Partnerships don’t pay federal income tax. Instead, the partnership’s income, losses, deductions, and credits pass through to the partners themselves, who then report these amounts as part of their personal income tax returns. Even though partnerships aren’t taxed, they still must file a tax return every year. Here are the five steps required to file a partnership return.
Step 1: Prepare Form 1065, U.S. Return of Partnership Income
The first thing you need to do is prepare a federal partnership tax return on Internal Revenue Servicer Form 1065. On this form, you will be asked to provide the partnership’s total income or loss. You’ll list deductions like salaries, guaranteed payments to partners, rent, repairs, taxes, depreciation, and employee benefit programs. You’ll also need to fill out several Form 1065 schedules. Tax accountants can help you with this. The partnership return must be signed by a general partner.
Step 2: Prepare Schedule K-1
Partnership returns also require you to complete a federal Schedule K-1, Partner’s Share of Income, Deductions, Credits etc., for each person who was a partner at any point during the tax year. The K-1 form lists the partner’s name, address, and percentage shares of profits, losses, capital, and liabilities. It then lists the partner’s share of ordinary business income or loss, rental income or loss, and interest income. Finally, it includes the partner’s self-employment income, credits, and distributions.
Step 3: File Form 1065 and Copies of the K-1 Forms
The next step in the partnership return is to file the correct forms. Partnerships must file copies of the K-1 forms with their Form 1065. The filing deadline for Form 1065 is April 15. Most partnerships can file the forms either by mail or electronically.
Step 4: File State Tax Returns
Your state might require partnerships to file a state tax return. Depending on the state, partnerships may be required to pay franchise, excise, or sales taxes. You can find the tax filing requirements on your state’s department of revenue website.
Step 5: File Personal Tax Returns
The final step is to file personal tax returns. If you are a general or limited partner, you must report your share of the partnership income or loss on your federal income tax return. The Schedule K-1 you receive from the partnership contains the information you need to do this. The income or loss you receive from the partnership may affect your personal income tax rate. For example, the personal income tax rate for New York ranges from 4% to 8.82% as of 2017. The partnership income might knock you into a different tax bracket, affecting your rate.
Filing a partnership return in a multi-step process, and you may want to consult an accountant to help you complete your returns. The professionals at George Dimov, C.P.A. are fully equipped to help you through this complicated process.