Who Needs to File Form 561 for Pass-Through Entities?
Understand who must file Form 561 for pass-through entities, how income and deductions are reported, key deadlines, and how to handle corrections or penalties.
Form 561 is a tax document used by pass-through entities to report income, deductions, and other financial details to tax authorities. These entities don’t pay taxes at the business level; instead, their earnings flow through to individual owners or partners, who report the income on their personal tax returns. Filing requirements depend on entity type, income levels, and state regulations.
Entities That Must File
Pass-through entities required to file Form 561 include partnerships, S corporations, and certain limited liability companies (LLCs) electing partnership tax treatment. Filing is necessary if they meet specific income thresholds or financial activity requirements.
Partnerships must file if gross receipts exceed $250,000 or total assets surpass $1 million at year-end. S corporations must file if they have shareholders receiving income distributions, regardless of revenue.
State regulations vary. California requires LLCs classified as partnerships to file if total income, including gross receipts and investment earnings, exceeds $250,000. New York mandates filing for partnerships with New York-source income, even if based elsewhere. Businesses operating in multiple states must comply with both federal and state laws.
Income Reporting
Pass-through entities must categorize revenue streams such as business income, rental earnings, interest, dividends, and capital gains, as tax treatment varies. Ordinary business income is taxed at the owner’s individual rate, while qualified dividends may be subject to lower rates.
Profits and losses are allocated based on ownership percentages or agreements in the entity’s operating documents. Partnerships report each partner’s share on a Schedule K-1, which is used for individual tax returns. S corporations follow a similar process for shareholders.
State tax laws complicate income reporting, especially for businesses operating in multiple jurisdictions. Some states require income apportionment based on sales, payroll, and property within their borders. A partnership with operations in Texas and Illinois may need to divide its income between the two states using an apportionment formula, affecting partners’ tax liabilities depending on residency.
Deductions and Adjustments
Pass-through entities can reduce taxable income by deducting business expenses that meet IRS guidelines, including rent, utilities, employee wages, and professional fees. Depreciation allows businesses to deduct the cost of tangible assets over time, with Section 179 permitting immediate write-offs for qualifying purchases up to $1.22 million in 2024.
Certain deductions have limitations. Meals are generally 50% deductible, while entertainment expenses are no longer deductible under the Tax Cuts and Jobs Act. Interest expense deductions are capped at 30% of adjusted taxable income for entities with gross receipts exceeding $27 million under IRC Section 163(j).
Adjustments may be necessary when reconciling book income to tax income. Federal income taxes, fines, and penalties are not deductible. Some states require addbacks for deductions allowed at the federal level, such as bonus depreciation.
Filing Deadlines and Extensions
Pass-through entities must file by March 15 for calendar-year partnerships and S corporations. Fiscal-year entities must file by the 15th day of the third month following the end of their tax year. A business with a June 30 year-end, for example, must file by September 15. These deadlines apply even if the entity has no taxable income.
An automatic six-month extension is available by filing Form 7004 before the original deadline, moving the due date to September 15 for calendar-year entities. However, extensions do not delay required tax payments. Some states require separate extension requests and estimated tax payments. New York, for example, requires an estimated tax payment for S corporations seeking an extension, while Texas mandates a minimum franchise tax payment.
Handling Corrections
Errors in Form 561 filings must be corrected promptly. To amend a previously filed form, entities must submit an updated version marked as an “Amended Return.” Changes to income, deductions, or partner distributions require corresponding updates to Schedule K-1s, which must be reissued to affected owners.
If an error results in underpaid state taxes, interest and penalties may apply. Some states, such as California, require a separate amendment form, while others allow corrections through an updated filing. Entities should determine whether the error affects prior-year filings, as adjustments may be necessary for misreported depreciation or carryforward deductions.
Potential Penalties
Failing to file Form 561 on time or submitting inaccurate information can result in financial penalties. The IRS imposes a penalty of $220 per month, per partner or shareholder, for late filings, up to 12 months. A partnership with five partners that files three months late could owe $3,300 in penalties.
Failure to issue Schedule K-1s on time results in separate penalties of $310 per recipient if corrected within 30 days, increasing to $630 if delayed beyond August 1. In cases of intentional disregard, penalties can exceed $1,260 per form.
State penalties may add to the cost. Some states impose late filing fees, while others assess penalties based on unpaid tax liabilities. Repeated noncompliance can lead to audits or, in extreme cases, business license revocation. Businesses should implement internal controls such as automated filing reminders and professional tax reviews to ensure compliance.