IRS Form 1065 Analysis
A partnership is the relationship existing between two or more persons who join to carry on a trade or business. Each person contributes money, property, labor or skill, and expects to share in the profits and losses of the business.
A partnership generally is not a taxable entity. The income, gains, losses, deductions, and credits of a partnership are passed through to the partners based on each partner's distributive share of these items.
A partnership must file an annual information return (Form 1065) to report the income, deductions, gains, losses, credits, etc., from its operations, but it does not pay income tax. Instead, it "passes through" any profits or losses to its partners. All income (or losses) pass through to Schedule E of each partner’s individual tax return (each partner includes his or her share of the partnership's income or loss on his or her tax return); the partners, not the partnership, pay taxes at each individual’s personal tax rate. However, the income still belongs to the partnership in the credit analysis. Income is only passed on the individual if there is a disbursement from the company indicated on the Schedule K-1. The Schedule K-1 will also provide information regarding if the owner(s) had to make a capital contribution into the company. This amount is usually deducted against the personal cash flow of the individual owner.
Partners are not employees and should not be issued a Form W-2. The partnership must furnish copies of Schedule K-1 (Form 1065) to the partners.
Form 1065, U.S. Return of Partnership Income, is used by partnerships for tax returns.
- Related Forms & Schedules:
- Schedule K
- Schedule L
- Schedule M1 – Companies w/ Assets Below $10 Million
- Schedule M-3 – Companies w/ Assets $10 Million and Above
- Schedule F – Farm
- Form 8825 – Investment Real Estate. Real estate owned by a partnership is on Form 8825
- Form 4562