Form 1065: U.S. Return of Partnership Income (2011) – A Complete Guide

What Form 1065 Is For

Form 1065 is an information return that partnerships file with the IRS to report their financial activities for the year. Think of it as a report card for your partnership's business – but here's the key difference: the partnership itself doesn't pay federal income tax. Instead, it works on a "pass-through" basis, meaning all profits and losses flow through to the individual partners, who then report their share on their personal tax returns.

Who needs to file? Nearly every domestic partnership operating in the United States must file Form 1065, including general partnerships, limited partnerships, and limited liability companies (LLCs) classified as partnerships with at least two members. The only exception is if your partnership had absolutely no income and no expenses that could be claimed as deductions or credits during the year.

Along with Form 1065, the partnership must prepare Schedule K-1 for each partner. This critical document shows each partner's individual share of the partnership's income, deductions, credits, and other tax items. Partners use their Schedule K-1 to complete their personal tax returns (typically Form 1040), reporting their portion of partnership profits or losses. The partnership files copies of all K-1s with the IRS, while each partner keeps their copy for their records.

When You’d Use Form 1065

Regular Filing Deadline

For calendar year 2011, partnerships must file Form 1065 by April 15, 2012 (the 15th day of the 4th month after the tax year ends). If your partnership uses a fiscal year, the deadline is the 15th day of the 4th month after your fiscal year closes.

Extensions

If you need more time, you can request a 5-month extension by filing Form 7004 by the original due date. This pushes your deadline to September 15, 2012, for calendar-year partnerships. Note that partnerships keeping records outside the U.S. and Puerto Rico automatically get a 2-month extension without filing Form 7004.

Late Returns

If you miss the deadline, file as soon as possible. The IRS assesses penalties for late filing (see penalties section below), but the longer you wait, the more you'll owe. Life happens – businesses face challenges, records get lost, or you might simply have missed the deadline. Don't let fear of penalties prevent you from filing; reasonable cause can sometimes result in penalty relief.

Amended Returns

Made an error on your original return? For 2011, you'll need to use Form 1065X (Amended Return or Administrative Adjustment Request) if filing on paper. If filing electronically, complete a new Form 1065 and check box G(5) to indicate it's an amended return. When you amend the partnership return, you must also prepare amended Schedule K-1s for any partners whose information changed, checking the "Amended K-1" box at the top. Give each affected partner their corrected K-1 and file copies with the IRS.

Key Rules or Details for 2011

The 2011 tax year included several important updates and provisions:

Cost of Goods Sold Change

For 2011, the IRS moved the Cost of Goods Sold calculation from Schedule A on Form 1065 to a separate Form 1125-A. If your partnership sells products or maintains inventory, you'll complete this separate form.

Merchant Card Payment Reporting Deferred

The IRS postponed the requirement to separately report merchant card and third-party network payments from Form 1099-K. Simply report your gross receipts from all sources on lines 1a through 1d as you normally would.

Balance Sheet Updates

The 2011 form added new lines to Schedule L (Balance Sheets) to track loans between the partnership and partners. Line 7a captures loans to partners or persons related to partners, while line 19a shows loans from partners.

Enhanced Disclosure Requirements

Schedule B added questions about foreign government partners (line 3a), Form 1099 filing compliance (lines 18a and 18b), and Form 5471 filings for foreign corporation interests (line 19).

Expiring Provisions

Several tax benefits were set to expire after December 31, 2011, including enhanced deductions for film and television production expenses, increased charitable contribution deductions for food inventory, and special rules for conservation contributions of agricultural property. Plan ahead if your partnership benefits from these provisions.

Section 179 Limits

For 2011, partnerships could elect to expense up to $500,000 of qualifying property, with the deduction beginning to phase out when total purchases exceeded $2 million. These amounts changed in subsequent years.

Step-by-Step (High Level)

Step 1: Gather Your Records

Collect all financial statements, bank records, receipts, and documentation of income and expenses for the entire tax year. You'll need profit and loss statements, balance sheets, and records of each partner's capital account activity.

Step 2: Determine Your Accounting Method

Most partnerships use either the cash method (income recorded when received, expenses when paid) or accrual method (income recorded when earned, expenses when incurred). The method must be consistent and clearly reflect income. Partnerships with corporate partners and average annual gross receipts over $5 million generally cannot use the cash method.

Step 3: Complete the Main Form 1065

Fill in identifying information at the top, then report income on page 1, lines 1-8. Deductions go on lines 9-22. The result is ordinary business income (or loss), which flows to Schedule K.

Step 4: Fill Out Schedule K

This schedule breaks down all partnership items into categories that partners need for their individual returns: ordinary income, rental income, guaranteed payments, interest, dividends, capital gains, charitable contributions, and various deductions and credits.

Step 5: Prepare Schedule K-1 for Each Partner

Create an individual Schedule K-1 for every partner, showing their percentage ownership and their specific share of each item from Schedule K. Each partner's K-1 must match their portion of partnership activities.

Step 6: Complete Supporting Schedules

Fill out Schedule B (Other Information questionnaire), Schedule L (Balance Sheets), Schedule M-1 (Reconciliation of Income), and Schedule M-2 (Analysis of Partners' Capital Accounts). If you have cost of goods sold, complete Form 1125-A.

Step 7: Sign and File

A general partner or LLC member manager must sign the return. Assemble the return in order: Form 1065, Schedule K, supporting schedules, then all Schedules K-1. File with the appropriate IRS Service Center (Ogden, UT or Cincinnati, OH, depending on your location and asset size).

Step 8: Distribute K-1s to Partners

Give each partner their Schedule K-1 by the return due date (including extensions). Partners need these forms to complete their personal tax returns.

Common Mistakes and How to Avoid Them

Mistake #1: Missing or Incorrect Partner Information

Errors in partner names, Social Security numbers, or addresses cause processing delays. Double-check every partner's information against official documents before filing.

Mistake #2: Schedule K and K-1 Mismatches

The sum of all individual K-1s must equal the totals on Schedule K. Many preparers make mathematical errors or forget to account for all partners. Create a reconciliation worksheet to verify totals match.

Mistake #3: Ignoring Basis Tracking

Partners must track their "basis" (investment) in the partnership to determine how much loss they can deduct. The partnership provides capital account information, but partners are responsible for tracking their tax basis separately. Keep detailed records of contributions, distributions, and allocated income/losses.

Mistake #4: Misclassifying Guaranteed Payments

Payments to partners for services or capital use that are determined without regard to partnership income should be reported as guaranteed payments (line 10 and Schedule K, line 4). Don't confuse these with regular distributions or disguised salary payments.

Mistake #5: Incomplete Schedule B

Every question on Schedule B must be answered. Leaving items blank or writing "N/A" without considering whether the question applies can trigger IRS inquiries or processing delays.

Mistake #6: Balance Sheet Errors

Schedules L, M-1, and M-2 must reconcile. Your ending capital on Schedule M-2 should match the total capital shown on Schedule L. Beginning balances for the current year must match ending balances from the prior year.

Mistake #7: Forgetting to File Forms 1099

Partnerships must issue Forms 1099 to vendors and service providers paid $600 or more during the year. Failure to file these forms can result in substantial penalties separate from Form 1065 penalties.

Mistake #8: Late K-1 Distribution

Partners need their K-1s to file their personal returns. Failing to provide K-1s on time creates problems for your partners and may damage business relationships. Set internal deadlines to ensure timely distribution.

What Happens After You File

IRS Processing (60-90 Days)

The IRS receives and processes your return. For 2011 paper returns, processing typically took 8-12 weeks. E-filed returns process faster, usually within 3-4 weeks.

Partner Tax Returns

Each partner reports their K-1 information on their individual tax return (Form 1040, Form 1041 for trusts, or Form 1120 for corporate partners). Partners must generally report items consistently with how the partnership reported them unless filing Form 8082 to notify the IRS of inconsistent treatment.

Audit Considerations

While most returns aren't audited, partnerships face unified audit procedures under the TEFRA rules (Tax Equity and Fiscal Responsibility Act). In a partnership audit, adjustments are determined at the partnership level, and the Tax Matters Partner represents the partnership. Individual partners may have limited ability to separately contest adjustments.

Penalties if Late

The IRS assesses $195 per month (or partial month) per partner for up to 12 months for late filing. For a partnership with 5 partners filing 3 months late, the penalty would be $2,925 ($195 × 3 months × 5 partners). Request penalty abatement in writing if you have reasonable cause for late filing.

K-1 Distribution Penalties

Failing to furnish K-1s to partners or providing incorrect information results in $100 penalties per K-1, capped at $1.5 million annually. If the IRS determines the failures were intentional, penalties increase to $250 per K-1 (or 10% of the aggregate items to be reported if greater) with no maximum cap.

Record Retention

Keep all partnership records for at least 3 years from the date the return is due or filed, whichever is later. Records supporting property basis should be kept for as long as needed to determine basis of original or replacement property.

FAQs

Q1: Does the partnership pay taxes on its income?

No. Partnerships are "pass-through" entities. The partnership itself doesn't pay federal income tax. Instead, all income, deductions, and credits pass through to the partners, who report their share on their individual tax returns and pay tax at their personal rates.

Q2: What if our partnership had no activity during 2011?

If your partnership received no income and had no deductible expenses or credits, you're not required to file Form 1065. However, many partnerships file anyway to maintain their active status with the IRS and provide documentation to partners. If you had even minimal activity (like bank interest), you must file.

Q3: Can a husband and wife avoid filing Form 1065?

Yes, if certain conditions are met. A qualified joint venture between spouses allows them to report income and expenses directly on their individual Schedule C returns instead of filing Form 1065. Both spouses must materially participate in the business, file a joint tax return, and the business must be co-owned without being held in a formal entity like an LLC. Once made, this election cannot be easily revoked.

Q4: What's the difference between guaranteed payments and distributions?

Guaranteed payments are compensation for services or capital use, determined without regard to partnership income (like a partner's salary). They're deductible by the partnership and reported as ordinary income by the partner. Distributions are returns of capital or profit shares, not deductible by the partnership, and generally not taxable to partners unless exceeding their basis.

Q5: Do I need to file electronically?

For 2011, partnerships with more than 100 partners were required to file electronically. Smaller partnerships had the option but weren't required to e-file. Electronic filing offers faster processing, immediate confirmation of receipt, and fewer errors. You can request a waiver of e-filing requirements by submitting a written hardship request to the Ogden Submission Processing Center.

Q6: What if I discover an error after filing?

File an amended return using Form 1065X as soon as you discover the error. You must also provide amended K-1s to any partners whose information changed. Don't ignore errors hoping they'll go unnoticed – the IRS may assess additional penalties for substantial understatement of income. If the error is in the partners' favor (you overstated their income), they'll appreciate the correction.

Q7: Can I get help if I'm overwhelmed?

Absolutely. The IRS Taxpayer Advocate Service (1-877-777-4778) provides free assistance to partnerships experiencing economic hardship or unresolved tax problems. You can also consult a CPA or enrolled agent specializing in partnership taxation.

Additional Resources

IRS Partner's Instructions for Schedule K-1 (Form 1065) 2011
IRS Form 1065 Information Page

Frequently Asked Questions

Form 1065: U.S. Return of Partnership Income (2011) – A Complete Guide

What Form 1065 Is For

Form 1065 is an information return that partnerships file with the IRS to report their financial activities for the year. Think of it as a report card for your partnership's business – but here's the key difference: the partnership itself doesn't pay federal income tax. Instead, it works on a "pass-through" basis, meaning all profits and losses flow through to the individual partners, who then report their share on their personal tax returns.

Who needs to file? Nearly every domestic partnership operating in the United States must file Form 1065, including general partnerships, limited partnerships, and limited liability companies (LLCs) classified as partnerships with at least two members. The only exception is if your partnership had absolutely no income and no expenses that could be claimed as deductions or credits during the year.

Along with Form 1065, the partnership must prepare Schedule K-1 for each partner. This critical document shows each partner's individual share of the partnership's income, deductions, credits, and other tax items. Partners use their Schedule K-1 to complete their personal tax returns (typically Form 1040), reporting their portion of partnership profits or losses. The partnership files copies of all K-1s with the IRS, while each partner keeps their copy for their records.

When You’d Use Form 1065

Regular Filing Deadline

For calendar year 2011, partnerships must file Form 1065 by April 15, 2012 (the 15th day of the 4th month after the tax year ends). If your partnership uses a fiscal year, the deadline is the 15th day of the 4th month after your fiscal year closes.

Extensions

If you need more time, you can request a 5-month extension by filing Form 7004 by the original due date. This pushes your deadline to September 15, 2012, for calendar-year partnerships. Note that partnerships keeping records outside the U.S. and Puerto Rico automatically get a 2-month extension without filing Form 7004.

Late Returns

If you miss the deadline, file as soon as possible. The IRS assesses penalties for late filing (see penalties section below), but the longer you wait, the more you'll owe. Life happens – businesses face challenges, records get lost, or you might simply have missed the deadline. Don't let fear of penalties prevent you from filing; reasonable cause can sometimes result in penalty relief.

Amended Returns

Made an error on your original return? For 2011, you'll need to use Form 1065X (Amended Return or Administrative Adjustment Request) if filing on paper. If filing electronically, complete a new Form 1065 and check box G(5) to indicate it's an amended return. When you amend the partnership return, you must also prepare amended Schedule K-1s for any partners whose information changed, checking the "Amended K-1" box at the top. Give each affected partner their corrected K-1 and file copies with the IRS.

Key Rules or Details for 2011

The 2011 tax year included several important updates and provisions:

Cost of Goods Sold Change

For 2011, the IRS moved the Cost of Goods Sold calculation from Schedule A on Form 1065 to a separate Form 1125-A. If your partnership sells products or maintains inventory, you'll complete this separate form.

Merchant Card Payment Reporting Deferred

The IRS postponed the requirement to separately report merchant card and third-party network payments from Form 1099-K. Simply report your gross receipts from all sources on lines 1a through 1d as you normally would.

Balance Sheet Updates

The 2011 form added new lines to Schedule L (Balance Sheets) to track loans between the partnership and partners. Line 7a captures loans to partners or persons related to partners, while line 19a shows loans from partners.

Enhanced Disclosure Requirements

Schedule B added questions about foreign government partners (line 3a), Form 1099 filing compliance (lines 18a and 18b), and Form 5471 filings for foreign corporation interests (line 19).

