Form 1065 for Tax Year 2014: IRS-Accurate Compliance Checklist and Instructions
Overview of Form 1065 for Tax Year 2014
Form 1065, U.S. Return of Partnership Income, is an information return used to report the income, gains, losses, deductions, and credits from the operation of a partnership. The partnership itself does not pay income tax. Instead, it passes through profits or losses to its partners, who must report their share on their individual or business tax returns.
For tax year 2014, partnerships are required to comply with specific filing requirements, deadlines, and reporting obligations. This checklist provides step-by-step guidance to ensure accurate and timely filing while incorporating important updates for the 2014 tax year.
Key Updates and Special Provisions for 2014
Schedule K-1 Code Y for Net Investment Income Tax
For 2014, the IRS continues to use code Y in box 20 of Schedule K-1 to report information related to the net investment income tax under section 1411. This code, introduced in 2013, provides partners with the necessary information to compute their net investment income tax liability. Former code Y, previously used for other purposes, has been renumbered to code Z.
Schedule M-3 Filing Relief for Mid-Size Partnerships
For tax years ending December 31, 2014, and later, partnerships that are required to file Schedule M-3 and have less than $50 million in total assets at the end of the tax year may choose to file only Part I of Schedule M-3 along with Schedule M-1 instead of completing all parts of Schedule M-3. Alternatively, these partnerships may complete the entire Schedule M-3.
Partnerships not required to file Schedule M-3 may voluntarily file it instead of Schedule M-1.
If a partnership chooses to file Schedule M-1 instead of completing Parts II and III of Schedule M-3, it is not required to file Schedule C or Form 8916-A. This relief reduces the compliance burden for partnerships with assets between $10 million and $50 million in value.
Affordable Care Act Information Reporting Requirements
Under the Affordable Care Act, employers that offer health insurance coverage and entities that provide minimum essential coverage are required under sections 6055 and 6056 to provide certain information to the IRS and to individuals. This information is reported on Forms 1094-B and 1095-B for section 6055 compliance and Forms 1094-C and 1095-C for section 6056 compliance. These are separate information returns filed independently from Form 1065.
Information reporting is required for calendar years beginning after December 31, 2014, but may be voluntarily filed with the IRS and provided to individuals for calendar year 2014. Partnerships that are applicable to large employers or that provide self-insured coverage must comply with these separate reporting requirements using the designated ACA forms.
Activity-Based Reporting Clarifications
The 2014 instructions provide clarified guidance for activity-based reporting. Partnerships with multiple activities must provide detailed information to partners about each separate activity to enable proper passive activity loss limitation calculations on partner returns.
Step-by-Step Compliance Checklist
Step 1: Confirm Tax Year and Entity Status
Enter calendar year 2014 or the fiscal year beginning in 2014 on the cover page of Form 1065. Verify the partnership’s entity classification and employer identification number.
If applicable, determine whether the qualified joint venture election is available. Married couples who jointly own and operate a business, both materially participate in the trade or business, file a joint return, and elect not to be treated as a partnership may avoid filing Form 1065 entirely. Instead, each spouse files a separate Schedule C or Schedule F and reports their respective share of income, deductions, and credits.
Step 2: Determine Schedule L, M-1, and M-2 Exemption Status
Partnerships are not required to complete Schedules L, M-1, and M-2 if all four of the following requirements are met:
- The partnership’s total receipts for the tax year were less than $250,000. Total receipts include gross receipts or sales, all other income from Form 1065 page 1, income reported on Schedule K, and income or net gain reported on Form 8825.
- The partnership’s total assets at the end of the tax year were less than $1 million. Total assets are defined as the amount that would be reported in item F on page 1 of Form 1065.
- Schedules K-1 are filed with the return and furnished to the partners on or before the due date, including extensions, for the partnership return.
- The partnership is not required to file Schedule M-3.
If all four conditions are met, answer “Yes” to question 6 of Schedule B, and Schedules L, M-1, and M-2 are not required. If any condition is not met, complete all required schedules.
Step 3: Calculate Income
Report gross receipts or sales on line 1a and subtract returns and allowances on line 1b to determine net receipts. Complete and attach Form 1125-A, Cost of Goods Sold, if the partnership has inventory, and enter the result on line 2. Calculate gross profit by subtracting the cost of goods sold from gross receipts.
Add ordinary income from other sources, including farm income from Schedule F, net gain or loss from Form 4797 Part II, and other income items. Sum all income amounts to determine total income on line 8.
Step 4: Complete Deductions
Enter salaries and wages paid to employees, guaranteed payments to partners, repairs and maintenance, bad debts, rent paid on business property, taxes and licenses, and interest paid on business debt. Complete and attach Form 4562, Depreciation and Amortization, if required, and enter depreciation on line 16a. Subtract depreciation already reported on Form 1125-A and enter the result on line 16b.
Enter depletion on line 17, excluding oil and gas depletion, which each partner calculates separately on their individual returns. Report contributions to retirement plans, employee benefit programs, and other deductions. Sum all deductions on line 21.
Step 5: Complete Schedule K for Partners’ Distributive Share Items
Enter all income items, including ordinary business income from page 1 line 22, rental real estate income, other rental income, interest income, dividends, royalties, net short-term capital gain or loss, net long-term capital gain or loss, net section 1231 gain or loss, and other income items.
Report all deduction items, including charitable contributions, the section 179 expense deduction from Form 4562, investment interest expense, section 59 expenditures, other deductions, and the low-income housing credit. Include credits for other rental real estate activities, other rental activities, and other credits.
Use code Y in box 20 of Schedule K-1 to report information related to the net investment income tax under section 1411. Provide sufficient detail for partners to determine which items of partnership income, gain, loss, and deduction are included in net investment income.
