What Form 1065 Is For

Form 1065 is an information return used by partnerships to report their annual financial activity to the Internal Revenue Service. Unlike corporate tax returns, Form 1065 doesn't calculate tax owed by the partnership itself. Instead, partnerships are "pass-through" entities, meaning the business's profits, losses, deductions, and credits flow through to the individual partners, who then report these items on their personal or business tax returns.

The form captures the partnership's total income, gains, losses, deductions, and credits from all business operations during the tax year. Every domestic partnership that receives income or incurs deductible expenses must file Form 1065, with few exceptions. This includes general partnerships, limited partnerships (LPs), limited liability partnerships (LLPs), and multi-member limited liability companies (LLCs) classified as partnerships for tax purposes.

Along with Form 1065, partnerships must prepare Schedule K-1 for each partner. The Schedule K-1 shows each partner's individual share of the partnership's income, deductions, credits, and other tax items. Partners use this information to complete their own tax returns, whether they're individuals filing Form 1040, corporations filing Form 1120, or other entities. In essence, Form 1065 serves as both a comprehensive financial report to the IRS and a mechanism for allocating tax responsibility among the partners.

Foreign partnerships with U.S.-source income or those engaged in a U.S. trade or business generally must also file Form 1065, reporting both their foreign and U.S. source income. IRS.gov

When You’d Use Form 1065 (Including Late and Amended Filings)

Regular Filing

For the 2014 tax year, partnerships must file Form 1065 by the 15th day of the 4th month following the close of their tax year. For calendar-year partnerships (most common), this meant an April 15, 2015 deadline. Fiscal-year partnerships follow the same rule based on their specific year-end date.

Extensions

If you need more time, you can request a 5-month extension by filing Form 7004 by the original due date. This extension can be filed electronically and pushes the deadline to September 15, 2015 for calendar-year partnerships. Partnerships keeping their records outside the U.S. and Puerto Rico automatically receive a 2-month extension (to June 15 for calendar-year filers) without filing Form 7004, but can request an additional 3 months if needed.

Late Filing

If you miss the deadline without filing for an extension, you must still file Form 1065 as soon as possible. The IRS will assess penalties for late filing, but submitting the return late is far better than not filing at all. The penalty structure is substantial: $195 per partner per month (or partial month) for up to 12 months of delay.

Amended Returns

If you discover errors after filing your 2014 Form 1065, you have two options depending on your filing method. For electronic amendments, complete a new Form 1065, check box G(5) to indicate it's an amended return, and attach a detailed statement explaining each change with line numbers, corrected amounts, and reasons. For paper amendments, use Form 1065-X (Amended Return or Administrative Adjustment Request). If any Schedule K-1 information was incorrect, you must file amended K-1s for affected partners, checking the "Amended K-1" box at the top. Partners must then amend their own returns if the changes affect their personal tax liability. IRS.gov

Key Rules and Requirements for 2014

Electronic Filing Requirements

Partnerships with more than 100 partners were required to file Form 1065 and all related schedules electronically. Smaller partnerships had the option to e-file but weren't required to do so.

Schedule K-1 Changes

The 2014 version introduced a new Code Y in box 20 of Schedule K-1, specifically for reporting information related to the net investment income tax (a 3.8% surtax on certain investment income introduced by the Affordable Care Act). The previous Code Y ("Other information") became Code Z.

Tangible Property Regulations

Final regulations under Internal Revenue Code sections 162(a) and 263(a) took full effect for tax years beginning after December 31, 2013. These rules significantly impacted how partnerships deducted or capitalized expenditures related to acquiring, producing, or improving tangible property. Partnerships needed to carefully evaluate repairs versus improvements, with new safe harbors and simplified procedures available.

Accounting Method Requirements

Partnerships with inventory generally must use the accrual method of accounting. However, partnerships with average annual gross receipts of $5 million or less over the prior three years may use the cash method, even if they have inventory or a corporate partner (with some exceptions for tax shelters).