Expiring Provisions

Several tax benefits were set to expire after December 31, 2011, including enhanced deductions for film and television production expenses, increased charitable contribution deductions for food inventory, and special rules for conservation contributions of agricultural property. Plan ahead if your partnership benefits from these provisions.

Section 179 Limits

For 2011, partnerships could elect to expense up to $500,000 of qualifying property, with the deduction beginning to phase out when total purchases exceeded $2 million. These amounts changed in subsequent years.

Step-by-Step (High Level)

Step 1: Gather Your Records

Collect all financial statements, bank records, receipts, and documentation of income and expenses for the entire tax year. You'll need profit and loss statements, balance sheets, and records of each partner's capital account activity.

Step 2: Determine Your Accounting Method

Most partnerships use either the cash method (income recorded when received, expenses when paid) or accrual method (income recorded when earned, expenses when incurred). The method must be consistent and clearly reflect income. Partnerships with corporate partners and average annual gross receipts over $5 million generally cannot use the cash method.

Step 3: Complete the Main Form 1065

Fill in identifying information at the top, then report income on page 1, lines 1-8. Deductions go on lines 9-22. The result is ordinary business income (or loss), which flows to Schedule K.

Step 4: Fill Out Schedule K

This schedule breaks down all partnership items into categories that partners need for their individual returns: ordinary income, rental income, guaranteed payments, interest, dividends, capital gains, charitable contributions, and various deductions and credits.

Step 5: Prepare Schedule K-1 for Each Partner

Create an individual Schedule K-1 for every partner, showing their percentage ownership and their specific share of each item from Schedule K. Each partner's K-1 must match their portion of partnership activities.

Step 6: Complete Supporting Schedules

Fill out Schedule B (Other Information questionnaire), Schedule L (Balance Sheets), Schedule M-1 (Reconciliation of Income), and Schedule M-2 (Analysis of Partners' Capital Accounts). If you have cost of goods sold, complete Form 1125-A.

Step 7: Sign and File

A general partner or LLC member manager must sign the return. Assemble the return in order: Form 1065, Schedule K, supporting schedules, then all Schedules K-1. File with the appropriate IRS Service Center (Ogden, UT or Cincinnati, OH, depending on your location and asset size).

Step 8: Distribute K-1s to Partners

Give each partner their Schedule K-1 by the return due date (including extensions). Partners need these forms to complete their personal tax returns.

Common Mistakes and How to Avoid Them

Mistake #1: Missing or Incorrect Partner Information

Errors in partner names, Social Security numbers, or addresses cause processing delays. Double-check every partner's information against official documents before filing.

Mistake #2: Schedule K and K-1 Mismatches

The sum of all individual K-1s must equal the totals on Schedule K. Many preparers make mathematical errors or forget to account for all partners. Create a reconciliation worksheet to verify totals match.

Mistake #3: Ignoring Basis Tracking

Partners must track their "basis" (investment) in the partnership to determine how much loss they can deduct. The partnership provides capital account information, but partners are responsible for tracking their tax basis separately. Keep detailed records of contributions, distributions, and allocated income/losses.

Mistake #4: Misclassifying Guaranteed Payments

Payments to partners for services or capital use that are determined without regard to partnership income should be reported as guaranteed payments (line 10 and Schedule K, line 4). Don't confuse these with regular distributions or disguised salary payments.

Mistake #5: Incomplete Schedule B

Every question on Schedule B must be answered. Leaving items blank or writing "N/A" without considering whether the question applies can trigger IRS inquiries or processing delays.

Mistake #6: Balance Sheet Errors

Schedules L, M-1, and M-2 must reconcile. Your ending capital on Schedule M-2 should match the total capital shown on Schedule L. Beginning balances for the current year must match ending balances from the prior year.

Mistake #7: Forgetting to File Forms 1099

Partnerships must issue Forms 1099 to vendors and service providers paid $600 or more during the year. Failure to file these forms can result in substantial penalties separate from Form 1065 penalties.

Mistake #8: Late K-1 Distribution

Partners need their K-1s to file their personal returns. Failing to provide K-1s on time creates problems for your partners and may damage business relationships. Set internal deadlines to ensure timely distribution.

What Happens After You File

IRS Processing (60-90 Days)

The IRS receives and processes your return. For 2011 paper returns, processing typically took 8-12 weeks. E-filed returns process faster, usually within 3-4 weeks.

Partner Tax Returns

Each partner reports their K-1 information on their individual tax return (Form 1040, Form 1041 for trusts, or Form 1120 for corporate partners). Partners must generally report items consistently with how the partnership reported them unless filing Form 8082 to notify the IRS of inconsistent treatment.

Audit Considerations

While most returns aren't audited, partnerships face unified audit procedures under the TEFRA rules (Tax Equity and Fiscal Responsibility Act). In a partnership audit, adjustments are determined at the partnership level, and the Tax Matters Partner represents the partnership. Individual partners may have limited ability to separately contest adjustments.

Penalties if Late

The IRS assesses $195 per month (or partial month) per partner for up to 12 months for late filing. For a partnership with 5 partners filing 3 months late, the penalty would be $2,925 ($195 × 3 months × 5 partners). Request penalty abatement in writing if you have reasonable cause for late filing.

K-1 Distribution Penalties

Failing to furnish K-1s to partners or providing incorrect information results in $100 penalties per K-1, capped at $1.5 million annually. If the IRS determines the failures were intentional, penalties increase to $250 per K-1 (or 10% of the aggregate items to be reported if greater) with no maximum cap.

Record Retention

Keep all partnership records for at least 3 years from the date the return is due or filed, whichever is later. Records supporting property basis should be kept for as long as needed to determine basis of original or replacement property.

FAQs

Q1: Does the partnership pay taxes on its income?

No. Partnerships are "pass-through" entities. The partnership itself doesn't pay federal income tax. Instead, all income, deductions, and credits pass through to the partners, who report their share on their individual tax returns and pay tax at their personal rates.

Q2: What if our partnership had no activity during 2011?

If your partnership received no income and had no deductible expenses or credits, you're not required to file Form 1065. However, many partnerships file anyway to maintain their active status with the IRS and provide documentation to partners. If you had even minimal activity (like bank interest), you must file.

Q3: Can a husband and wife avoid filing Form 1065?

Yes, if certain conditions are met. A qualified joint venture between spouses allows them to report income and expenses directly on their individual Schedule C returns instead of filing Form 1065. Both spouses must materially participate in the business, file a joint tax return, and the business must be co-owned without being held in a formal entity like an LLC. Once made, this election cannot be easily revoked.

Q4: What's the difference between guaranteed payments and distributions?

Guaranteed payments are compensation for services or capital use, determined without regard to partnership income (like a partner's salary). They're deductible by the partnership and reported as ordinary income by the partner. Distributions are returns of capital or profit shares, not deductible by the partnership, and generally not taxable to partners unless exceeding their basis.

Q5: Do I need to file electronically?

For 2011, partnerships with more than 100 partners were required to file electronically. Smaller partnerships had the option but weren't required to e-file. Electronic filing offers faster processing, immediate confirmation of receipt, and fewer errors. You can request a waiver of e-filing requirements by submitting a written hardship request to the Ogden Submission Processing Center.

Q6: What if I discover an error after filing?

File an amended return using Form 1065X as soon as you discover the error. You must also provide amended K-1s to any partners whose information changed. Don't ignore errors hoping they'll go unnoticed – the IRS may assess additional penalties for substantial understatement of income. If the error is in the partners' favor (you overstated their income), they'll appreciate the correction.

Q7: Can I get help if I'm overwhelmed?

Absolutely. The IRS Taxpayer Advocate Service (1-877-777-4778) provides free assistance to partnerships experiencing economic hardship or unresolved tax problems. You can also consult a CPA or enrolled agent specializing in partnership taxation.

Additional Resources

IRS Partner's Instructions for Schedule K-1 (Form 1065) 2011
IRS Form 1065 Information Page

Frequently Asked Questions

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Form 1065: U.S. Return of Partnership Income (2011) – A Complete Guide

What Form 1065 Is For

Form 1065 is an information return that partnerships file with the IRS to report their financial activities for the year. Think of it as a report card for your partnership's business – but here's the key difference: the partnership itself doesn't pay federal income tax. Instead, it works on a "pass-through" basis, meaning all profits and losses flow through to the individual partners, who then report their share on their personal tax returns.

Who needs to file? Nearly every domestic partnership operating in the United States must file Form 1065, including general partnerships, limited partnerships, and limited liability companies (LLCs) classified as partnerships with at least two members. The only exception is if your partnership had absolutely no income and no expenses that could be claimed as deductions or credits during the year.

Along with Form 1065, the partnership must prepare Schedule K-1 for each partner. This critical document shows each partner's individual share of the partnership's income, deductions, credits, and other tax items. Partners use their Schedule K-1 to complete their personal tax returns (typically Form 1040), reporting their portion of partnership profits or losses. The partnership files copies of all K-1s with the IRS, while each partner keeps their copy for their records.

When You’d Use Form 1065

Regular Filing Deadline

For calendar year 2011, partnerships must file Form 1065 by April 15, 2012 (the 15th day of the 4th month after the tax year ends). If your partnership uses a fiscal year, the deadline is the 15th day of the 4th month after your fiscal year closes.

Extensions

If you need more time, you can request a 5-month extension by filing Form 7004 by the original due date. This pushes your deadline to September 15, 2012, for calendar-year partnerships. Note that partnerships keeping records outside the U.S. and Puerto Rico automatically get a 2-month extension without filing Form 7004.

Late Returns

If you miss the deadline, file as soon as possible. The IRS assesses penalties for late filing (see penalties section below), but the longer you wait, the more you'll owe. Life happens – businesses face challenges, records get lost, or you might simply have missed the deadline. Don't let fear of penalties prevent you from filing; reasonable cause can sometimes result in penalty relief.

Amended Returns

Made an error on your original return? For 2011, you'll need to use Form 1065X (Amended Return or Administrative Adjustment Request) if filing on paper. If filing electronically, complete a new Form 1065 and check box G(5) to indicate it's an amended return. When you amend the partnership return, you must also prepare amended Schedule K-1s for any partners whose information changed, checking the "Amended K-1" box at the top. Give each affected partner their corrected K-1 and file copies with the IRS.

Key Rules or Details for 2011

The 2011 tax year included several important updates and provisions:

Cost of Goods Sold Change

For 2011, the IRS moved the Cost of Goods Sold calculation from Schedule A on Form 1065 to a separate Form 1125-A. If your partnership sells products or maintains inventory, you'll complete this separate form.

Merchant Card Payment Reporting Deferred

The IRS postponed the requirement to separately report merchant card and third-party network payments from Form 1099-K. Simply report your gross receipts from all sources on lines 1a through 1d as you normally would.

Balance Sheet Updates

The 2011 form added new lines to Schedule L (Balance Sheets) to track loans between the partnership and partners. Line 7a captures loans to partners or persons related to partners, while line 19a shows loans from partners.

Enhanced Disclosure Requirements

Schedule B added questions about foreign government partners (line 3a), Form 1099 filing compliance (lines 18a and 18b), and Form 5471 filings for foreign corporation interests (line 19).

Expiring Provisions

Several tax benefits were set to expire after December 31, 2011, including enhanced deductions for film and television production expenses, increased charitable contribution deductions for food inventory, and special rules for conservation contributions of agricultural property. Plan ahead if your partnership benefits from these provisions.

Section 179 Limits

For 2011, partnerships could elect to expense up to $500,000 of qualifying property, with the deduction beginning to phase out when total purchases exceeded $2 million. These amounts changed in subsequent years.

Step-by-Step (High Level)

Step 1: Gather Your Records

Collect all financial statements, bank records, receipts, and documentation of income and expenses for the entire tax year. You'll need profit and loss statements, balance sheets, and records of each partner's capital account activity.

Step 2: Determine Your Accounting Method

Most partnerships use either the cash method (income recorded when received, expenses when paid) or accrual method (income recorded when earned, expenses when incurred). The method must be consistent and clearly reflect income. Partnerships with corporate partners and average annual gross receipts over $5 million generally cannot use the cash method.

Step 3: Complete the Main Form 1065

Fill in identifying information at the top, then report income on page 1, lines 1-8. Deductions go on lines 9-22. The result is ordinary business income (or loss), which flows to Schedule K.

Step 4: Fill Out Schedule K

This schedule breaks down all partnership items into categories that partners need for their individual returns: ordinary income, rental income, guaranteed payments, interest, dividends, capital gains, charitable contributions, and various deductions and credits.

Step 5: Prepare Schedule K-1 for Each Partner

Create an individual Schedule K-1 for every partner, showing their percentage ownership and their specific share of each item from Schedule K. Each partner's K-1 must match their portion of partnership activities.

Step 6: Complete Supporting Schedules

Fill out Schedule B (Other Information questionnaire), Schedule L (Balance Sheets), Schedule M-1 (Reconciliation of Income), and Schedule M-2 (Analysis of Partners' Capital Accounts). If you have cost of goods sold, complete Form 1125-A.

Step 7: Sign and File

A general partner or LLC member manager must sign the return. Assemble the return in order: Form 1065, Schedule K, supporting schedules, then all Schedules K-1. File with the appropriate IRS Service Center (Ogden, UT or Cincinnati, OH, depending on your location and asset size).

Step 8: Distribute K-1s to Partners

Give each partner their Schedule K-1 by the return due date (including extensions). Partners need these forms to complete their personal tax returns.

Common Mistakes and How to Avoid Them

Mistake #1: Missing or Incorrect Partner Information

Errors in partner names, Social Security numbers, or addresses cause processing delays. Double-check every partner's information against official documents before filing.

Mistake #2: Schedule K and K-1 Mismatches

The sum of all individual K-1s must equal the totals on Schedule K. Many preparers make mathematical errors or forget to account for all partners. Create a reconciliation worksheet to verify totals match.

Mistake #3: Ignoring Basis Tracking

Partners must track their "basis" (investment) in the partnership to determine how much loss they can deduct. The partnership provides capital account information, but partners are responsible for tracking their tax basis separately. Keep detailed records of contributions, distributions, and allocated income/losses.

