What the Form Is For

Form 1065 is an information return that partnerships file with the IRS to report their annual financial activities. Think of it as a report card for your partnership—it shows income, expenses, gains, losses, deductions, and credits from the partnership's operations during the tax year.

Here's the crucial point: partnerships themselves don't pay federal income tax. Instead, the partnership "passes through" profits and losses to individual partners, who then report these amounts on their personal tax returns. Form 1065 serves as the official record of what each partner receives.

The form applies to various business structures, including traditional partnerships, limited partnerships (LPs), limited liability partnerships (LLPs), and multi-member limited liability companies (LLCs) classified as partnerships. If you and others are running a business together—contributing money, property, labor, or skills, and sharing profits and losses—you likely need to file Form 1065.

Along with Form 1065, partnerships must prepare Schedule K-1 for each partner. This schedule breaks down each partner's individual share of the partnership's income, deductions, and credits. Partners use their Schedule K-1 to complete their personal tax returns (typically Form 1040).

When You’d Use It (Including Late and Amended Filing)

Regular Filing Deadline

For partnerships operating on a calendar year (January 1–December 31, 2012), Form 1065 must be filed by April 15, 2013—the 15th day of the fourth month after the tax year ends. Fiscal-year partnerships follow the same rule based on their year-end date.

Extension Options

Can't meet the deadline? File Form 7004 by the original due date to request an automatic 5-month extension. This moves your filing deadline to September 15 for calendar-year partnerships. Note that this extends your time to file, not your time to pay any taxes owed by partners.

If your partnership maintains records and books outside the United States and Puerto Rico, you automatically get a 2-month extension (to the 15th day of the sixth month) without filing Form 7004. If you need even more time beyond that, you can still file Form 7004 for an additional 3-month extension.

Late Filing

Missing the deadline triggers penalties. The IRS charges $195 per partner, per month (or partial month), up to 12 months maximum. For a three-partner firm filing six months late, that's $3,510 in penalties ($195 × 3 partners × 6 months). The penalty applies unless you can demonstrate "reasonable cause" for the delay.

Amended Returns

Discovered an error after filing? You have options.
If filing electronically, complete a new Form 1065, check box G(5) to indicate it's an amended return, attach a detailed explanation of changes, and file amended Schedule K-1s for affected partners (marking them as "Amended K-1").
For paper filing or if your partnership is subject to consolidated audit procedures, use Form 1065X (Amended Return or Administrative Adjustment Request).

Key Rules for 2012

Who Must File

Every domestic partnership that receives income or incurs expenses qualifying for deductions or credits must file Form 1065. Even partnerships with minimal activity need to file if they had any financial transactions.
Exception: Partnerships that neither received income nor incurred any deductible expenses or creditable activities.

Multi-Member LLCs

A domestic LLC with at least two members is automatically treated as a partnership for tax purposes (unless it files Form 8832 to elect corporate treatment). These LLCs must file Form 1065.

Husband-Wife Exception

If spouses jointly own an unincorporated business, both materially participate, and they file a joint tax return, they can elect to be treated as a "qualified joint venture" instead of a partnership. This lets them avoid Form 1065 and report income directly on Schedule C of their joint Form 1040.

Schedule K-1 Requirements

Partnerships must provide Schedule K-1 to each partner by the same deadline as the partnership return (including extensions).
Failing to furnish K-1s on time or including incorrect information carries a penalty of $100 per K-1 (max $1.5 million per year). Intentional disregard increases the penalty to $250 per K-1 with no cap.

Foreign Partnerships

Foreign partnerships with U.S.-source income or income effectively connected with U.S. business activities must generally file Form 1065. Exceptions apply if:

• No U.S. partners,
• No effectively connected income,
• Limited U.S. source income below $20,000, and
• Proper withholding completed.

Electronic Filing

In 2012, partnerships with more than 100 partners were required to file electronically. Smaller partnerships could e-file voluntarily.

New for 2012

• Added question: number of partners that are foreign governments under section 892.
• Schedule K-1 added item I2 to indicate whether the partner is a retirement plan (IRA/SEP/Keogh).

Step-by-Step: How to Complete Form 1065 (High Level)

Step 1: Basic Information

Fill out the partnership's name, address, EIN, and business activity code. Indicate the tax year and check applicable boxes (initial return, final return, name/address change, or amended return).

Step 2: Income Section

Report all income sources—gross receipts/sales, cost of goods sold, gross profit, interest, dividends, royalties, and other income—to calculate gross income.

