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What Partnership Return Do I File?

Headliner Volume 113
March 2, 2005

Every year, business taxpayers have questions about what tax forms a partnership should file. Here are some common forms and schedules partnerships use. This list is not all inclusive and you should consult the instructions for each form for any related forms necessary to file a complete tax return.

Form 1065 – U.S. Partnership Return of Income

Form 1065 is an information return a partnership uses to report its income, deductions, gains, losses, etc. A partnership does not pay tax on its income but “passes through” any profits or losses to its partners. Partners must include partnership items on their tax returns.

Domestic Partnerships
Except as provided in the instructions, every domestic partnership must file Form 1065, unless it neither receives income nor incurs any expenditure treated as deductions or credits for Federal income tax purposes.

Entities formed as LLCs that are classified as partnerships for Federal income tax purposes must file Form 1065. Special rules apply for a religious or apostolic organization exempt from income tax under section 501(d) that must file Form 1065 to report its taxable income. See the Instructions for Form 1065 for more information.

Foreign Partnerships
Generally, a foreign partnership that has gross income effectively connected with the conduct of a trade or business within the United States or has gross income derived from sources in the United States must file Form 1065, even if its principal place of business is outside the United States or all its members are foreign persons. A foreign partnership required to file a return generally must report all of its foreign and U.S. source income.

A foreign partnership with U.S. source income is not required to file Form 1065 if it qualifies as either one of two exceptions. See the Instructions for Form 1065 for more information.

Form 1065 Schedule D - Capital Gains and Losses

A partnership should use Schedule D (Form 1065) to report sales or exchanges of capital assets, capital gain distributions, and non-business bad debts. The partnership should not report on Schedule D capital gains (losses) specially allocated to any partners. More information is available under the How Income Is Shared Among Partners chapter in the Instructions for Form 1065.

Other forms that may be required along with Schedule D include:

Additional information is in Publication 544, Sales and Other Dispositions of Assets.

Form 1065 Schedule K-1 – Partners Share of Income, Credits etc.

The Internal Revenue Service has redesigned the Schedule K-1 for Form 1065 for 2004 tax returns.  The new form is similar in its reporting requirements and purpose as the old K-1 however, the IRS restructured the form to make it easier to understand.  The form is now one page and contains spaces for various codes to further clarify the type of income, deduction or credit reported and where the amount flows through to the 1040 or other form.

The partnership uses Schedule K-1 to report your share of the partnership’s income, credits, deductions, etc. All Partnerships must complete Schedule K.  Partners should keep the K-1 with their tax return. The partnership has filed a copy with the IRS.

Although the partnership generally is not subject to income tax, partners are liable for tax on their share of the partnership income, whether or not the partnership distributed the income. Partners must include their share on their tax return if a return is required. The Partners Instructions for Schedule K-1 (Form 1065) explain where partners should report the items shown on Schedule K-1 on their tax return.

The amount of loss and deduction that partners may claim on their tax return may be less than the amount reported on the Schedule K-1. It is the partner’s responsibility to consider and apply any applicable limitations. More information is available in the Limitations on Losses, Deductions, and Credits section on page 2 of the Instructions for Schedule K-1.

If  “attach schedule” appears beside a line item on Schedule K-1, a partner should refer to either the schedule that the partnership has attached for that line or line 25 of Schedule K-1.

Form 1065B – US Partnership Return of Income for Electing Large Partnerships

Form 1065-B is an information return an electing large partnership (as defined in IRC section 775) uses to report its income, deductions, gains, losses, etc.  An electing large partnership may be required to pay certain taxes, such as recapture of the investment credit, but generally it “passes through” any profits or losses to its partners. Partners must include these items on their tax returns.  Additional information about the requirements for Form 1065B is in the Instructions for Form 1065B.

Form 1065B Schedule K-1 – Partners Share of Income, Credits etc.

Form 1065B Schedule K-1 has the same purpose as Form 1065 Schedule K-1 in that it reports the partner’s share of income, credits and other items.