Mistake #4: Misclassifying Guaranteed Payments

Payments to partners for services or capital use that are determined without regard to partnership income should be reported as guaranteed payments (line 10 and Schedule K, line 4). Don't confuse these with regular distributions or disguised salary payments.

Mistake #5: Incomplete Schedule B

Every question on Schedule B must be answered. Leaving items blank or writing "N/A" without considering whether the question applies can trigger IRS inquiries or processing delays.

Mistake #6: Balance Sheet Errors

Schedules L, M-1, and M-2 must reconcile. Your ending capital on Schedule M-2 should match the total capital shown on Schedule L. Beginning balances for the current year must match ending balances from the prior year.

Mistake #7: Forgetting to File Forms 1099

Partnerships must issue Forms 1099 to vendors and service providers paid $600 or more during the year. Failure to file these forms can result in substantial penalties separate from Form 1065 penalties.

Mistake #8: Late K-1 Distribution

Partners need their K-1s to file their personal returns. Failing to provide K-1s on time creates problems for your partners and may damage business relationships. Set internal deadlines to ensure timely distribution.

What Happens After You File

IRS Processing (60-90 Days)

The IRS receives and processes your return. For 2011 paper returns, processing typically took 8-12 weeks. E-filed returns process faster, usually within 3-4 weeks.

Partner Tax Returns

Each partner reports their K-1 information on their individual tax return (Form 1040, Form 1041 for trusts, or Form 1120 for corporate partners). Partners must generally report items consistently with how the partnership reported them unless filing Form 8082 to notify the IRS of inconsistent treatment.

Audit Considerations

While most returns aren't audited, partnerships face unified audit procedures under the TEFRA rules (Tax Equity and Fiscal Responsibility Act). In a partnership audit, adjustments are determined at the partnership level, and the Tax Matters Partner represents the partnership. Individual partners may have limited ability to separately contest adjustments.

Penalties if Late

The IRS assesses $195 per month (or partial month) per partner for up to 12 months for late filing. For a partnership with 5 partners filing 3 months late, the penalty would be $2,925 ($195 × 3 months × 5 partners). Request penalty abatement in writing if you have reasonable cause for late filing.

K-1 Distribution Penalties

Failing to furnish K-1s to partners or providing incorrect information results in $100 penalties per K-1, capped at $1.5 million annually. If the IRS determines the failures were intentional, penalties increase to $250 per K-1 (or 10% of the aggregate items to be reported if greater) with no maximum cap.

Record Retention

Keep all partnership records for at least 3 years from the date the return is due or filed, whichever is later. Records supporting property basis should be kept for as long as needed to determine basis of original or replacement property.

FAQs

Q1: Does the partnership pay taxes on its income?

No. Partnerships are "pass-through" entities. The partnership itself doesn't pay federal income tax. Instead, all income, deductions, and credits pass through to the partners, who report their share on their individual tax returns and pay tax at their personal rates.

Q2: What if our partnership had no activity during 2011?

If your partnership received no income and had no deductible expenses or credits, you're not required to file Form 1065. However, many partnerships file anyway to maintain their active status with the IRS and provide documentation to partners. If you had even minimal activity (like bank interest), you must file.

Q3: Can a husband and wife avoid filing Form 1065?

Yes, if certain conditions are met. A qualified joint venture between spouses allows them to report income and expenses directly on their individual Schedule C returns instead of filing Form 1065. Both spouses must materially participate in the business, file a joint tax return, and the business must be co-owned without being held in a formal entity like an LLC. Once made, this election cannot be easily revoked.

Q4: What's the difference between guaranteed payments and distributions?

Guaranteed payments are compensation for services or capital use, determined without regard to partnership income (like a partner's salary). They're deductible by the partnership and reported as ordinary income by the partner. Distributions are returns of capital or profit shares, not deductible by the partnership, and generally not taxable to partners unless exceeding their basis.

Q5: Do I need to file electronically?

For 2011, partnerships with more than 100 partners were required to file electronically. Smaller partnerships had the option but weren't required to e-file. Electronic filing offers faster processing, immediate confirmation of receipt, and fewer errors. You can request a waiver of e-filing requirements by submitting a written hardship request to the Ogden Submission Processing Center.

Q6: What if I discover an error after filing?

File an amended return using Form 1065X as soon as you discover the error. You must also provide amended K-1s to any partners whose information changed. Don't ignore errors hoping they'll go unnoticed – the IRS may assess additional penalties for substantial understatement of income. If the error is in the partners' favor (you overstated their income), they'll appreciate the correction.

Q7: Can I get help if I'm overwhelmed?

Absolutely. The IRS Taxpayer Advocate Service (1-877-777-4778) provides free assistance to partnerships experiencing economic hardship or unresolved tax problems. You can also consult a CPA or enrolled agent specializing in partnership taxation.

Additional Resources

IRS Partner's Instructions for Schedule K-1 (Form 1065) 2011
IRS Form 1065 Information Page

Frequently Asked Questions

Form 1065: U.S. Return of Partnership Income (2011) – A Complete Guide

What Form 1065 Is For

Form 1065 is an information return that partnerships file with the IRS to report their financial activities for the year. Think of it as a report card for your partnership's business – but here's the key difference: the partnership itself doesn't pay federal income tax. Instead, it works on a "pass-through" basis, meaning all profits and losses flow through to the individual partners, who then report their share on their personal tax returns.

Who needs to file? Nearly every domestic partnership operating in the United States must file Form 1065, including general partnerships, limited partnerships, and limited liability companies (LLCs) classified as partnerships with at least two members. The only exception is if your partnership had absolutely no income and no expenses that could be claimed as deductions or credits during the year.

Along with Form 1065, the partnership must prepare Schedule K-1 for each partner. This critical document shows each partner's individual share of the partnership's income, deductions, credits, and other tax items. Partners use their Schedule K-1 to complete their personal tax returns (typically Form 1040), reporting their portion of partnership profits or losses. The partnership files copies of all K-1s with the IRS, while each partner keeps their copy for their records.

When You’d Use Form 1065

Regular Filing Deadline

For calendar year 2011, partnerships must file Form 1065 by April 15, 2012 (the 15th day of the 4th month after the tax year ends). If your partnership uses a fiscal year, the deadline is the 15th day of the 4th month after your fiscal year closes.

Extensions

If you need more time, you can request a 5-month extension by filing Form 7004 by the original due date. This pushes your deadline to September 15, 2012, for calendar-year partnerships. Note that partnerships keeping records outside the U.S. and Puerto Rico automatically get a 2-month extension without filing Form 7004.

Late Returns

If you miss the deadline, file as soon as possible. The IRS assesses penalties for late filing (see penalties section below), but the longer you wait, the more you'll owe. Life happens – businesses face challenges, records get lost, or you might simply have missed the deadline. Don't let fear of penalties prevent you from filing; reasonable cause can sometimes result in penalty relief.

Amended Returns

Made an error on your original return? For 2011, you'll need to use Form 1065X (Amended Return or Administrative Adjustment Request) if filing on paper. If filing electronically, complete a new Form 1065 and check box G(5) to indicate it's an amended return. When you amend the partnership return, you must also prepare amended Schedule K-1s for any partners whose information changed, checking the "Amended K-1" box at the top. Give each affected partner their corrected K-1 and file copies with the IRS.

Key Rules or Details for 2011

The 2011 tax year included several important updates and provisions:

Cost of Goods Sold Change

For 2011, the IRS moved the Cost of Goods Sold calculation from Schedule A on Form 1065 to a separate Form 1125-A. If your partnership sells products or maintains inventory, you'll complete this separate form.

Merchant Card Payment Reporting Deferred

The IRS postponed the requirement to separately report merchant card and third-party network payments from Form 1099-K. Simply report your gross receipts from all sources on lines 1a through 1d as you normally would.

Balance Sheet Updates

The 2011 form added new lines to Schedule L (Balance Sheets) to track loans between the partnership and partners. Line 7a captures loans to partners or persons related to partners, while line 19a shows loans from partners.

Enhanced Disclosure Requirements

Schedule B added questions about foreign government partners (line 3a), Form 1099 filing compliance (lines 18a and 18b), and Form 5471 filings for foreign corporation interests (line 19).

Expiring Provisions

Several tax benefits were set to expire after December 31, 2011, including enhanced deductions for film and television production expenses, increased charitable contribution deductions for food inventory, and special rules for conservation contributions of agricultural property. Plan ahead if your partnership benefits from these provisions.

Section 179 Limits

For 2011, partnerships could elect to expense up to $500,000 of qualifying property, with the deduction beginning to phase out when total purchases exceeded $2 million. These amounts changed in subsequent years.

Step-by-Step (High Level)

Step 1: Gather Your Records

Collect all financial statements, bank records, receipts, and documentation of income and expenses for the entire tax year. You'll need profit and loss statements, balance sheets, and records of each partner's capital account activity.

Step 2: Determine Your Accounting Method

Most partnerships use either the cash method (income recorded when received, expenses when paid) or accrual method (income recorded when earned, expenses when incurred). The method must be consistent and clearly reflect income. Partnerships with corporate partners and average annual gross receipts over $5 million generally cannot use the cash method.

Step 3: Complete the Main Form 1065

Fill in identifying information at the top, then report income on page 1, lines 1-8. Deductions go on lines 9-22. The result is ordinary business income (or loss), which flows to Schedule K.

Step 4: Fill Out Schedule K

This schedule breaks down all partnership items into categories that partners need for their individual returns: ordinary income, rental income, guaranteed payments, interest, dividends, capital gains, charitable contributions, and various deductions and credits.

Step 5: Prepare Schedule K-1 for Each Partner

Create an individual Schedule K-1 for every partner, showing their percentage ownership and their specific share of each item from Schedule K. Each partner's K-1 must match their portion of partnership activities.

Step 6: Complete Supporting Schedules

Fill out Schedule B (Other Information questionnaire), Schedule L (Balance Sheets), Schedule M-1 (Reconciliation of Income), and Schedule M-2 (Analysis of Partners' Capital Accounts). If you have cost of goods sold, complete Form 1125-A.

Step 7: Sign and File

A general partner or LLC member manager must sign the return. Assemble the return in order: Form 1065, Schedule K, supporting schedules, then all Schedules K-1. File with the appropriate IRS Service Center (Ogden, UT or Cincinnati, OH, depending on your location and asset size).

Step 8: Distribute K-1s to Partners

Give each partner their Schedule K-1 by the return due date (including extensions). Partners need these forms to complete their personal tax returns.

Common Mistakes and How to Avoid Them

Mistake #1: Missing or Incorrect Partner Information

Errors in partner names, Social Security numbers, or addresses cause processing delays. Double-check every partner's information against official documents before filing.

Mistake #2: Schedule K and K-1 Mismatches

The sum of all individual K-1s must equal the totals on Schedule K. Many preparers make mathematical errors or forget to account for all partners. Create a reconciliation worksheet to verify totals match.

Mistake #3: Ignoring Basis Tracking

Partners must track their "basis" (investment) in the partnership to determine how much loss they can deduct. The partnership provides capital account information, but partners are responsible for tracking their tax basis separately. Keep detailed records of contributions, distributions, and allocated income/losses.

Mistake #4: Misclassifying Guaranteed Payments

Payments to partners for services or capital use that are determined without regard to partnership income should be reported as guaranteed payments (line 10 and Schedule K, line 4). Don't confuse these with regular distributions or disguised salary payments.

Mistake #5: Incomplete Schedule B

Every question on Schedule B must be answered. Leaving items blank or writing "N/A" without considering whether the question applies can trigger IRS inquiries or processing delays.

Mistake #6: Balance Sheet Errors

Schedules L, M-1, and M-2 must reconcile. Your ending capital on Schedule M-2 should match the total capital shown on Schedule L. Beginning balances for the current year must match ending balances from the prior year.

Mistake #7: Forgetting to File Forms 1099

Partnerships must issue Forms 1099 to vendors and service providers paid $600 or more during the year. Failure to file these forms can result in substantial penalties separate from Form 1065 penalties.

Mistake #8: Late K-1 Distribution

Partners need their K-1s to file their personal returns. Failing to provide K-1s on time creates problems for your partners and may damage business relationships. Set internal deadlines to ensure timely distribution.

What Happens After You File

IRS Processing (60-90 Days)

The IRS receives and processes your return. For 2011 paper returns, processing typically took 8-12 weeks. E-filed returns process faster, usually within 3-4 weeks.

Partner Tax Returns

Each partner reports their K-1 information on their individual tax return (Form 1040, Form 1041 for trusts, or Form 1120 for corporate partners). Partners must generally report items consistently with how the partnership reported them unless filing Form 8082 to notify the IRS of inconsistent treatment.

Audit Considerations

While most returns aren't audited, partnerships face unified audit procedures under the TEFRA rules (Tax Equity and Fiscal Responsibility Act). In a partnership audit, adjustments are determined at the partnership level, and the Tax Matters Partner represents the partnership. Individual partners may have limited ability to separately contest adjustments.

Penalties if Late

The IRS assesses $195 per month (or partial month) per partner for up to 12 months for late filing. For a partnership with 5 partners filing 3 months late, the penalty would be $2,925 ($195 × 3 months × 5 partners). Request penalty abatement in writing if you have reasonable cause for late filing.

K-1 Distribution Penalties

Failing to furnish K-1s to partners or providing incorrect information results in $100 penalties per K-1, capped at $1.5 million annually. If the IRS determines the failures were intentional, penalties increase to $250 per K-1 (or 10% of the aggregate items to be reported if greater) with no maximum cap.

Record Retention

Keep all partnership records for at least 3 years from the date the return is due or filed, whichever is later. Records supporting property basis should be kept for as long as needed to determine basis of original or replacement property.

FAQs

Q1: Does the partnership pay taxes on its income?

No. Partnerships are "pass-through" entities. The partnership itself doesn't pay federal income tax. Instead, all income, deductions, and credits pass through to the partners, who report their share on their individual tax returns and pay tax at their personal rates.

Q2: What if our partnership had no activity during 2011?

If your partnership received no income and had no deductible expenses or credits, you're not required to file Form 1065. However, many partnerships file anyway to maintain their active status with the IRS and provide documentation to partners. If you had even minimal activity (like bank interest), you must file.

Q3: Can a husband and wife avoid filing Form 1065?

