Forming a business partnership is beneficial for a number of reasons. However, come tax time, correctly registering your partnership and filing all of the appropriate documents can be quite difficult. And that includes the 1065 tax form.
Since partnerships themselves don’t pay taxes on profits (income tax), partners need to fill out a detailed 1065 form to determine how much they should be taxed. It’s worth noting here that this form lists a number of important pieces of information including income, revenue, and expenses.
Here we’ll cover everything you need to know about 1065 tax forms, including who needs to file, what you’ll need to fill one out, and all of the many ins and outs of the instructions.
Do I Need to Fill out a 1065 Tax Form?
If you are engaged in any sort of business partnership, then you are required to fill out a 1065 tax form. A few examples of partnerships that must file include:
- General Partnerships
- Limited Partnerships
- Limited Liability Partnerships
- Multiple-Member LLCs
- Joint Ventures
- Qualified Joint Ventures
Individuals who are involved in a partnership with the sole intention of playing the Illinois State Lottery are not required to file a 1065 tax form. Investment partnerships are not required to submit a 1065 either. Lastly, though partnerships are not allowed to file a combined return, they may be asked to complete a separate, unitary return. The good news is each partner can use the same 1065 form once completed.
What Do I Need to Fill out a 1065 Tax Form?
If you’re committed to filling out a 1065 form on your own, then be prepared to 1) collect a wide range of documents related to your business and 2) do plenty of math. The 1065 form is exhaustive, and you’ll have to determine:
- Ordinary Income/Loss
- Unmodified Base Income
- Base Income or Loss
- Income Allocable to Illinois
- Net Income
- Net Replacement Tax
- Refund or Balance Due
In order to calculate each of these given figures, you’ll have to have access to many documents relating to your business, such as a profit-and-loss statement, a balance-sheet statement, last year’s 1065, any and all distributions made to partners, and fixed-asset statements. You’ll also need to have your business’s insurance information handy. Plus, you should also know your Federal Employer Identification (FEIN) Number as well as your North American Industry Classification System (NAICS) Code.
How Do I Fill out a 1065 Tax Form?
Once you’ve assembled all the relevant info relating to your personal and professional fiscal year, you’re ready to fill out a 1065 tax form. Still, navigating the form itself can be a tricky prospect –– especially if you’ve never done it before. Here, we’ll take you through it section-by-section and explain in plain English the answers the form asks you to provide:
Section 1: Identifying Partners
The first section of the form relates to general information, e.g. your name address, FEIN Number, and NAICs Code. You’ll also have to make certain designations about your business, like if you’re involved in a unitary business group, if you generate income outside of Illinois, or if you’re claiming special deprecation modifications on your form.
Section 2 & 3: Ordinary Income & Unmodified Income
The second section calls for the filer to figure their ordinary income or loss. Ordinary income, in the business sense, is the amount of money generated by the day-to-day operations of a business that does not include the sale of capital assets or charitable contributions. In the following section (3), you’ll be asked to determine your unmodified base income and include any items of expense that you are required to state separately from your partners.
Section 4 & 7: Calculating Income
In these sections, partners are asked to calculate their base income, their income allocable to Illinois, and their net income. Before filling out these sections, it’s important to first complete a Schedule K 1065 sheet. The Schedule K is a summary of a business’s income, deductions, and credits. What’s more, individual partners should include a copy of their partnership’s Schedule K on their tax form.
Though sections 4-7 may seem intimidating at first, they actually contain the instructions necessary to calculate net income, income allocable to Illinois, etc.
For example, to determine tax income allocable to Illinois, one must list total business income (or loss), total sales made everywhere, and total sales inside of Illinois. Next, divide total sales made in Illinois by total sales made everywhere. This will provide you with an apportionment factor. Lastly, multiply the apportionment factor with your business income or loss. The resultant number is your base income or loss allocable to Illinois.
Section 8 & 9: Replacement Tax and Refund or Balance Due
In section eight, partnerships are required to list recapture of investment credits to figure replacement tax revenue. (Essentially, replacement taxes exist for governments to recoup losses of tax income from corporations that they had once received in the form of personal property taxes, which have been out of use in Illinois since 1979.)
In conclusion, to complete the 1065 tax form, partners must take into account their net income and losses, any possible overpayments, as well as voluntary tax payments throughout the year to arrive at either their tax refund or the balance due on their taxes.
1065 Tax Form Due Date
As confusing as it may seem, the due date for the 1065 tax form is actually March 15, not April 15. However, partnerships can gain a six-month extension that lasts until September 15.
Penalties & Interest
There are several ways to incur a penalty fee for failing to make a complete and timely payment based on your 1065 tax form. Penalty fees are charged when businesses:
- Don’t file before the deadline
- Don’t pay before the deadline
- Pay with a bad check or remittance that is not honored by the state
- Don’t pay 30 days after the due date and thus triggers an automatic cost-of-collection fee
In addition, the IRS will charge interest on a late payment starting from the day after the original due date all the way through (and including) the day payment is made.
What’s worse is that if you fail to file on time, the IRS will charge you by their standard fee ($195) multiplied by the number of partners in your LLC, and they’ll do so every month you don’t file. As one can imagine, these costs add up quickly.
To wrap up, if you’re concerned that you’ve made a mistake on your tax form and need to correct it after filing, you should request a Form IL-1065-X, also known as an Amended Partnership Replacement Tax Return. Keep in mind that penalties or interest may change as a result of a new calculation.
Though it’s possible to complete a 1065 tax form on your own, it’s nevertheless recommended that you seek assistance from a professional. Not only is the form complicated and comprehensive, but there are a myriad of exemptions and special circumstances that may or may not apply to your business. Rather than spending days combing through the fine print, consider reaching out to a business law firm. At Sivia Law, we’ll help you avoid the headache and stress associated with tax time. Contact us today to get started!