Step 6: Prepare and Distribute Schedule K-1 to Each Partner
Complete a Schedule K-1 for each person who was a partner at any time during the tax year 2014. Furnish Schedule K-1 to each partner on or before the due date, including extensions, for the partnership return.
Report each partner’s distributive share of income, deductions, credits, and other items. Include information about beginning and ending ownership percentages, share of partnership liabilities, capital account information, and any special allocations or basis adjustments.
Partners use Schedule K-1 to report their share of partnership items on their individual or business tax returns. The partnership files copies of all Schedules K-1 with Form 1065.
Step 7: Determine Schedule M-3 Filing Requirements
A partnership must file Schedule M-3, Net Income (Loss) Reconciliation for Certain Partnerships, instead of Schedule M-1 if any of the following apply:
- The amount of total assets at the end of the tax year is $10 million or more.
- The amount of adjusted total assets for the tax year is $10 million or more.
- The amount of total receipts for the tax year is $35 million or more.
A reportable entity partner owns, or is deemed to own, directly or indirectly, an interest of 50% or more in the partnership’s capital, profit, or loss on any day during the tax year.
For partnerships required to file Schedule M-3 that have less than $50 million in total assets, the partnership may choose to file Schedule M-1 instead of completing Parts II and III of Schedule M-3. If this election is held, the partnership must complete Part I of Schedule M-3 along with Schedule M-1, and it is not required to file Schedule C or Form 8916-A.
Any partnership required to file Schedule M-3 in its entirety must also complete and file Schedule C, Additional Information for Schedule M-3 Filers. Partnerships that do not have to file Schedule M-3 can choose to file it instead of Schedule M-1.
Step 8: Complete Schedule L if Required
Suppose the partnership does not qualify for the exemption described in Step 2; complete Schedule L, Balance Sheets per Books. Enter beginning and ending balances for all assets, including cash, trade notes, accounts receivable, inventories, buildings, and other depreciable assets, land, and other assets.
Report all liabilities, including accounts payable, mortgages, notes payable, and other current and long-term liabilities. Enter partners’ capital accounts showing beginning balances, capital contributed during the year, net income or loss for the year, withdrawals and distributions, and ending balances.
Total assets on line 14 must equal the sum of total liabilities and partners’ capital on line 22. If differences exist between book and tax reporting, attach an explanation statement.
Step 9: Answer Schedule B Questions Completely
Complete all questions in Schedule B, Other Information. Identify the type of partnership entity in question 1. Report ownership percentages in questions 3 and 4 for any partner who owned 20% or more or 50% or more of the partnership interest.
Answer question 10 regarding foreign financial accounts. If the partnership had an interest in or signature authority over a financial account in a foreign country with an aggregate value exceeding $10,000 at any time during calendar year 2014, check “Yes” and provide required information, including filing FinCEN Form 114.
Answer question 18 regarding Form 1099 filing requirements. If the partnership made payments of $600 or more in the course of its trade or business during 2014, indicate whether required Forms 1099 were or will be filed.
Step 10: Sign, Attach All Required Schedules, and File
A general partner or LLC member manager must sign and date the return. If a receiver, trustee, or assignee prepares the return on behalf of the partnership, the fiduciary must sign instead. If a paid preparer completed the return, the preparer must sign, enter their preparer tax identification number, and complete the paid preparer section.
Attach all required schedules and forms, including one Schedule K-1 for each partner, Schedule L if required, Schedules M-1 and M-2 if required, Schedule M-3 if required, Schedule C if Schedule M-3 is filed in its entirety, Form 1125-A if cost of goods sold is reported, Form 4562 if depreciation is claimed, Schedule D if capital gains or losses are reported, and Form 4797 if section 1231 gains or losses are reported.
File the complete return by the 15th day of the 4th month following the end of the partnership’s tax year. For calendar year partnerships, the filing deadline is April 15, 2015. If additional time is needed, request an extension by filing Form 7004 by the original due date. Form 7004 provides a five-month extension.
Important Form-Specific Rules and Limitations
Oil and Gas Depletion
Partnerships cannot deduct oil and gas depletion on Form 1065, line 17. Each partner must calculate their share of oil and gas depletion separately on their individual return based on their proportionate share of the partnership’s adjusted basis in the oil and gas property.
Foreign Partnership Filing Exceptions
A foreign partnership with U.S. source income is not required to file Form 1065 if it meets specific exceptions. For foreign partnerships with U.S. partners, a return is required only if the partnership had effectively connected income, had U.S. source income of more than $20,000, 1% or more of any partnership item was allocable to direct U.S. partners, or the partnership is a withholding foreign partnership.
For foreign partnerships with no U.S. partners, no return is required if the partnership had no effectively connected income, had no U.S. partners at any time during the tax year, all required Forms 1042 and 1042-S were filed, and the tax liability of each partner was fully satisfied by withholding. The partnership is not a withholding foreign partnership.
Qualified Joint Venture Election
Married couples who jointly own and operate a business may elect qualified joint venture status to avoid filing Form 1065. Both spouses must materially participate in the trade or business, file a joint return, and elect not to be treated as a partnership. Each spouse reports their share of income and deductions on separate Schedule C or Schedule F forms and files a separate Schedule SE for self-employment tax.
By following this comprehensive checklist, partnerships can ensure compliance with all Form 1065 requirements for tax year 2014, properly report partner distributive shares, and avoid penalties for late or incomplete filing.
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This checklist is for educational purposes only and does not constitute tax or legal advice. Always review official IRS instructions and consult a qualified professional for guidance.