Yes, if certain conditions are met. A qualified joint venture between spouses allows them to report income and expenses directly on their individual Schedule C returns instead of filing Form 1065. Both spouses must materially participate in the business, file a joint tax return, and the business must be co-owned without being held in a formal entity like an LLC. Once made, this election cannot be easily revoked.

Q4: What's the difference between guaranteed payments and distributions?

Guaranteed payments are compensation for services or capital use, determined without regard to partnership income (like a partner's salary). They're deductible by the partnership and reported as ordinary income by the partner. Distributions are returns of capital or profit shares, not deductible by the partnership, and generally not taxable to partners unless exceeding their basis.

Q5: Do I need to file electronically?

For 2011, partnerships with more than 100 partners were required to file electronically. Smaller partnerships had the option but weren't required to e-file. Electronic filing offers faster processing, immediate confirmation of receipt, and fewer errors. You can request a waiver of e-filing requirements by submitting a written hardship request to the Ogden Submission Processing Center.

Q6: What if I discover an error after filing?

File an amended return using Form 1065X as soon as you discover the error. You must also provide amended K-1s to any partners whose information changed. Don't ignore errors hoping they'll go unnoticed – the IRS may assess additional penalties for substantial understatement of income. If the error is in the partners' favor (you overstated their income), they'll appreciate the correction.

Q7: Can I get help if I'm overwhelmed?

Absolutely. The IRS Taxpayer Advocate Service (1-877-777-4778) provides free assistance to partnerships experiencing economic hardship or unresolved tax problems. You can also consult a CPA or enrolled agent specializing in partnership taxation.

Additional Resources

IRS Partner's Instructions for Schedule K-1 (Form 1065) 2011
IRS Form 1065 Information Page

Frequently Asked Questions

Form 1065: U.S. Return of Partnership Income (2011) – A Complete Guide

Heading

What Form 1065 Is For

Form 1065 is an information return that partnerships file with the IRS to report their financial activities for the year. Think of it as a report card for your partnership's business – but here's the key difference: the partnership itself doesn't pay federal income tax. Instead, it works on a "pass-through" basis, meaning all profits and losses flow through to the individual partners, who then report their share on their personal tax returns.

Who needs to file? Nearly every domestic partnership operating in the United States must file Form 1065, including general partnerships, limited partnerships, and limited liability companies (LLCs) classified as partnerships with at least two members. The only exception is if your partnership had absolutely no income and no expenses that could be claimed as deductions or credits during the year.

Along with Form 1065, the partnership must prepare Schedule K-1 for each partner. This critical document shows each partner's individual share of the partnership's income, deductions, credits, and other tax items. Partners use their Schedule K-1 to complete their personal tax returns (typically Form 1040), reporting their portion of partnership profits or losses. The partnership files copies of all K-1s with the IRS, while each partner keeps their copy for their records.

When You’d Use Form 1065

Regular Filing Deadline

For calendar year 2011, partnerships must file Form 1065 by April 15, 2012 (the 15th day of the 4th month after the tax year ends). If your partnership uses a fiscal year, the deadline is the 15th day of the 4th month after your fiscal year closes.

Extensions

If you need more time, you can request a 5-month extension by filing Form 7004 by the original due date. This pushes your deadline to September 15, 2012, for calendar-year partnerships. Note that partnerships keeping records outside the U.S. and Puerto Rico automatically get a 2-month extension without filing Form 7004.

Late Returns

If you miss the deadline, file as soon as possible. The IRS assesses penalties for late filing (see penalties section below), but the longer you wait, the more you'll owe. Life happens – businesses face challenges, records get lost, or you might simply have missed the deadline. Don't let fear of penalties prevent you from filing; reasonable cause can sometimes result in penalty relief.

Amended Returns

Made an error on your original return? For 2011, you'll need to use Form 1065X (Amended Return or Administrative Adjustment Request) if filing on paper. If filing electronically, complete a new Form 1065 and check box G(5) to indicate it's an amended return. When you amend the partnership return, you must also prepare amended Schedule K-1s for any partners whose information changed, checking the "Amended K-1" box at the top. Give each affected partner their corrected K-1 and file copies with the IRS.

Key Rules or Details for 2011

The 2011 tax year included several important updates and provisions:

Cost of Goods Sold Change

For 2011, the IRS moved the Cost of Goods Sold calculation from Schedule A on Form 1065 to a separate Form 1125-A. If your partnership sells products or maintains inventory, you'll complete this separate form.

Merchant Card Payment Reporting Deferred

The IRS postponed the requirement to separately report merchant card and third-party network payments from Form 1099-K. Simply report your gross receipts from all sources on lines 1a through 1d as you normally would.

Balance Sheet Updates

The 2011 form added new lines to Schedule L (Balance Sheets) to track loans between the partnership and partners. Line 7a captures loans to partners or persons related to partners, while line 19a shows loans from partners.

Enhanced Disclosure Requirements

Schedule B added questions about foreign government partners (line 3a), Form 1099 filing compliance (lines 18a and 18b), and Form 5471 filings for foreign corporation interests (line 19).

Expiring Provisions

Several tax benefits were set to expire after December 31, 2011, including enhanced deductions for film and television production expenses, increased charitable contribution deductions for food inventory, and special rules for conservation contributions of agricultural property. Plan ahead if your partnership benefits from these provisions.

Section 179 Limits

For 2011, partnerships could elect to expense up to $500,000 of qualifying property, with the deduction beginning to phase out when total purchases exceeded $2 million. These amounts changed in subsequent years.

Step-by-Step (High Level)

Step 1: Gather Your Records

Collect all financial statements, bank records, receipts, and documentation of income and expenses for the entire tax year. You'll need profit and loss statements, balance sheets, and records of each partner's capital account activity.

Step 2: Determine Your Accounting Method

Most partnerships use either the cash method (income recorded when received, expenses when paid) or accrual method (income recorded when earned, expenses when incurred). The method must be consistent and clearly reflect income. Partnerships with corporate partners and average annual gross receipts over $5 million generally cannot use the cash method.

Step 3: Complete the Main Form 1065

Fill in identifying information at the top, then report income on page 1, lines 1-8. Deductions go on lines 9-22. The result is ordinary business income (or loss), which flows to Schedule K.

Step 4: Fill Out Schedule K

This schedule breaks down all partnership items into categories that partners need for their individual returns: ordinary income, rental income, guaranteed payments, interest, dividends, capital gains, charitable contributions, and various deductions and credits.

Step 5: Prepare Schedule K-1 for Each Partner

Create an individual Schedule K-1 for every partner, showing their percentage ownership and their specific share of each item from Schedule K. Each partner's K-1 must match their portion of partnership activities.

Step 6: Complete Supporting Schedules

Fill out Schedule B (Other Information questionnaire), Schedule L (Balance Sheets), Schedule M-1 (Reconciliation of Income), and Schedule M-2 (Analysis of Partners' Capital Accounts). If you have cost of goods sold, complete Form 1125-A.

Step 7: Sign and File

A general partner or LLC member manager must sign the return. Assemble the return in order: Form 1065, Schedule K, supporting schedules, then all Schedules K-1. File with the appropriate IRS Service Center (Ogden, UT or Cincinnati, OH, depending on your location and asset size).

Step 8: Distribute K-1s to Partners

Give each partner their Schedule K-1 by the return due date (including extensions). Partners need these forms to complete their personal tax returns.

Common Mistakes and How to Avoid Them

Mistake #1: Missing or Incorrect Partner Information

Errors in partner names, Social Security numbers, or addresses cause processing delays. Double-check every partner's information against official documents before filing.

Mistake #2: Schedule K and K-1 Mismatches

The sum of all individual K-1s must equal the totals on Schedule K. Many preparers make mathematical errors or forget to account for all partners. Create a reconciliation worksheet to verify totals match.

Mistake #3: Ignoring Basis Tracking

Partners must track their "basis" (investment) in the partnership to determine how much loss they can deduct. The partnership provides capital account information, but partners are responsible for tracking their tax basis separately. Keep detailed records of contributions, distributions, and allocated income/losses.

Mistake #4: Misclassifying Guaranteed Payments

Payments to partners for services or capital use that are determined without regard to partnership income should be reported as guaranteed payments (line 10 and Schedule K, line 4). Don't confuse these with regular distributions or disguised salary payments.

Mistake #5: Incomplete Schedule B

Every question on Schedule B must be answered. Leaving items blank or writing "N/A" without considering whether the question applies can trigger IRS inquiries or processing delays.

Mistake #6: Balance Sheet Errors

Schedules L, M-1, and M-2 must reconcile. Your ending capital on Schedule M-2 should match the total capital shown on Schedule L. Beginning balances for the current year must match ending balances from the prior year.

Mistake #7: Forgetting to File Forms 1099

Partnerships must issue Forms 1099 to vendors and service providers paid $600 or more during the year. Failure to file these forms can result in substantial penalties separate from Form 1065 penalties.

Mistake #8: Late K-1 Distribution

Partners need their K-1s to file their personal returns. Failing to provide K-1s on time creates problems for your partners and may damage business relationships. Set internal deadlines to ensure timely distribution.

What Happens After You File

IRS Processing (60-90 Days)

The IRS receives and processes your return. For 2011 paper returns, processing typically took 8-12 weeks. E-filed returns process faster, usually within 3-4 weeks.

Partner Tax Returns

Each partner reports their K-1 information on their individual tax return (Form 1040, Form 1041 for trusts, or Form 1120 for corporate partners). Partners must generally report items consistently with how the partnership reported them unless filing Form 8082 to notify the IRS of inconsistent treatment.

Audit Considerations

While most returns aren't audited, partnerships face unified audit procedures under the TEFRA rules (Tax Equity and Fiscal Responsibility Act). In a partnership audit, adjustments are determined at the partnership level, and the Tax Matters Partner represents the partnership. Individual partners may have limited ability to separately contest adjustments.

Penalties if Late

The IRS assesses $195 per month (or partial month) per partner for up to 12 months for late filing. For a partnership with 5 partners filing 3 months late, the penalty would be $2,925 ($195 × 3 months × 5 partners). Request penalty abatement in writing if you have reasonable cause for late filing.

K-1 Distribution Penalties

Failing to furnish K-1s to partners or providing incorrect information results in $100 penalties per K-1, capped at $1.5 million annually. If the IRS determines the failures were intentional, penalties increase to $250 per K-1 (or 10% of the aggregate items to be reported if greater) with no maximum cap.

Record Retention

Keep all partnership records for at least 3 years from the date the return is due or filed, whichever is later. Records supporting property basis should be kept for as long as needed to determine basis of original or replacement property.

FAQs

Q1: Does the partnership pay taxes on its income?

No. Partnerships are "pass-through" entities. The partnership itself doesn't pay federal income tax. Instead, all income, deductions, and credits pass through to the partners, who report their share on their individual tax returns and pay tax at their personal rates.

Q2: What if our partnership had no activity during 2011?

If your partnership received no income and had no deductible expenses or credits, you're not required to file Form 1065. However, many partnerships file anyway to maintain their active status with the IRS and provide documentation to partners. If you had even minimal activity (like bank interest), you must file.

Q3: Can a husband and wife avoid filing Form 1065?

Yes, if certain conditions are met. A qualified joint venture between spouses allows them to report income and expenses directly on their individual Schedule C returns instead of filing Form 1065. Both spouses must materially participate in the business, file a joint tax return, and the business must be co-owned without being held in a formal entity like an LLC. Once made, this election cannot be easily revoked.

Q4: What's the difference between guaranteed payments and distributions?

Guaranteed payments are compensation for services or capital use, determined without regard to partnership income (like a partner's salary). They're deductible by the partnership and reported as ordinary income by the partner. Distributions are returns of capital or profit shares, not deductible by the partnership, and generally not taxable to partners unless exceeding their basis.

Q5: Do I need to file electronically?

For 2011, partnerships with more than 100 partners were required to file electronically. Smaller partnerships had the option but weren't required to e-file. Electronic filing offers faster processing, immediate confirmation of receipt, and fewer errors. You can request a waiver of e-filing requirements by submitting a written hardship request to the Ogden Submission Processing Center.

Q6: What if I discover an error after filing?

File an amended return using Form 1065X as soon as you discover the error. You must also provide amended K-1s to any partners whose information changed. Don't ignore errors hoping they'll go unnoticed – the IRS may assess additional penalties for substantial understatement of income. If the error is in the partners' favor (you overstated their income), they'll appreciate the correction.

Q7: Can I get help if I'm overwhelmed?

Absolutely. The IRS Taxpayer Advocate Service (1-877-777-4778) provides free assistance to partnerships experiencing economic hardship or unresolved tax problems. You can also consult a CPA or enrolled agent specializing in partnership taxation.

Additional Resources

IRS Partner's Instructions for Schedule K-1 (Form 1065) 2011
IRS Form 1065 Information Page

Form 1065: U.S. Return of Partnership Income (2011) – A Complete Guide

Frequently Asked Questions

Form 1065: U.S. Return of Partnership Income (2011) – A Complete Guide

What Form 1065 Is For

Form 1065 is an information return that partnerships file with the IRS to report their financial activities for the year. Think of it as a report card for your partnership's business – but here's the key difference: the partnership itself doesn't pay federal income tax. Instead, it works on a "pass-through" basis, meaning all profits and losses flow through to the individual partners, who then report their share on their personal tax returns.

Who needs to file? Nearly every domestic partnership operating in the United States must file Form 1065, including general partnerships, limited partnerships, and limited liability companies (LLCs) classified as partnerships with at least two members. The only exception is if your partnership had absolutely no income and no expenses that could be claimed as deductions or credits during the year.

Along with Form 1065, the partnership must prepare Schedule K-1 for each partner. This critical document shows each partner's individual share of the partnership's income, deductions, credits, and other tax items. Partners use their Schedule K-1 to complete their personal tax returns (typically Form 1040), reporting their portion of partnership profits or losses. The partnership files copies of all K-1s with the IRS, while each partner keeps their copy for their records.

When You’d Use Form 1065

Regular Filing Deadline

For calendar year 2011, partnerships must file Form 1065 by April 15, 2012 (the 15th day of the 4th month after the tax year ends). If your partnership uses a fiscal year, the deadline is the 15th day of the 4th month after your fiscal year closes.

