Filing Taxes as a Partnership
Partnerships don’t have a formal filing or registration requirements when originally formed. The partnership is merely an agreement between two or more people to do business together. For tax purposes, partnerships are considered pass-through entities meaning that the IRS does not consider partnerships to be separate from their owners for tax purposes. This means that the profit and loss of the partnership passes-through to the partners, who pay tax on their share of the profits on their individual tax returns. Even though the partnership itself does not pay income taxes, the partnership is required to file Form 1065, Return of Partnership Income, an informational tax return with the IRS.
The partners each receive a Schedule K-1 from the partnership which reports the partner’s share of income, deductions, gains, and losses from the partnership. The IRS reviews the partnership information return to determine whether the partners are properly reporting their Schedule K-1 income from the partnership on their individual tax returns.
Partnerships come in two varieties: general partnerships and limited partnerships.
- In general partnerships, all partners manage the company and assume responsibility for partnership’s debts and obligations.
- A limited partnership has both general partners and limited partners. The limited partners serve as investors only; they have no control over the company. The general partner may be personally liable for the debts of the company while limited partner is not.
The advantages of a partnership:
- No taxation at the partnership level.
- Partnerships offer superior flexibility to decide how partners split ownership, voting and income rights. Partners can generally split these items in any manner they see fit.
- Tax-free property transfers - contributions to and distributions from a partnership can generally be made without any income tax consequences.
- Partners may claim the Qualified Business Income deduction of up to 20% of qualified business income from a pass-through entity under new 2018 tax law.
The disadvantages of a partnership:
- The partner’s income is considered self-employment income and as such: you are liable for self-employment taxes (Social Security and Medicare) due on all income received.
- Unlike a corporation, a partnership is not a separate legal entity from the individual owners and partners take on the risk and liability for their partner’s actions.
Preparing to file Form 1065
In order to prepare Form 1065, the partnership must provide a profit and loss statement and balance sheet to the tax preparer. Additionally, the following items will be needed:
- Employer Identification Number (EIN)
- Principal business activity
- Business Activity Code Number
- Business start date
- Accounting method - cash or accrual
- Number of partners
- Names, addresses, and SSNs of each partner
- Amount of distributions paid to each partner
Partnership Return Due Date
Partnership returns are due March 15th. If your partnership is not ready to file a timely return, an extension of time to file the return may be requested by filing Form 7004 by the regular due date of the partnership return. An extension extends the due date of the return until September 15th. A penalty may be assessed against the partnership if it fails to file by the return due date, including extensions or files an incomplete return, unless such a failure is due to reasonable cause. The penalty for late filing is $200 per month, per partner, for a max of 12 months. These penalties are avoidable so make sure that you file your return or extension timely.