DEFINITION of 'Form 1065'
Form 1065 is a tax document used to report the profits, losses and deductions of business partnerships. In addition to Form 1065, partnerships must also submit Schedule K-1, a document prepared for each individual partner. Schedule K-1 identifies the percentage share of profit and loss assigned to each partner, both at the beginning of the reporting period and at the end. Partnerships themselves do not pay income tax, so Form 1065 is just for informational purposes.
BREAKING DOWN 'Form 1065'
All domestic partnerships and Limited Liability Corporations (LLCs) classified as domestic partnerships must submit Form 1065. The Internal Revenue Service (IRS) defines a partnership as two or more people who carry on a trade or business together. Each person involved contributes something in terms of money, skill or property, and they each expect to share in the endeavor's profits and losses. Domestic simply refers to the fact that the partnership is based in the United States.
Foreign partnerships with income in the United States must also file Form 1065. As of 2016, there are some limited exceptions for foreign partnerships earning less than $20,000 in the United States or partnerships earning less than 1 percent of their income in the United States. They may not have to file.
Finally, non-profit religious organizations must report their income and losses on Form 1065. These organizations must show that any profits generated were given to their members as dividends, whether or not the dividends were distributed.
Information on Form 1065
Form 1065 requests a great deal of information about the partnership's annual financials, including gross receipts or sales as well as deductions and expenses such as rent, wages to employees, bad debts, interest on business loans, and other costs of doing business. The form also requires information on the partners involved, and their stake in the company.
In order to complete Form 1065, filers need information from the following forms: 4562, 1125-A and 4797. They also need copies of any 1099 forms issued by the partnership. In some cases, filers need Form 8893, Election of Partnership Level Tax Treatment; Form 8918, Material Advisor Disclosure Statement; Form 114 Report of Foreign Bank and Financial Accounts Disclosure Statement; Form 3520, Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts; and Form 3520, Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts. Farming partnerships need a copy of Form 1040 as well.
Form 1065 does not determine how much tax a partnership owes. Rather, it shows the IRS a snapshot of the company's financials for the year. However, the partners involved in the partnership must report their share of income from the partnership on their individual tax returns, and they must pay income tax on that. Partners must pay income tax on their earnings whether or not they draw the money out of the company.