Extensions

If you need more time, you can request a 5-month extension by filing Form 7004 by the original due date. This pushes your deadline to September 15, 2012, for calendar-year partnerships. Note that partnerships keeping records outside the U.S. and Puerto Rico automatically get a 2-month extension without filing Form 7004.

Late Returns

If you miss the deadline, file as soon as possible. The IRS assesses penalties for late filing (see penalties section below), but the longer you wait, the more you'll owe. Life happens – businesses face challenges, records get lost, or you might simply have missed the deadline. Don't let fear of penalties prevent you from filing; reasonable cause can sometimes result in penalty relief.

Amended Returns

Made an error on your original return? For 2011, you'll need to use Form 1065X (Amended Return or Administrative Adjustment Request) if filing on paper. If filing electronically, complete a new Form 1065 and check box G(5) to indicate it's an amended return. When you amend the partnership return, you must also prepare amended Schedule K-1s for any partners whose information changed, checking the "Amended K-1" box at the top. Give each affected partner their corrected K-1 and file copies with the IRS.

Key Rules or Details for 2011

The 2011 tax year included several important updates and provisions:

Cost of Goods Sold Change

For 2011, the IRS moved the Cost of Goods Sold calculation from Schedule A on Form 1065 to a separate Form 1125-A. If your partnership sells products or maintains inventory, you'll complete this separate form.

Merchant Card Payment Reporting Deferred

The IRS postponed the requirement to separately report merchant card and third-party network payments from Form 1099-K. Simply report your gross receipts from all sources on lines 1a through 1d as you normally would.

Balance Sheet Updates

The 2011 form added new lines to Schedule L (Balance Sheets) to track loans between the partnership and partners. Line 7a captures loans to partners or persons related to partners, while line 19a shows loans from partners.

Enhanced Disclosure Requirements

Schedule B added questions about foreign government partners (line 3a), Form 1099 filing compliance (lines 18a and 18b), and Form 5471 filings for foreign corporation interests (line 19).

Expiring Provisions

Several tax benefits were set to expire after December 31, 2011, including enhanced deductions for film and television production expenses, increased charitable contribution deductions for food inventory, and special rules for conservation contributions of agricultural property. Plan ahead if your partnership benefits from these provisions.

Section 179 Limits

For 2011, partnerships could elect to expense up to $500,000 of qualifying property, with the deduction beginning to phase out when total purchases exceeded $2 million. These amounts changed in subsequent years.

Step-by-Step (High Level)

Step 1: Gather Your Records

Collect all financial statements, bank records, receipts, and documentation of income and expenses for the entire tax year. You'll need profit and loss statements, balance sheets, and records of each partner's capital account activity.

Step 2: Determine Your Accounting Method

Most partnerships use either the cash method (income recorded when received, expenses when paid) or accrual method (income recorded when earned, expenses when incurred). The method must be consistent and clearly reflect income. Partnerships with corporate partners and average annual gross receipts over $5 million generally cannot use the cash method.

Step 3: Complete the Main Form 1065

Fill in identifying information at the top, then report income on page 1, lines 1-8. Deductions go on lines 9-22. The result is ordinary business income (or loss), which flows to Schedule K.

Step 4: Fill Out Schedule K

This schedule breaks down all partnership items into categories that partners need for their individual returns: ordinary income, rental income, guaranteed payments, interest, dividends, capital gains, charitable contributions, and various deductions and credits.

Step 5: Prepare Schedule K-1 for Each Partner

Create an individual Schedule K-1 for every partner, showing their percentage ownership and their specific share of each item from Schedule K. Each partner's K-1 must match their portion of partnership activities.

Step 6: Complete Supporting Schedules

Fill out Schedule B (Other Information questionnaire), Schedule L (Balance Sheets), Schedule M-1 (Reconciliation of Income), and Schedule M-2 (Analysis of Partners' Capital Accounts). If you have cost of goods sold, complete Form 1125-A.

Step 7: Sign and File

A general partner or LLC member manager must sign the return. Assemble the return in order: Form 1065, Schedule K, supporting schedules, then all Schedules K-1. File with the appropriate IRS Service Center (Ogden, UT or Cincinnati, OH, depending on your location and asset size).

Step 8: Distribute K-1s to Partners

Give each partner their Schedule K-1 by the return due date (including extensions). Partners need these forms to complete their personal tax returns.

Common Mistakes and How to Avoid Them

Mistake #1: Missing or Incorrect Partner Information

Errors in partner names, Social Security numbers, or addresses cause processing delays. Double-check every partner's information against official documents before filing.

Mistake #2: Schedule K and K-1 Mismatches

The sum of all individual K-1s must equal the totals on Schedule K. Many preparers make mathematical errors or forget to account for all partners. Create a reconciliation worksheet to verify totals match.

Mistake #3: Ignoring Basis Tracking

Partners must track their "basis" (investment) in the partnership to determine how much loss they can deduct. The partnership provides capital account information, but partners are responsible for tracking their tax basis separately. Keep detailed records of contributions, distributions, and allocated income/losses.

Mistake #4: Misclassifying Guaranteed Payments

Payments to partners for services or capital use that are determined without regard to partnership income should be reported as guaranteed payments (line 10 and Schedule K, line 4). Don't confuse these with regular distributions or disguised salary payments.

Mistake #5: Incomplete Schedule B

Every question on Schedule B must be answered. Leaving items blank or writing "N/A" without considering whether the question applies can trigger IRS inquiries or processing delays.

Mistake #6: Balance Sheet Errors

Schedules L, M-1, and M-2 must reconcile. Your ending capital on Schedule M-2 should match the total capital shown on Schedule L. Beginning balances for the current year must match ending balances from the prior year.

Mistake #7: Forgetting to File Forms 1099

Partnerships must issue Forms 1099 to vendors and service providers paid $600 or more during the year. Failure to file these forms can result in substantial penalties separate from Form 1065 penalties.

Mistake #8: Late K-1 Distribution

Partners need their K-1s to file their personal returns. Failing to provide K-1s on time creates problems for your partners and may damage business relationships. Set internal deadlines to ensure timely distribution.

What Happens After You File

IRS Processing (60-90 Days)

The IRS receives and processes your return. For 2011 paper returns, processing typically took 8-12 weeks. E-filed returns process faster, usually within 3-4 weeks.

Partner Tax Returns

Each partner reports their K-1 information on their individual tax return (Form 1040, Form 1041 for trusts, or Form 1120 for corporate partners). Partners must generally report items consistently with how the partnership reported them unless filing Form 8082 to notify the IRS of inconsistent treatment.

Audit Considerations

While most returns aren't audited, partnerships face unified audit procedures under the TEFRA rules (Tax Equity and Fiscal Responsibility Act). In a partnership audit, adjustments are determined at the partnership level, and the Tax Matters Partner represents the partnership. Individual partners may have limited ability to separately contest adjustments.

Penalties if Late

The IRS assesses $195 per month (or partial month) per partner for up to 12 months for late filing. For a partnership with 5 partners filing 3 months late, the penalty would be $2,925 ($195 × 3 months × 5 partners). Request penalty abatement in writing if you have reasonable cause for late filing.

K-1 Distribution Penalties

Failing to furnish K-1s to partners or providing incorrect information results in $100 penalties per K-1, capped at $1.5 million annually. If the IRS determines the failures were intentional, penalties increase to $250 per K-1 (or 10% of the aggregate items to be reported if greater) with no maximum cap.

Record Retention

Keep all partnership records for at least 3 years from the date the return is due or filed, whichever is later. Records supporting property basis should be kept for as long as needed to determine basis of original or replacement property.

FAQs

Q1: Does the partnership pay taxes on its income?

No. Partnerships are "pass-through" entities. The partnership itself doesn't pay federal income tax. Instead, all income, deductions, and credits pass through to the partners, who report their share on their individual tax returns and pay tax at their personal rates.

Q2: What if our partnership had no activity during 2011?

If your partnership received no income and had no deductible expenses or credits, you're not required to file Form 1065. However, many partnerships file anyway to maintain their active status with the IRS and provide documentation to partners. If you had even minimal activity (like bank interest), you must file.

Q3: Can a husband and wife avoid filing Form 1065?

Yes, if certain conditions are met. A qualified joint venture between spouses allows them to report income and expenses directly on their individual Schedule C returns instead of filing Form 1065. Both spouses must materially participate in the business, file a joint tax return, and the business must be co-owned without being held in a formal entity like an LLC. Once made, this election cannot be easily revoked.

Q4: What's the difference between guaranteed payments and distributions?

Guaranteed payments are compensation for services or capital use, determined without regard to partnership income (like a partner's salary). They're deductible by the partnership and reported as ordinary income by the partner. Distributions are returns of capital or profit shares, not deductible by the partnership, and generally not taxable to partners unless exceeding their basis.

Q5: Do I need to file electronically?

For 2011, partnerships with more than 100 partners were required to file electronically. Smaller partnerships had the option but weren't required to e-file. Electronic filing offers faster processing, immediate confirmation of receipt, and fewer errors. You can request a waiver of e-filing requirements by submitting a written hardship request to the Ogden Submission Processing Center.

Q6: What if I discover an error after filing?

File an amended return using Form 1065X as soon as you discover the error. You must also provide amended K-1s to any partners whose information changed. Don't ignore errors hoping they'll go unnoticed – the IRS may assess additional penalties for substantial understatement of income. If the error is in the partners' favor (you overstated their income), they'll appreciate the correction.

Q7: Can I get help if I'm overwhelmed?

Absolutely. The IRS Taxpayer Advocate Service (1-877-777-4778) provides free assistance to partnerships experiencing economic hardship or unresolved tax problems. You can also consult a CPA or enrolled agent specializing in partnership taxation.

Additional Resources

IRS Partner's Instructions for Schedule K-1 (Form 1065) 2011
IRS Form 1065 Information Page

Frequently Asked Questions

Form 1065: U.S. Return of Partnership Income (2011) – A Complete Guide

What Form 1065 Is For

Form 1065 is an information return that partnerships file with the IRS to report their financial activities for the year. Think of it as a report card for your partnership's business – but here's the key difference: the partnership itself doesn't pay federal income tax. Instead, it works on a "pass-through" basis, meaning all profits and losses flow through to the individual partners, who then report their share on their personal tax returns.

Who needs to file? Nearly every domestic partnership operating in the United States must file Form 1065, including general partnerships, limited partnerships, and limited liability companies (LLCs) classified as partnerships with at least two members. The only exception is if your partnership had absolutely no income and no expenses that could be claimed as deductions or credits during the year.

Along with Form 1065, the partnership must prepare Schedule K-1 for each partner. This critical document shows each partner's individual share of the partnership's income, deductions, credits, and other tax items. Partners use their Schedule K-1 to complete their personal tax returns (typically Form 1040), reporting their portion of partnership profits or losses. The partnership files copies of all K-1s with the IRS, while each partner keeps their copy for their records.

When You’d Use Form 1065

Regular Filing Deadline

For calendar year 2011, partnerships must file Form 1065 by April 15, 2012 (the 15th day of the 4th month after the tax year ends). If your partnership uses a fiscal year, the deadline is the 15th day of the 4th month after your fiscal year closes.

Extensions

If you need more time, you can request a 5-month extension by filing Form 7004 by the original due date. This pushes your deadline to September 15, 2012, for calendar-year partnerships. Note that partnerships keeping records outside the U.S. and Puerto Rico automatically get a 2-month extension without filing Form 7004.

Late Returns

If you miss the deadline, file as soon as possible. The IRS assesses penalties for late filing (see penalties section below), but the longer you wait, the more you'll owe. Life happens – businesses face challenges, records get lost, or you might simply have missed the deadline. Don't let fear of penalties prevent you from filing; reasonable cause can sometimes result in penalty relief.

Amended Returns

Made an error on your original return? For 2011, you'll need to use Form 1065X (Amended Return or Administrative Adjustment Request) if filing on paper. If filing electronically, complete a new Form 1065 and check box G(5) to indicate it's an amended return. When you amend the partnership return, you must also prepare amended Schedule K-1s for any partners whose information changed, checking the "Amended K-1" box at the top. Give each affected partner their corrected K-1 and file copies with the IRS.

Key Rules or Details for 2011

The 2011 tax year included several important updates and provisions:

Cost of Goods Sold Change

For 2011, the IRS moved the Cost of Goods Sold calculation from Schedule A on Form 1065 to a separate Form 1125-A. If your partnership sells products or maintains inventory, you'll complete this separate form.

Merchant Card Payment Reporting Deferred

The IRS postponed the requirement to separately report merchant card and third-party network payments from Form 1099-K. Simply report your gross receipts from all sources on lines 1a through 1d as you normally would.

Balance Sheet Updates

The 2011 form added new lines to Schedule L (Balance Sheets) to track loans between the partnership and partners. Line 7a captures loans to partners or persons related to partners, while line 19a shows loans from partners.

Enhanced Disclosure Requirements

Schedule B added questions about foreign government partners (line 3a), Form 1099 filing compliance (lines 18a and 18b), and Form 5471 filings for foreign corporation interests (line 19).

Expiring Provisions

Several tax benefits were set to expire after December 31, 2011, including enhanced deductions for film and television production expenses, increased charitable contribution deductions for food inventory, and special rules for conservation contributions of agricultural property. Plan ahead if your partnership benefits from these provisions.

Section 179 Limits

For 2011, partnerships could elect to expense up to $500,000 of qualifying property, with the deduction beginning to phase out when total purchases exceeded $2 million. These amounts changed in subsequent years.

Step-by-Step (High Level)

Step 1: Gather Your Records

Collect all financial statements, bank records, receipts, and documentation of income and expenses for the entire tax year. You'll need profit and loss statements, balance sheets, and records of each partner's capital account activity.

Step 2: Determine Your Accounting Method

Most partnerships use either the cash method (income recorded when received, expenses when paid) or accrual method (income recorded when earned, expenses when incurred). The method must be consistent and clearly reflect income. Partnerships with corporate partners and average annual gross receipts over $5 million generally cannot use the cash method.

Step 3: Complete the Main Form 1065

Fill in identifying information at the top, then report income on page 1, lines 1-8. Deductions go on lines 9-22. The result is ordinary business income (or loss), which flows to Schedule K.

Step 4: Fill Out Schedule K

This schedule breaks down all partnership items into categories that partners need for their individual returns: ordinary income, rental income, guaranteed payments, interest, dividends, capital gains, charitable contributions, and various deductions and credits.