Who Must Sign

Form 1065 isn't considered valid unless signed by a general partner or LLC member-manager. When multiple general partners exist, only one signature is required, but that person takes responsibility for the accuracy of the return.

Record Retention

Partnerships must maintain records supporting all items on the return for at least three years from the return's due date or filing date, whichever is later. Records establishing basis in partnership property must be kept indefinitely. IRS.gov

Step-by-Step (High Level)

Step 1: Gather Financial Records

Compile all income statements, expense records, receipts, and financial statements for the partnership's 2014 tax year. Ensure your books are closed and reconciled.

Step 2: Determine Each Partner's Allocation

Review your partnership agreement to understand how income, losses, deductions, and credits are allocated among partners. These allocations must have "substantial economic effect" under IRS rules.

Step 3: Complete the Income Section

Report gross receipts or sales (line 1a), cost of goods sold (line 2), and calculate gross profit. Add other income sources like interest, dividends, capital gains, and other business income.

Step 4: Calculate Deductions

Detail all ordinary and necessary business expenses including salaries, guaranteed payments to partners, rent, interest, taxes, depreciation, and other deductions. Remember that some items must be separately stated on Schedule K rather than deducted on page 1.

Step 5: Complete Schedule K (Summary)

Schedule K summarizes all partners' shares of income, deductions, credits, and other items that must be reported separately (rather than in ordinary business income). This includes items like net rental income, Section 179 deductions, charitable contributions, and foreign taxes.

Step 6: Prepare Individual Schedules K-1

Create a separate Schedule K-1 for each person who was a partner at any time during 2014. Each K-1 shows that partner's distributive share of the items from Schedule K, along with partner-specific information.

Step 7: Complete Required Schedules

Fill out Schedule L (balance sheet), Schedule M-1 or M-3 (reconciliation of book and tax income), Schedule M-2 (analysis of partners' capital accounts), and Schedule B (additional questions about the partnership).

Step 8: Review and Sign

A general partner or LLC member-manager must review the complete return for accuracy and sign it. Attach all required schedules and statements.

Step 9: File and Distribute

Submit Form 1065 with attached K-1s to the IRS by the deadline. Provide each partner with their Schedule K-1 by the same deadline. IRS.gov

Common Mistakes and How to Avoid Them

1. Incomplete Forms or Using "See Attached"

The IRS explicitly warns against leaving entry spaces blank or writing "See Attached" instead of entering data in designated fields. Complete every applicable line. If you need more space, attach separate sheets but always show totals on the printed form itself.

2. Missing or Late Schedule K-1s

Failure to provide Schedule K-1s to all partners by the filing deadline triggers a $100 penalty per K-1, potentially reaching $1.5 million total. Prepare K-1s simultaneously with Form 1065, not as an afterthought.

3. Misreporting Tax-Exempt Income

Tax-exempt income should never appear on lines 1a through 8 of Form 1065. Instead, report it on line 18b of Schedule K and box 18 of each Schedule K-1 using the appropriate code. Mixing tax-exempt and taxable income causes calculation errors and partner confusion.

4. Inconsistent Partner Allocations

The total of all partners' K-1 amounts for each item must exactly match the corresponding Schedule K amount. Use a spreadsheet or software to verify this crucial reconciliation before filing.

5. Wrong Filing Address

Filing location depends on your partnership's location and total assets. Partnerships with $10 million or more in assets, or those filing Schedule M-3 regardless of asset size, must file with the Ogden, Utah service center. Others may file with Cincinnati, Ohio (for eastern states) or Ogden (for western states and foreign partnerships).

6. Forgetting the EIN

Every partnership must have an Employer Identification Number (EIN) and include it on Form 1065. Don't use a partner's social security number or individual EIN.