Step 3: Deductions

List deductions: salaries, guaranteed payments, rent, taxes, interest, depreciation, and other ordinary business expenses. Total to determine ordinary business income (or loss).

Step 4: Schedule B – Other Information

Answer yes/no questions about structure, accounting methods, ownership changes, foreign transactions, etc. This identifies compliance issues.

Step 5: Schedule K – Distributive Share Items

Report total income, deductions, credits, and separately stated items (rental income, guaranteed payments, section 179, charitable contributions, etc.) that partners need for their returns.

Step 6: Schedules L, M-1, and M-2

Complete:

• L: Balance sheet
• M-1: Book-to-tax reconciliation
• M-2: Partners’ capital accounts
  These give the IRS a complete financial picture.

Step 7: Schedule K-1

Prepare one for each partner showing their share of all items from Schedule K, based on the partnership agreement or profit/loss ratios.

Step 8: Signature and Assembly

A general partner or member-manager must sign under penalty of perjury. Assemble schedules, attach statements, and file by the deadline.

Common Mistakes and How to Avoid Them

Mistake #1: Missing or Incorrect Schedule K-1s

Forgetting or misreporting K-1s triggers $100 penalties per form.
Fix: Maintain a year-end checklist, verify partner details, and confirm all shares total correctly.

Mistake #2: Incomplete Returns

Leaving blanks or writing “See attached” often leads to processing issues.
Fix: Fill every applicable field, enter “N/A” or “0” instead of leaving blanks.

Mistake #3: Filing Without a Signature

Unsigned returns are invalid.
Fix: Create a review process ensuring the general partner signs before filing.

Mistake #4: Mismatched Numbers

Inconsistent figures across schedules raise red flags.
Fix: Use software or manual reconciliation to cross-check.

Mistake #5: Wrong Tax Year

Incorrect year selection leads to confusion or penalties.
Fix: Follow required tax year rules—majority partners’ year, principal partners’ year, or least-aggregate-deferral year.

Mistake #6: Ignoring Guaranteed Payments

Guaranteed payments must appear on Schedule K and each K-1.
Fix: Track and report them correctly on line 4 and line 10 of Schedule K.

Mistake #7: Late K-1 Distribution

Delays frustrate partners and risk penalties.
Fix: Distribute K-1s at least two weeks before the partnership return due date.

What Happens After You File

IRS Processing

The IRS checks for accuracy and completeness. Missing info or errors may trigger a notice for clarification.

State Filing

Most states require separate partnership filings. Federal filing doesn’t satisfy state requirements.

Partner Responsibilities

Each partner reports their share of partnership items on their individual returns (Form 1040 + Schedule E). Late K-1s may require extensions.

Recordkeeping

Keep all records, Form 1065, schedules, and supporting docs for at least three years (longer for basis records or audit situations).

Audits and Inquiries

Some returns face audits or IRS inquiries. The tax matters partner (TMP) represents the partnership in these cases.

Potential Changes

IRS adjustments during audit flow through to partners, who may need to amend their returns.

FAQs (Frequently Asked Questions)

Q1: Does my partnership owe tax when we file Form 1065?

No. Form 1065 is informational only. Partners pay tax individually on their share of income.

Q2: What if our partnership had no activity in 2012—do we still need to file?

Generally no, unless the partnership had any income or deductible expenses. Filing a zero return can still be wise for documentation.

Q3: Can I file Form 1065 electronically for 2012?

Yes. Required for partnerships with 100+ partners; optional for others. Check with your software provider for eligibility.

Q4: What’s the difference between guaranteed payments and distributive shares?

Guaranteed payments are fixed payments for services or capital use, deductible by the partnership. Distributive shares are profit/loss allocations per the partnership agreement.

Q5: We have a new partner who joined mid-year. How do we handle their Schedule K-1?

Prepare a K-1 for their portion of the year based on your agreement—either prorated or interim book closing.

Q6: What happens if a partner’s address changes after we file Schedule K-1?

You don’t need an amended return for an address change, but provide a corrected K-1 and update records for next year.

Q7: Can individual partners deduct partnership losses on their personal returns?

Yes, but subject to basis, at-risk, and passive activity loss limitations. Suspended losses carry forward until allowed.

For More Information:
Visit IRS.gov/Form1065 or review the complete 2012 Instructions for Form 1065 at IRS.gov/pub/irs-prior/i1065--2012.pdf.

Note: This summary is for educational purposes only and does not constitute tax advice. Consult a qualified tax professional for personalized guidance.