Partnerships, and LLCs with two or more members that have not elected corporate treatment, file Form 1065, U.S. Return of Partnership Income. The partnership generally does not pay income tax. Each partner receives a Schedule K-1 showing their share of income, deductions and credits to report on their own return. The IRS explains the rules in Publication 541.

Due date and extension

Form 1065 is generally due on the 15th day of the third month after the tax year ends, March 15 for calendar-year partnerships. Filing Form 7004 extends the deadline by six months. Late-filing penalties are calculated per partner per month, so they add up quickly for partnerships with several members.

Allocations follow the partnership agreement

Partnerships can allocate income and losses according to the partnership agreement, subject to tax rules on substantial economic effect. A 50/50 partnership may allocate profit 50/50, but agreements can provide preferred returns or different ratios. The return preparer needs the current signed agreement.

Capital accounts

Each partner has a capital account that increases with contributions and allocated income and decreases with distributions and allocated losses. Form 1065 requires capital accounts reported on the tax basis on each K-1. We keep a capital account rollforward in the books for each partner so year-end reporting is a matter of checking, not reconstructing.

Guaranteed payments versus distributions

Partners are not employees of their partnership and are generally not paid through payroll. Fixed payments to partners for services or capital, regardless of profit, are guaranteed payments, which are deductible by the partnership and taxable to the partner. Distributions are withdrawals of capital or profit and are not deductible. Recording them in separate accounts is essential; see owner draw vs salary.

Self-employment tax for partners

General partners usually pay self-employment tax on their share of trade or business income and on guaranteed payments. Rules for limited partners and LLC members are more complex; your preparer will review each member's role.

Records the preparer will ask for

  • Reconciled balance sheet and profit and loss
  • Capital account rollforward for each partner
  • Guaranteed payments by partner
  • Fixed asset additions and disposals
  • Partnership agreement and any amendments

Our tax services team prepares partnership returns from reconciled books.

Bookkeeping that makes the 1065 easier

  • Track each partner's capital account with separate equity accounts for contributions, distributions and allocated income
  • Record guaranteed payments separately from distributions, since they are reported differently
  • Keep balance sheet accounts reconciled, because the return generally includes a balance sheet and reconciliations of book and tax income for many partnerships
  • Maintain the partnership agreement with your records so allocations follow its terms

Key terms

Definitions for terms used in this guide, from our small business glossary:

  • Debits and Credits: Debits and credits are the two sides of every bookkeeping entry; each account type increases on one side and decreases on the other.
  • Tax Basis: Tax basis is the amount the tax law treats as your investment in property, used to figure depreciation and gain or loss.
  • Schedule K-1: Schedule K-1 reports each owner's share of a partnership's or S corporation's income, deductions and credits.
  • Guaranteed Payments: Guaranteed payments are payments a partnership makes to a partner for services or use of capital, regardless of profit.
  • Capital Account: A capital account tracks each partner's or member's equity in a partnership or LLC.
  • Self-Employment Tax: Self-employment tax is the Social Security and Medicare tax paid by people who work for themselves, calculated on net earnings from self-employment.
  • Balance Sheet: A balance sheet shows what a business owns, what it owes and the owners' equity at a specific date.