Partnerships don’t pay federal income tax. Instead, the partnership’s income, losses, deductions, and credits pass through to the partners, who report these amounts on their personal income tax returns. Although partnerships aren’t taxed directly, they must file a tax return each year. Follow these five steps to file a partnership return:
Step 1: Prepare Form 1065, U.S. Return of Partnership Income
First, prepare the federal partnership tax return using IRS Form 1065. On this form, provide the partnership’s total income or loss. List deductions such as salaries, guaranteed payments to partners, rent, repairs, taxes, depreciation, and employee benefits. Complete the required Form 1065 schedules. Tax accountants can assist with this. A general partner must sign the partnership return.
Step 2: Prepare Schedule K-1
Next, complete a federal Schedule K-1, Partner’s Share of Income, Deductions, Credits, etc., for each partner during the tax year. The K-1 form details the partner’s name, address, and percentage shares of profits, losses, capital, and liabilities. It also lists the partner’s share of ordinary business income or loss, rental income or loss, interest income, self-employment income, credits, and distributions.
Step 3: File Form 1065 and Copies of the K-1 Forms
Then, file Form 1065 along with copies of the K-1 forms. The deadline for filing Form 1065 is April 15. Partnerships can file these forms by mail or electronically.
Step 4: File State Tax Returns
Check if your state requires you to file a state tax return. Depending on the state, you might need to pay franchise, excise, or sales taxes. Consult your state’s department of revenue website for specific filing requirements.
Step 5: File Personal Tax Returns
Finally, file your personal tax return. As a general or limited partner, report your share of the partnership income or loss on your federal income tax return. Use the information from the Schedule K-1 for this purpose. The partnership income or loss can affect your personal income tax rate, potentially moving you into a different tax bracket.
Filing a partnership return involves multiple steps, and consulting an accountant can simplify the process. The professionals at George Dimov, C.P.A. are ready to assist with this complex task.