Step 5: Prepare Schedule K-1 for Each Partner

Create an individual Schedule K-1 for every partner, showing their percentage ownership and their specific share of each item from Schedule K. Each partner's K-1 must match their portion of partnership activities.

Step 6: Complete Supporting Schedules

Fill out Schedule B (Other Information questionnaire), Schedule L (Balance Sheets), Schedule M-1 (Reconciliation of Income), and Schedule M-2 (Analysis of Partners' Capital Accounts). If you have cost of goods sold, complete Form 1125-A.

Step 7: Sign and File

A general partner or LLC member manager must sign the return. Assemble the return in order: Form 1065, Schedule K, supporting schedules, then all Schedules K-1. File with the appropriate IRS Service Center (Ogden, UT or Cincinnati, OH, depending on your location and asset size).

Step 8: Distribute K-1s to Partners

Give each partner their Schedule K-1 by the return due date (including extensions). Partners need these forms to complete their personal tax returns.

Common Mistakes and How to Avoid Them

Mistake #1: Missing or Incorrect Partner Information

Errors in partner names, Social Security numbers, or addresses cause processing delays. Double-check every partner's information against official documents before filing.

Mistake #2: Schedule K and K-1 Mismatches

The sum of all individual K-1s must equal the totals on Schedule K. Many preparers make mathematical errors or forget to account for all partners. Create a reconciliation worksheet to verify totals match.

Mistake #3: Ignoring Basis Tracking

Partners must track their "basis" (investment) in the partnership to determine how much loss they can deduct. The partnership provides capital account information, but partners are responsible for tracking their tax basis separately. Keep detailed records of contributions, distributions, and allocated income/losses.

Mistake #4: Misclassifying Guaranteed Payments

Payments to partners for services or capital use that are determined without regard to partnership income should be reported as guaranteed payments (line 10 and Schedule K, line 4). Don't confuse these with regular distributions or disguised salary payments.

Mistake #5: Incomplete Schedule B

Every question on Schedule B must be answered. Leaving items blank or writing "N/A" without considering whether the question applies can trigger IRS inquiries or processing delays.

Mistake #6: Balance Sheet Errors

Schedules L, M-1, and M-2 must reconcile. Your ending capital on Schedule M-2 should match the total capital shown on Schedule L. Beginning balances for the current year must match ending balances from the prior year.

Mistake #7: Forgetting to File Forms 1099

Partnerships must issue Forms 1099 to vendors and service providers paid $600 or more during the year. Failure to file these forms can result in substantial penalties separate from Form 1065 penalties.

Mistake #8: Late K-1 Distribution

Partners need their K-1s to file their personal returns. Failing to provide K-1s on time creates problems for your partners and may damage business relationships. Set internal deadlines to ensure timely distribution.

What Happens After You File

IRS Processing (60-90 Days)

The IRS receives and processes your return. For 2011 paper returns, processing typically took 8-12 weeks. E-filed returns process faster, usually within 3-4 weeks.

Partner Tax Returns

Each partner reports their K-1 information on their individual tax return (Form 1040, Form 1041 for trusts, or Form 1120 for corporate partners). Partners must generally report items consistently with how the partnership reported them unless filing Form 8082 to notify the IRS of inconsistent treatment.

Audit Considerations

While most returns aren't audited, partnerships face unified audit procedures under the TEFRA rules (Tax Equity and Fiscal Responsibility Act). In a partnership audit, adjustments are determined at the partnership level, and the Tax Matters Partner represents the partnership. Individual partners may have limited ability to separately contest adjustments.

Penalties if Late

The IRS assesses $195 per month (or partial month) per partner for up to 12 months for late filing. For a partnership with 5 partners filing 3 months late, the penalty would be $2,925 ($195 × 3 months × 5 partners). Request penalty abatement in writing if you have reasonable cause for late filing.

K-1 Distribution Penalties

Failing to furnish K-1s to partners or providing incorrect information results in $100 penalties per K-1, capped at $1.5 million annually. If the IRS determines the failures were intentional, penalties increase to $250 per K-1 (or 10% of the aggregate items to be reported if greater) with no maximum cap.

Record Retention

Keep all partnership records for at least 3 years from the date the return is due or filed, whichever is later. Records supporting property basis should be kept for as long as needed to determine basis of original or replacement property.

FAQs

Q1: Does the partnership pay taxes on its income?

No. Partnerships are "pass-through" entities. The partnership itself doesn't pay federal income tax. Instead, all income, deductions, and credits pass through to the partners, who report their share on their individual tax returns and pay tax at their personal rates.

Q2: What if our partnership had no activity during 2011?

If your partnership received no income and had no deductible expenses or credits, you're not required to file Form 1065. However, many partnerships file anyway to maintain their active status with the IRS and provide documentation to partners. If you had even minimal activity (like bank interest), you must file.

Q3: Can a husband and wife avoid filing Form 1065?

Yes, if certain conditions are met. A qualified joint venture between spouses allows them to report income and expenses directly on their individual Schedule C returns instead of filing Form 1065. Both spouses must materially participate in the business, file a joint tax return, and the business must be co-owned without being held in a formal entity like an LLC. Once made, this election cannot be easily revoked.

Q4: What's the difference between guaranteed payments and distributions?

Guaranteed payments are compensation for services or capital use, determined without regard to partnership income (like a partner's salary). They're deductible by the partnership and reported as ordinary income by the partner. Distributions are returns of capital or profit shares, not deductible by the partnership, and generally not taxable to partners unless exceeding their basis.

Q5: Do I need to file electronically?

For 2011, partnerships with more than 100 partners were required to file electronically. Smaller partnerships had the option but weren't required to e-file. Electronic filing offers faster processing, immediate confirmation of receipt, and fewer errors. You can request a waiver of e-filing requirements by submitting a written hardship request to the Ogden Submission Processing Center.

Q6: What if I discover an error after filing?

File an amended return using Form 1065X as soon as you discover the error. You must also provide amended K-1s to any partners whose information changed. Don't ignore errors hoping they'll go unnoticed – the IRS may assess additional penalties for substantial understatement of income. If the error is in the partners' favor (you overstated their income), they'll appreciate the correction.

Q7: Can I get help if I'm overwhelmed?

Absolutely. The IRS Taxpayer Advocate Service (1-877-777-4778) provides free assistance to partnerships experiencing economic hardship or unresolved tax problems. You can also consult a CPA or enrolled agent specializing in partnership taxation.

Additional Resources

IRS Partner's Instructions for Schedule K-1 (Form 1065) 2011
IRS Form 1065 Information Page

Frequently Asked Questions

Form 1065: U.S. Return of Partnership Income (2011) – A Complete Guide

What Form 1065 Is For

Form 1065 is an information return that partnerships file with the IRS to report their financial activities for the year. Think of it as a report card for your partnership's business – but here's the key difference: the partnership itself doesn't pay federal income tax. Instead, it works on a "pass-through" basis, meaning all profits and losses flow through to the individual partners, who then report their share on their personal tax returns.

Who needs to file? Nearly every domestic partnership operating in the United States must file Form 1065, including general partnerships, limited partnerships, and limited liability companies (LLCs) classified as partnerships with at least two members. The only exception is if your partnership had absolutely no income and no expenses that could be claimed as deductions or credits during the year.

Along with Form 1065, the partnership must prepare Schedule K-1 for each partner. This critical document shows each partner's individual share of the partnership's income, deductions, credits, and other tax items. Partners use their Schedule K-1 to complete their personal tax returns (typically Form 1040), reporting their portion of partnership profits or losses. The partnership files copies of all K-1s with the IRS, while each partner keeps their copy for their records.

When You’d Use Form 1065

Regular Filing Deadline

For calendar year 2011, partnerships must file Form 1065 by April 15, 2012 (the 15th day of the 4th month after the tax year ends). If your partnership uses a fiscal year, the deadline is the 15th day of the 4th month after your fiscal year closes.

Extensions

If you need more time, you can request a 5-month extension by filing Form 7004 by the original due date. This pushes your deadline to September 15, 2012, for calendar-year partnerships. Note that partnerships keeping records outside the U.S. and Puerto Rico automatically get a 2-month extension without filing Form 7004.

Late Returns

If you miss the deadline, file as soon as possible. The IRS assesses penalties for late filing (see penalties section below), but the longer you wait, the more you'll owe. Life happens – businesses face challenges, records get lost, or you might simply have missed the deadline. Don't let fear of penalties prevent you from filing; reasonable cause can sometimes result in penalty relief.

Amended Returns

Made an error on your original return? For 2011, you'll need to use Form 1065X (Amended Return or Administrative Adjustment Request) if filing on paper. If filing electronically, complete a new Form 1065 and check box G(5) to indicate it's an amended return. When you amend the partnership return, you must also prepare amended Schedule K-1s for any partners whose information changed, checking the "Amended K-1" box at the top. Give each affected partner their corrected K-1 and file copies with the IRS.

Key Rules or Details for 2011

The 2011 tax year included several important updates and provisions:

Cost of Goods Sold Change

For 2011, the IRS moved the Cost of Goods Sold calculation from Schedule A on Form 1065 to a separate Form 1125-A. If your partnership sells products or maintains inventory, you'll complete this separate form.

Merchant Card Payment Reporting Deferred

The IRS postponed the requirement to separately report merchant card and third-party network payments from Form 1099-K. Simply report your gross receipts from all sources on lines 1a through 1d as you normally would.

Balance Sheet Updates

The 2011 form added new lines to Schedule L (Balance Sheets) to track loans between the partnership and partners. Line 7a captures loans to partners or persons related to partners, while line 19a shows loans from partners.

Enhanced Disclosure Requirements

Schedule B added questions about foreign government partners (line 3a), Form 1099 filing compliance (lines 18a and 18b), and Form 5471 filings for foreign corporation interests (line 19).

Expiring Provisions

Several tax benefits were set to expire after December 31, 2011, including enhanced deductions for film and television production expenses, increased charitable contribution deductions for food inventory, and special rules for conservation contributions of agricultural property. Plan ahead if your partnership benefits from these provisions.

Section 179 Limits

For 2011, partnerships could elect to expense up to $500,000 of qualifying property, with the deduction beginning to phase out when total purchases exceeded $2 million. These amounts changed in subsequent years.

Step-by-Step (High Level)

Step 1: Gather Your Records

Collect all financial statements, bank records, receipts, and documentation of income and expenses for the entire tax year. You'll need profit and loss statements, balance sheets, and records of each partner's capital account activity.

Step 2: Determine Your Accounting Method

Most partnerships use either the cash method (income recorded when received, expenses when paid) or accrual method (income recorded when earned, expenses when incurred). The method must be consistent and clearly reflect income. Partnerships with corporate partners and average annual gross receipts over $5 million generally cannot use the cash method.

Step 3: Complete the Main Form 1065

Fill in identifying information at the top, then report income on page 1, lines 1-8. Deductions go on lines 9-22. The result is ordinary business income (or loss), which flows to Schedule K.

Step 4: Fill Out Schedule K

This schedule breaks down all partnership items into categories that partners need for their individual returns: ordinary income, rental income, guaranteed payments, interest, dividends, capital gains, charitable contributions, and various deductions and credits.

Step 5: Prepare Schedule K-1 for Each Partner

Create an individual Schedule K-1 for every partner, showing their percentage ownership and their specific share of each item from Schedule K. Each partner's K-1 must match their portion of partnership activities.

Step 6: Complete Supporting Schedules

Fill out Schedule B (Other Information questionnaire), Schedule L (Balance Sheets), Schedule M-1 (Reconciliation of Income), and Schedule M-2 (Analysis of Partners' Capital Accounts). If you have cost of goods sold, complete Form 1125-A.

Step 7: Sign and File

A general partner or LLC member manager must sign the return. Assemble the return in order: Form 1065, Schedule K, supporting schedules, then all Schedules K-1. File with the appropriate IRS Service Center (Ogden, UT or Cincinnati, OH, depending on your location and asset size).

Step 8: Distribute K-1s to Partners

Give each partner their Schedule K-1 by the return due date (including extensions). Partners need these forms to complete their personal tax returns.

Common Mistakes and How to Avoid Them

Mistake #1: Missing or Incorrect Partner Information

Errors in partner names, Social Security numbers, or addresses cause processing delays. Double-check every partner's information against official documents before filing.

Mistake #2: Schedule K and K-1 Mismatches

The sum of all individual K-1s must equal the totals on Schedule K. Many preparers make mathematical errors or forget to account for all partners. Create a reconciliation worksheet to verify totals match.

Mistake #3: Ignoring Basis Tracking

Partners must track their "basis" (investment) in the partnership to determine how much loss they can deduct. The partnership provides capital account information, but partners are responsible for tracking their tax basis separately. Keep detailed records of contributions, distributions, and allocated income/losses.

Mistake #4: Misclassifying Guaranteed Payments

Payments to partners for services or capital use that are determined without regard to partnership income should be reported as guaranteed payments (line 10 and Schedule K, line 4). Don't confuse these with regular distributions or disguised salary payments.

Mistake #5: Incomplete Schedule B

Every question on Schedule B must be answered. Leaving items blank or writing "N/A" without considering whether the question applies can trigger IRS inquiries or processing delays.

Mistake #6: Balance Sheet Errors

Schedules L, M-1, and M-2 must reconcile. Your ending capital on Schedule M-2 should match the total capital shown on Schedule L. Beginning balances for the current year must match ending balances from the prior year.

Mistake #7: Forgetting to File Forms 1099

Partnerships must issue Forms 1099 to vendors and service providers paid $600 or more during the year. Failure to file these forms can result in substantial penalties separate from Form 1065 penalties.

Mistake #8: Late K-1 Distribution

Partners need their K-1s to file their personal returns. Failing to provide K-1s on time creates problems for your partners and may damage business relationships. Set internal deadlines to ensure timely distribution.

What Happens After You File

IRS Processing (60-90 Days)

The IRS receives and processes your return. For 2011 paper returns, processing typically took 8-12 weeks. E-filed returns process faster, usually within 3-4 weeks.

Partner Tax Returns

Each partner reports their K-1 information on their individual tax return (Form 1040, Form 1041 for trusts, or Form 1120 for corporate partners). Partners must generally report items consistently with how the partnership reported them unless filing Form 8082 to notify the IRS of inconsistent treatment.

