If you're operating a business partnership, the IRS would like some information on the income the business is distributing to its members. Under federal tax rules, partnerships are not taxed on their own profit, but pass that profit on to the partners, who must declare it as income on their individual returns. Use Form 1065 to declare partnership income to the IRS, and Schedule L to detail the partnership's balance sheet.
Items you will need
IRS Form 1065, including Schedule B and Schedule L
Partnership financial statements, including year-end and year-start balance sheets
B Before L, Except After K and M-3
Complete Schedule B before turning to Schedule L. You do not have to complete Schedule L if Line 6 on Schedule B is "yes," indicating that all of the following are true: the partnership's total receipts were less than $250,000; its total assets as of year-end were less than $1 million; Schedule K-1 is completed and filed with Form 1065 and furnished to the partners by the due date; and the partnership does not have to file Form M-3. Schedule K-1 declares each partner's share of the total income. M-3 has to be filed under certain conditions, including assets of more than $10 million.
Complete each line of Schedule L with the required amounts. A balance sheet is a financial snapshot of a business; it declares all assets and liabilities on a given date. "Balance" refers to the rule that assets must equal liabilities plus equity or capital. Balance sheet assets include cash, accounts receivable, investments, inventories and loans made to individuals or other businesses. Liabilities include accounts payable, loans to the partnership and capital in the partnership held by the individual partners.
On Line 14, enter total assets at the beginning and end of the year. On Line 22, enter total liabilities at the beginning and end of the year. The numbers for assets and liabilities and capital should match at year-start and year-end. There's no tax on these assets nor on the partnership's income. Schedule L and Form 1065 are informational documents that keep the IRS apprised of the financial condition of the business.
Completing Form K-1 does not mean you're a partnership, or that you must file Form 1065. K-1 is also used for S corporations, estates and trusts to declare income passed from the entities to individuals.
When two spouses are the only partners in a limited liability company, they must also file Form 1065, unless they are operating a qualified joint venture.
The deadline for filing Form 1065 is April 15; the IRS allows a five-month extension.
Advise all partners receiving Form K-1 that they must declare any income on Schedule E, Supplemental Income and Loss, with their Form 1040s.