7. Ignoring New 2014 Rules

The tangible property capitalization rules and new Schedule K-1 Code Y for net investment income tax information were new for 2014. Partnerships that overlooked these changes filed incomplete returns. IRS.gov

What Happens After You File

IRS Processing

Once filed, the IRS processes Form 1065 as an information return. Unlike individual or corporate returns, there's no tax calculation or refund check. The IRS uses the information to verify that partners correctly report their distributive shares on their personal returns.

Partner Reporting

Each partner receives their Schedule K-1 and must report the information on their own tax return. Individual partners report most items on Schedule E (Supplemental Income and Loss) of Form 1040. The partner's tax return is typically due April 15, 2015 for the 2014 tax year, though partners can request extensions.

IRS Verification and Matching

The IRS's computers match the information from each partner's K-1 (as attached to Form 1065) with what appears on that partner's individual return. Discrepancies trigger automated notices asking for explanations or corrections.

Potential Penalties

If the IRS identifies problems after processing, they may assess penalties: late filing penalties ($195 per partner per month), penalties for incomplete or incorrect K-1s ($100-$250 per K-1), or accuracy-related penalties if the return substantially understates income.

Audit Possibility

Form 1065 can be selected for audit, though partnership audits are relatively less common than individual audits. For tax years beginning before 2018, partnerships were generally subject to TEFRA (Tax Equity and Fiscal Responsibility Act) audit procedures, where the IRS audits the partnership as an entity and any adjustments flow through to partners via amended K-1s.

State Filing

Most states with income taxes require separate partnership information returns. After filing federally, check your state's requirements and deadlines, which often differ from federal rules. IRS.gov

FAQs

1. Does my partnership have to file if we had no income or activity in 2014?

Generally, no. If your partnership neither received income nor incurred any expenses that would qualify as deductions or credits, you don't need to file Form 1065. However, if you're unsure or had even minimal activity, filing a zero-return is safer than risking penalty notices.

2. What's the penalty for filing late, and can it be waived?

The penalty is $195 per partner per month (or partial month) for up to 12 months, multiplied by the number of partners. For a 5-partner partnership filed 3 months late, that's $2,925 ($195 × 5 × 3). The penalty can be waived if you can demonstrate "reasonable cause" for the delay—serious illness, natural disaster, or unavoidable absence are examples. Simply forgetting or being busy typically doesn't qualify.

3. My partnership dissolved during 2014. Do I still need to file?

Yes. A partnership that terminates during the year must file Form 1065 for the short tax year, from the beginning of the tax year to the termination date. Check the "Final return" box on page 1. A partnership terminates when it ceases all business operations or when 50% or more of the partnership interests are sold or exchanged within a 12-month period.

4. Can I file Form 1065 electronically, and is it required?

Partnerships with more than 100 partners must e-file Form 1065 for 2014. Other partnerships have the option to e-file but can still file paper returns. E-filing is faster, more secure, and reduces errors. Most tax software programs support partnership e-filing.

5. What if I disagree with my Schedule K-1 as a partner?

If you're a partner who receives a K-1 you believe is incorrect, first contact the partnership or tax matters partner to discuss the issue. If the partnership agrees, they should file an amended return and issue a corrected K-1. If they refuse and you file your return using different amounts, you must file Form 8082 (Notice of Inconsistent Treatment) with your return explaining the discrepancy.

6. Are guaranteed payments to partners deductible business expenses?

Yes. Guaranteed payments (payments to partners for services or use of capital that are determined without regard to partnership income) are deductible by the partnership on line 10 of Form 1065. They're also separately reported on Schedule K and each partner's K-1, as they're treated as ordinary income to the receiving partner.

7. Do I need to attach financial statements to Form 1065?

Not usually. Form 1065 includes Schedule L (balance sheet) and Schedule M-1 or M-3 (book-to-tax reconciliation), which provide financial information to the IRS. You don't need to attach full financial statements unless specifically requested during an audit or required by state law. IRS.gov

Sources

Sources: All information is sourced from official IRS publications including the 2014 Form 1065, 2014 Instructions for Form 1065, and the IRS Forms and Publications page.