Audit Considerations

While most returns aren't audited, partnerships face unified audit procedures under the TEFRA rules (Tax Equity and Fiscal Responsibility Act). In a partnership audit, adjustments are determined at the partnership level, and the Tax Matters Partner represents the partnership. Individual partners may have limited ability to separately contest adjustments.

Penalties if Late

The IRS assesses $195 per month (or partial month) per partner for up to 12 months for late filing. For a partnership with 5 partners filing 3 months late, the penalty would be $2,925 ($195 × 3 months × 5 partners). Request penalty abatement in writing if you have reasonable cause for late filing.

K-1 Distribution Penalties

Failing to furnish K-1s to partners or providing incorrect information results in $100 penalties per K-1, capped at $1.5 million annually. If the IRS determines the failures were intentional, penalties increase to $250 per K-1 (or 10% of the aggregate items to be reported if greater) with no maximum cap.

Record Retention

Keep all partnership records for at least 3 years from the date the return is due or filed, whichever is later. Records supporting property basis should be kept for as long as needed to determine basis of original or replacement property.

FAQs

Q1: Does the partnership pay taxes on its income?

No. Partnerships are "pass-through" entities. The partnership itself doesn't pay federal income tax. Instead, all income, deductions, and credits pass through to the partners, who report their share on their individual tax returns and pay tax at their personal rates.

Q2: What if our partnership had no activity during 2011?

If your partnership received no income and had no deductible expenses or credits, you're not required to file Form 1065. However, many partnerships file anyway to maintain their active status with the IRS and provide documentation to partners. If you had even minimal activity (like bank interest), you must file.

Q3: Can a husband and wife avoid filing Form 1065?

Yes, if certain conditions are met. A qualified joint venture between spouses allows them to report income and expenses directly on their individual Schedule C returns instead of filing Form 1065. Both spouses must materially participate in the business, file a joint tax return, and the business must be co-owned without being held in a formal entity like an LLC. Once made, this election cannot be easily revoked.

Q4: What's the difference between guaranteed payments and distributions?

Guaranteed payments are compensation for services or capital use, determined without regard to partnership income (like a partner's salary). They're deductible by the partnership and reported as ordinary income by the partner. Distributions are returns of capital or profit shares, not deductible by the partnership, and generally not taxable to partners unless exceeding their basis.

Q5: Do I need to file electronically?

For 2011, partnerships with more than 100 partners were required to file electronically. Smaller partnerships had the option but weren't required to e-file. Electronic filing offers faster processing, immediate confirmation of receipt, and fewer errors. You can request a waiver of e-filing requirements by submitting a written hardship request to the Ogden Submission Processing Center.

Q6: What if I discover an error after filing?

File an amended return using Form 1065X as soon as you discover the error. You must also provide amended K-1s to any partners whose information changed. Don't ignore errors hoping they'll go unnoticed – the IRS may assess additional penalties for substantial understatement of income. If the error is in the partners' favor (you overstated their income), they'll appreciate the correction.

Q7: Can I get help if I'm overwhelmed?

Absolutely. The IRS Taxpayer Advocate Service (1-877-777-4778) provides free assistance to partnerships experiencing economic hardship or unresolved tax problems. You can also consult a CPA or enrolled agent specializing in partnership taxation.

Additional Resources

IRS Partner's Instructions for Schedule K-1 (Form 1065) 2011
IRS Form 1065 Information Page

Frequently Asked Questions

Form 1065: U.S. Return of Partnership Income (2011) – A Complete Guide

What Form 1065 Is For

Form 1065 is an information return that partnerships file with the IRS to report their financial activities for the year. Think of it as a report card for your partnership's business – but here's the key difference: the partnership itself doesn't pay federal income tax. Instead, it works on a "pass-through" basis, meaning all profits and losses flow through to the individual partners, who then report their share on their personal tax returns.

Who needs to file? Nearly every domestic partnership operating in the United States must file Form 1065, including general partnerships, limited partnerships, and limited liability companies (LLCs) classified as partnerships with at least two members. The only exception is if your partnership had absolutely no income and no expenses that could be claimed as deductions or credits during the year.

Along with Form 1065, the partnership must prepare Schedule K-1 for each partner. This critical document shows each partner's individual share of the partnership's income, deductions, credits, and other tax items. Partners use their Schedule K-1 to complete their personal tax returns (typically Form 1040), reporting their portion of partnership profits or losses. The partnership files copies of all K-1s with the IRS, while each partner keeps their copy for their records.

When You’d Use Form 1065

Regular Filing Deadline

For calendar year 2011, partnerships must file Form 1065 by April 15, 2012 (the 15th day of the 4th month after the tax year ends). If your partnership uses a fiscal year, the deadline is the 15th day of the 4th month after your fiscal year closes.

Extensions

If you need more time, you can request a 5-month extension by filing Form 7004 by the original due date. This pushes your deadline to September 15, 2012, for calendar-year partnerships. Note that partnerships keeping records outside the U.S. and Puerto Rico automatically get a 2-month extension without filing Form 7004.

Late Returns

If you miss the deadline, file as soon as possible. The IRS assesses penalties for late filing (see penalties section below), but the longer you wait, the more you'll owe. Life happens – businesses face challenges, records get lost, or you might simply have missed the deadline. Don't let fear of penalties prevent you from filing; reasonable cause can sometimes result in penalty relief.

Amended Returns

Made an error on your original return? For 2011, you'll need to use Form 1065X (Amended Return or Administrative Adjustment Request) if filing on paper. If filing electronically, complete a new Form 1065 and check box G(5) to indicate it's an amended return. When you amend the partnership return, you must also prepare amended Schedule K-1s for any partners whose information changed, checking the "Amended K-1" box at the top. Give each affected partner their corrected K-1 and file copies with the IRS.

Key Rules or Details for 2011

The 2011 tax year included several important updates and provisions:

Cost of Goods Sold Change

For 2011, the IRS moved the Cost of Goods Sold calculation from Schedule A on Form 1065 to a separate Form 1125-A. If your partnership sells products or maintains inventory, you'll complete this separate form.

Merchant Card Payment Reporting Deferred

The IRS postponed the requirement to separately report merchant card and third-party network payments from Form 1099-K. Simply report your gross receipts from all sources on lines 1a through 1d as you normally would.

Balance Sheet Updates

The 2011 form added new lines to Schedule L (Balance Sheets) to track loans between the partnership and partners. Line 7a captures loans to partners or persons related to partners, while line 19a shows loans from partners.

Enhanced Disclosure Requirements

Schedule B added questions about foreign government partners (line 3a), Form 1099 filing compliance (lines 18a and 18b), and Form 5471 filings for foreign corporation interests (line 19).

Expiring Provisions

Several tax benefits were set to expire after December 31, 2011, including enhanced deductions for film and television production expenses, increased charitable contribution deductions for food inventory, and special rules for conservation contributions of agricultural property. Plan ahead if your partnership benefits from these provisions.

Section 179 Limits

For 2011, partnerships could elect to expense up to $500,000 of qualifying property, with the deduction beginning to phase out when total purchases exceeded $2 million. These amounts changed in subsequent years.

Step-by-Step (High Level)

Step 1: Gather Your Records

Collect all financial statements, bank records, receipts, and documentation of income and expenses for the entire tax year. You'll need profit and loss statements, balance sheets, and records of each partner's capital account activity.

Step 2: Determine Your Accounting Method

Most partnerships use either the cash method (income recorded when received, expenses when paid) or accrual method (income recorded when earned, expenses when incurred). The method must be consistent and clearly reflect income. Partnerships with corporate partners and average annual gross receipts over $5 million generally cannot use the cash method.

Step 3: Complete the Main Form 1065

Fill in identifying information at the top, then report income on page 1, lines 1-8. Deductions go on lines 9-22. The result is ordinary business income (or loss), which flows to Schedule K.

Step 4: Fill Out Schedule K

This schedule breaks down all partnership items into categories that partners need for their individual returns: ordinary income, rental income, guaranteed payments, interest, dividends, capital gains, charitable contributions, and various deductions and credits.

Step 5: Prepare Schedule K-1 for Each Partner

Create an individual Schedule K-1 for every partner, showing their percentage ownership and their specific share of each item from Schedule K. Each partner's K-1 must match their portion of partnership activities.

Step 6: Complete Supporting Schedules

Fill out Schedule B (Other Information questionnaire), Schedule L (Balance Sheets), Schedule M-1 (Reconciliation of Income), and Schedule M-2 (Analysis of Partners' Capital Accounts). If you have cost of goods sold, complete Form 1125-A.

Step 7: Sign and File

A general partner or LLC member manager must sign the return. Assemble the return in order: Form 1065, Schedule K, supporting schedules, then all Schedules K-1. File with the appropriate IRS Service Center (Ogden, UT or Cincinnati, OH, depending on your location and asset size).

Step 8: Distribute K-1s to Partners

Give each partner their Schedule K-1 by the return due date (including extensions). Partners need these forms to complete their personal tax returns.

Common Mistakes and How to Avoid Them

Mistake #1: Missing or Incorrect Partner Information

Errors in partner names, Social Security numbers, or addresses cause processing delays. Double-check every partner's information against official documents before filing.

Mistake #2: Schedule K and K-1 Mismatches

The sum of all individual K-1s must equal the totals on Schedule K. Many preparers make mathematical errors or forget to account for all partners. Create a reconciliation worksheet to verify totals match.

Mistake #3: Ignoring Basis Tracking

Partners must track their "basis" (investment) in the partnership to determine how much loss they can deduct. The partnership provides capital account information, but partners are responsible for tracking their tax basis separately. Keep detailed records of contributions, distributions, and allocated income/losses.

Mistake #4: Misclassifying Guaranteed Payments

Payments to partners for services or capital use that are determined without regard to partnership income should be reported as guaranteed payments (line 10 and Schedule K, line 4). Don't confuse these with regular distributions or disguised salary payments.

Mistake #5: Incomplete Schedule B

Every question on Schedule B must be answered. Leaving items blank or writing "N/A" without considering whether the question applies can trigger IRS inquiries or processing delays.

Mistake #6: Balance Sheet Errors

Schedules L, M-1, and M-2 must reconcile. Your ending capital on Schedule M-2 should match the total capital shown on Schedule L. Beginning balances for the current year must match ending balances from the prior year.

Mistake #7: Forgetting to File Forms 1099

Partnerships must issue Forms 1099 to vendors and service providers paid $600 or more during the year. Failure to file these forms can result in substantial penalties separate from Form 1065 penalties.

Mistake #8: Late K-1 Distribution

Partners need their K-1s to file their personal returns. Failing to provide K-1s on time creates problems for your partners and may damage business relationships. Set internal deadlines to ensure timely distribution.

What Happens After You File

IRS Processing (60-90 Days)

The IRS receives and processes your return. For 2011 paper returns, processing typically took 8-12 weeks. E-filed returns process faster, usually within 3-4 weeks.

Partner Tax Returns

Each partner reports their K-1 information on their individual tax return (Form 1040, Form 1041 for trusts, or Form 1120 for corporate partners). Partners must generally report items consistently with how the partnership reported them unless filing Form 8082 to notify the IRS of inconsistent treatment.

Audit Considerations

While most returns aren't audited, partnerships face unified audit procedures under the TEFRA rules (Tax Equity and Fiscal Responsibility Act). In a partnership audit, adjustments are determined at the partnership level, and the Tax Matters Partner represents the partnership. Individual partners may have limited ability to separately contest adjustments.

Penalties if Late

The IRS assesses $195 per month (or partial month) per partner for up to 12 months for late filing. For a partnership with 5 partners filing 3 months late, the penalty would be $2,925 ($195 × 3 months × 5 partners). Request penalty abatement in writing if you have reasonable cause for late filing.

K-1 Distribution Penalties

Failing to furnish K-1s to partners or providing incorrect information results in $100 penalties per K-1, capped at $1.5 million annually. If the IRS determines the failures were intentional, penalties increase to $250 per K-1 (or 10% of the aggregate items to be reported if greater) with no maximum cap.

Record Retention

Keep all partnership records for at least 3 years from the date the return is due or filed, whichever is later. Records supporting property basis should be kept for as long as needed to determine basis of original or replacement property.

FAQs

Q1: Does the partnership pay taxes on its income?

No. Partnerships are "pass-through" entities. The partnership itself doesn't pay federal income tax. Instead, all income, deductions, and credits pass through to the partners, who report their share on their individual tax returns and pay tax at their personal rates.

Q2: What if our partnership had no activity during 2011?

If your partnership received no income and had no deductible expenses or credits, you're not required to file Form 1065. However, many partnerships file anyway to maintain their active status with the IRS and provide documentation to partners. If you had even minimal activity (like bank interest), you must file.

Q3: Can a husband and wife avoid filing Form 1065?

Yes, if certain conditions are met. A qualified joint venture between spouses allows them to report income and expenses directly on their individual Schedule C returns instead of filing Form 1065. Both spouses must materially participate in the business, file a joint tax return, and the business must be co-owned without being held in a formal entity like an LLC. Once made, this election cannot be easily revoked.

Q4: What's the difference between guaranteed payments and distributions?

Guaranteed payments are compensation for services or capital use, determined without regard to partnership income (like a partner's salary). They're deductible by the partnership and reported as ordinary income by the partner. Distributions are returns of capital or profit shares, not deductible by the partnership, and generally not taxable to partners unless exceeding their basis.

Q5: Do I need to file electronically?

For 2011, partnerships with more than 100 partners were required to file electronically. Smaller partnerships had the option but weren't required to e-file. Electronic filing offers faster processing, immediate confirmation of receipt, and fewer errors. You can request a waiver of e-filing requirements by submitting a written hardship request to the Ogden Submission Processing Center.

Q6: What if I discover an error after filing?

File an amended return using Form 1065X as soon as you discover the error. You must also provide amended K-1s to any partners whose information changed. Don't ignore errors hoping they'll go unnoticed – the IRS may assess additional penalties for substantial understatement of income. If the error is in the partners' favor (you overstated their income), they'll appreciate the correction.

Q7: Can I get help if I'm overwhelmed?

