agreement; if no specific provisions exist, the IRS defaults to pro-rata allocations based on capital interest.

Beyond ordinary business income, Schedule K-1 reports separately stated items that require direct handling on a partner’s tax return. Capital gains, Section 179 expense deductions, and tax-exempt interest must be individually accounted for. Long-term capital gains are taxed at preferential rates of 0%, 15%, or 20%, depending on the partner’s taxable income, whereas ordinary business income is subject to graduated rates up to 37% and potentially self-employment taxes.

If a partner’s distributions exceed their adjusted basis, the excess is treated as a capital gain under Internal Revenue Code Section 731. Properly tracking basis is essential, as it determines the ability to deduct losses and the tax treatment of withdrawals.

Submission Steps

Once Form 1065 and all Schedules K-1 are completed, the final step is submitting the return to the IRS. Partnerships can file electronically or by mail, though e-filing is required for those with more than 100 partners. The deadline is March 15 for calendar-year partnerships, with an automatic six-month extension available by filing Form 7004. Fiscal-year partnerships must file by the 15th day of the third month after the tax year ends.

Partnerships operating in multiple states may need to submit state tax returns. Some states impose franchise taxes or require additional filings, such as California’s Form 565 or New York’s IT-204. If foreign partners are involved, Form 8805 may be required to report withholding on effectively connected income. Ensuring all required forms are submitted on time helps avoid penalties and ensures compliance.