Absolutely. The IRS Taxpayer Advocate Service (1-877-777-4778) provides free assistance to partnerships experiencing economic hardship or unresolved tax problems. You can also consult a CPA or enrolled agent specializing in partnership taxation.

Additional Resources

IRS Partner's Instructions for Schedule K-1 (Form 1065) 2011
IRS Form 1065 Information Page

Frequently Asked Questions

Form 1065: U.S. Return of Partnership Income (2011) – A Complete Guide

What Form 1065 Is For

Form 1065 is an information return that partnerships file with the IRS to report their financial activities for the year. Think of it as a report card for your partnership's business – but here's the key difference: the partnership itself doesn't pay federal income tax. Instead, it works on a "pass-through" basis, meaning all profits and losses flow through to the individual partners, who then report their share on their personal tax returns.

Who needs to file? Nearly every domestic partnership operating in the United States must file Form 1065, including general partnerships, limited partnerships, and limited liability companies (LLCs) classified as partnerships with at least two members. The only exception is if your partnership had absolutely no income and no expenses that could be claimed as deductions or credits during the year.

Along with Form 1065, the partnership must prepare Schedule K-1 for each partner. This critical document shows each partner's individual share of the partnership's income, deductions, credits, and other tax items. Partners use their Schedule K-1 to complete their personal tax returns (typically Form 1040), reporting their portion of partnership profits or losses. The partnership files copies of all K-1s with the IRS, while each partner keeps their copy for their records.

When You’d Use Form 1065

Regular Filing Deadline

For calendar year 2011, partnerships must file Form 1065 by April 15, 2012 (the 15th day of the 4th month after the tax year ends). If your partnership uses a fiscal year, the deadline is the 15th day of the 4th month after your fiscal year closes.

Extensions

If you need more time, you can request a 5-month extension by filing Form 7004 by the original due date. This pushes your deadline to September 15, 2012, for calendar-year partnerships. Note that partnerships keeping records outside the U.S. and Puerto Rico automatically get a 2-month extension without filing Form 7004.

Late Returns

If you miss the deadline, file as soon as possible. The IRS assesses penalties for late filing (see penalties section below), but the longer you wait, the more you'll owe. Life happens – businesses face challenges, records get lost, or you might simply have missed the deadline. Don't let fear of penalties prevent you from filing; reasonable cause can sometimes result in penalty relief.

Amended Returns

Made an error on your original return? For 2011, you'll need to use Form 1065X (Amended Return or Administrative Adjustment Request) if filing on paper. If filing electronically, complete a new Form 1065 and check box G(5) to indicate it's an amended return. When you amend the partnership return, you must also prepare amended Schedule K-1s for any partners whose information changed, checking the "Amended K-1" box at the top. Give each affected partner their corrected K-1 and file copies with the IRS.

Key Rules or Details for 2011

The 2011 tax year included several important updates and provisions:

Cost of Goods Sold Change

For 2011, the IRS moved the Cost of Goods Sold calculation from Schedule A on Form 1065 to a separate Form 1125-A. If your partnership sells products or maintains inventory, you'll complete this separate form.

Merchant Card Payment Reporting Deferred

The IRS postponed the requirement to separately report merchant card and third-party network payments from Form 1099-K. Simply report your gross receipts from all sources on lines 1a through 1d as you normally would.

Balance Sheet Updates

The 2011 form added new lines to Schedule L (Balance Sheets) to track loans between the partnership and partners. Line 7a captures loans to partners or persons related to partners, while line 19a shows loans from partners.

Enhanced Disclosure Requirements

Schedule B added questions about foreign government partners (line 3a), Form 1099 filing compliance (lines 18a and 18b), and Form 5471 filings for foreign corporation interests (line 19).

Expiring Provisions

Several tax benefits were set to expire after December 31, 2011, including enhanced deductions for film and television production expenses, increased charitable contribution deductions for food inventory, and special rules for conservation contributions of agricultural property. Plan ahead if your partnership benefits from these provisions.

Section 179 Limits

For 2011, partnerships could elect to expense up to $500,000 of qualifying property, with the deduction beginning to phase out when total purchases exceeded $2 million. These amounts changed in subsequent years.

Step-by-Step (High Level)

Step 1: Gather Your Records

Collect all financial statements, bank records, receipts, and documentation of income and expenses for the entire tax year. You'll need profit and loss statements, balance sheets, and records of each partner's capital account activity.

Step 2: Determine Your Accounting Method

Most partnerships use either the cash method (income recorded when received, expenses when paid) or accrual method (income recorded when earned, expenses when incurred). The method must be consistent and clearly reflect income. Partnerships with corporate partners and average annual gross receipts over $5 million generally cannot use the cash method.

Step 3: Complete the Main Form 1065

Fill in identifying information at the top, then report income on page 1, lines 1-8. Deductions go on lines 9-22. The result is ordinary business income (or loss), which flows to Schedule K.

Step 4: Fill Out Schedule K

This schedule breaks down all partnership items into categories that partners need for their individual returns: ordinary income, rental income, guaranteed payments, interest, dividends, capital gains, charitable contributions, and various deductions and credits.

Step 5: Prepare Schedule K-1 for Each Partner

Create an individual Schedule K-1 for every partner, showing their percentage ownership and their specific share of each item from Schedule K. Each partner's K-1 must match their portion of partnership activities.

Step 6: Complete Supporting Schedules

Fill out Schedule B (Other Information questionnaire), Schedule L (Balance Sheets), Schedule M-1 (Reconciliation of Income), and Schedule M-2 (Analysis of Partners' Capital Accounts). If you have cost of goods sold, complete Form 1125-A.

Step 7: Sign and File

A general partner or LLC member manager must sign the return. Assemble the return in order: Form 1065, Schedule K, supporting schedules, then all Schedules K-1. File with the appropriate IRS Service Center (Ogden, UT or Cincinnati, OH, depending on your location and asset size).

Step 8: Distribute K-1s to Partners

Give each partner their Schedule K-1 by the return due date (including extensions). Partners need these forms to complete their personal tax returns.

Common Mistakes and How to Avoid Them

Mistake #1: Missing or Incorrect Partner Information

Errors in partner names, Social Security numbers, or addresses cause processing delays. Double-check every partner's information against official documents before filing.

Mistake #2: Schedule K and K-1 Mismatches

The sum of all individual K-1s must equal the totals on Schedule K. Many preparers make mathematical errors or forget to account for all partners. Create a reconciliation worksheet to verify totals match.

Mistake #3: Ignoring Basis Tracking

Partners must track their "basis" (investment) in the partnership to determine how much loss they can deduct. The partnership provides capital account information, but partners are responsible for tracking their tax basis separately. Keep detailed records of contributions, distributions, and allocated income/losses.

Mistake #4: Misclassifying Guaranteed Payments

Payments to partners for services or capital use that are determined without regard to partnership income should be reported as guaranteed payments (line 10 and Schedule K, line 4). Don't confuse these with regular distributions or disguised salary payments.

Mistake #5: Incomplete Schedule B

Every question on Schedule B must be answered. Leaving items blank or writing "N/A" without considering whether the question applies can trigger IRS inquiries or processing delays.

Mistake #6: Balance Sheet Errors

Schedules L, M-1, and M-2 must reconcile. Your ending capital on Schedule M-2 should match the total capital shown on Schedule L. Beginning balances for the current year must match ending balances from the prior year.

Mistake #7: Forgetting to File Forms 1099

Partnerships must issue Forms 1099 to vendors and service providers paid $600 or more during the year. Failure to file these forms can result in substantial penalties separate from Form 1065 penalties.

Mistake #8: Late K-1 Distribution

Partners need their K-1s to file their personal returns. Failing to provide K-1s on time creates problems for your partners and may damage business relationships. Set internal deadlines to ensure timely distribution.

What Happens After You File

IRS Processing (60-90 Days)

The IRS receives and processes your return. For 2011 paper returns, processing typically took 8-12 weeks. E-filed returns process faster, usually within 3-4 weeks.

Partner Tax Returns

Each partner reports their K-1 information on their individual tax return (Form 1040, Form 1041 for trusts, or Form 1120 for corporate partners). Partners must generally report items consistently with how the partnership reported them unless filing Form 8082 to notify the IRS of inconsistent treatment.

Audit Considerations

While most returns aren't audited, partnerships face unified audit procedures under the TEFRA rules (Tax Equity and Fiscal Responsibility Act). In a partnership audit, adjustments are determined at the partnership level, and the Tax Matters Partner represents the partnership. Individual partners may have limited ability to separately contest adjustments.

Penalties if Late

The IRS assesses $195 per month (or partial month) per partner for up to 12 months for late filing. For a partnership with 5 partners filing 3 months late, the penalty would be $2,925 ($195 × 3 months × 5 partners). Request penalty abatement in writing if you have reasonable cause for late filing.

K-1 Distribution Penalties

Failing to furnish K-1s to partners or providing incorrect information results in $100 penalties per K-1, capped at $1.5 million annually. If the IRS determines the failures were intentional, penalties increase to $250 per K-1 (or 10% of the aggregate items to be reported if greater) with no maximum cap.

Record Retention

Keep all partnership records for at least 3 years from the date the return is due or filed, whichever is later. Records supporting property basis should be kept for as long as needed to determine basis of original or replacement property.

FAQs

Q1: Does the partnership pay taxes on its income?

No. Partnerships are "pass-through" entities. The partnership itself doesn't pay federal income tax. Instead, all income, deductions, and credits pass through to the partners, who report their share on their individual tax returns and pay tax at their personal rates.

Q2: What if our partnership had no activity during 2011?

If your partnership received no income and had no deductible expenses or credits, you're not required to file Form 1065. However, many partnerships file anyway to maintain their active status with the IRS and provide documentation to partners. If you had even minimal activity (like bank interest), you must file.

Q3: Can a husband and wife avoid filing Form 1065?

Yes, if certain conditions are met. A qualified joint venture between spouses allows them to report income and expenses directly on their individual Schedule C returns instead of filing Form 1065. Both spouses must materially participate in the business, file a joint tax return, and the business must be co-owned without being held in a formal entity like an LLC. Once made, this election cannot be easily revoked.

Q4: What's the difference between guaranteed payments and distributions?

Guaranteed payments are compensation for services or capital use, determined without regard to partnership income (like a partner's salary). They're deductible by the partnership and reported as ordinary income by the partner. Distributions are returns of capital or profit shares, not deductible by the partnership, and generally not taxable to partners unless exceeding their basis.

Q5: Do I need to file electronically?

For 2011, partnerships with more than 100 partners were required to file electronically. Smaller partnerships had the option but weren't required to e-file. Electronic filing offers faster processing, immediate confirmation of receipt, and fewer errors. You can request a waiver of e-filing requirements by submitting a written hardship request to the Ogden Submission Processing Center.

Q6: What if I discover an error after filing?

File an amended return using Form 1065X as soon as you discover the error. You must also provide amended K-1s to any partners whose information changed. Don't ignore errors hoping they'll go unnoticed – the IRS may assess additional penalties for substantial understatement of income. If the error is in the partners' favor (you overstated their income), they'll appreciate the correction.

Q7: Can I get help if I'm overwhelmed?

Absolutely. The IRS Taxpayer Advocate Service (1-877-777-4778) provides free assistance to partnerships experiencing economic hardship or unresolved tax problems. You can also consult a CPA or enrolled agent specializing in partnership taxation.

Additional Resources

IRS Partner's Instructions for Schedule K-1 (Form 1065) 2011
IRS Form 1065 Information Page

Form 1065: U.S. Return of Partnership Income (2011) – A Complete Guide

What Form 1065 Is For

When You’d Use Form 1065

Regular Filing Deadline

Extensions

Late Returns

Amended Returns

Key Rules or Details for 2011

Cost of Goods Sold Change

Merchant Card Payment Reporting Deferred

Balance Sheet Updates

Enhanced Disclosure Requirements

Expiring Provisions

Section 179 Limits

Step-by-Step (High Level)

Step 1: Gather Your Records

Step 2: Determine Your Accounting Method

Step 3: Complete the Main Form 1065

Step 4: Fill Out Schedule K

Step 5: Prepare Schedule K-1 for Each Partner

Step 6: Complete Supporting Schedules

Step 7: Sign and File

Step 8: Distribute K-1s to Partners

Common Mistakes and How to Avoid Them

Mistake #1: Missing or Incorrect Partner Information

Mistake #2: Schedule K and K-1 Mismatches

Mistake #3: Ignoring Basis Tracking

Mistake #4: Misclassifying Guaranteed Payments

Mistake #5: Incomplete Schedule B

Mistake #6: Balance Sheet Errors

Mistake #7: Forgetting to File Forms 1099

Mistake #8: Late K-1 Distribution

What Happens After You File

IRS Processing (60-90 Days)

Partner Tax Returns

Audit Considerations

Penalties if Late

K-1 Distribution Penalties

Record Retention

FAQs

Q1: Does the partnership pay taxes on its income?

Q2: What if our partnership had no activity during 2011?

Q3: Can a husband and wife avoid filing Form 1065?

Q4: What's the difference between guaranteed payments and distributions?

Q5: Do I need to file electronically?

Q6: What if I discover an error after filing?

Q7: Can I get help if I'm overwhelmed?

Additional Resources

Thank you for submitting!

Frequently Asked Questions

Related Articles

Form 1065: U.S. Return of Partnership Income (2011) – A Complete Guide

What Form 1065 Is For

When You’d Use Form 1065

Regular Filing Deadline

Extensions

Late Returns

Amended Returns

Key Rules or Details for 2011

Cost of Goods Sold Change

Merchant Card Payment Reporting Deferred

Balance Sheet Updates

Enhanced Disclosure Requirements

Expiring Provisions

Section 179 Limits

Step-by-Step (High Level)

Step 1: Gather Your Records

Step 2: Determine Your Accounting Method

Step 3: Complete the Main Form 1065

Step 4: Fill Out Schedule K

Step 5: Prepare Schedule K-1 for Each Partner

Step 6: Complete Supporting Schedules

Step 7: Sign and File

Step 8: Distribute K-1s to Partners

Common Mistakes and How to Avoid Them

Mistake #1: Missing or Incorrect Partner Information

Mistake #2: Schedule K and K-1 Mismatches

Mistake #3: Ignoring Basis Tracking

Mistake #4: Misclassifying Guaranteed Payments

Mistake #5: Incomplete Schedule B