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IRS Tax Forms For Partnership Income
IRS Tax Forms For Partnership Income
As an entrepreneur, you are constantly looking for ways to simplify your daily tasks to focus on your business goals. You are constantly peek-a-boo-ing with your clients, stakeholders and customers and things like taxes could take a back seat until the tax season comes knocking on your door.
It’s then you try to go into overdrive to catch up with all the IRS regulations and forms needed to file your tax return. It’s also true if you are one of the partners in a partnership. A partnership has pass-through taxes, which means that the company’s taxes are passed to the owners of the partnership. The share of taxes is decided by the stake of each partner in the partnership, including 1099 tax.
To correctly file your share of partnership income tax, you have to get up to speed with all the relevant tax forms. Let’s make it a tad bit easier for you with this partnership tax form guide.
Table of contents
What is a partnership?
Partnerships are when two or more entrepreneurs or individuals join forces to work on a business idea with the goal of earning profits. The profits are divided as per the individual partnership agreements and each partner's stake in the company. Partnerships are easier to form with a minimum amount of paperwork.
Unlike an LLC, C Corp or sole proprietorship, the partners share profits and losses according to the terms and conditions of a formal partnership agreement. A partnership aims to divide goals and to set them up; you need to evaluate each individual of their skill-set.
There are primarily four types of partnerships:
- General Partnerships
- Limited Partnerships
- Limited Liability Partnerships
- LLC Partnerships
Like any other business entity registered in the U.S., a partnership must also file taxes. However, the taxes of a partnership are passed through to the owners of the partnership. It means that a partnership is never taxed. Instead, the partners are taxed on their income, and estimated taxes might not be needed.
To file for partnership tax, one has to keep track of several tax forms like Form 1065, Schedule K-1 and Form 1040. It's always a good idea to use a small business tax calculator during this process. Here, we will take a closer look at these forms and some of the finer details.
What's Form 1065?
Form 1065, in its full extension Form 1065: U.S. Return of Partnership Income, is an IRS tax document that helps report your profit, losses, credits and deductions of business partnerships.
Form 1065 reports the company's financial status to the IRS for each tax year. The company must have been formed through one of the four types of partnerships. In addition, foreign partnerships in the U.S. must also file the 1065 form if their income is more than $20,000 yearly or if they earn more than 1% of their total revenue.
Filing Form 1065: U.S. Return of Partnership Income?
The 1065 form offers total transparency to the IRS regarding the financial status of partnerships. It requires a lot of information like the receipts of payment to the partnership, the payouts made and the debts and liabilities. It also requires information for interest on loans and numerous other costs the company incurs.
You’ll also need to include information on each partner's stake and other personal information. As a filer, you'll need to get information from Form 1125-a, Form 4562, Form 1099 issued by the partnership, Form 8918, Form 114 and Form 3520.
What's Schedule K-1?
Unlike Form 1065, which reports the financial information about a partnership, Schedule K-1 reports the financial status of the partners. Schedule K-1 is used to register your share if you’re one of the partners in the partnership. Form K-1 is sent to the IRS by the partnership and it reports your share of income, deductions, liabilities, credits, etc., as a partner. Schedule K-1 is attached to Form 1065.
According to Schedule K-1 instructions, you can keep a copy of Schedule K-1 for your record. However, as a partner, the IRS only wants Schedule K-1 filed if you are specifically required to do so.
When your partnership files a Schedule K-1, your personal information is hidden and the form only mentions the last four digits of your Social Security Number (SSN).
What's Form 1125-A?
If the partnership sells some goods and products, it must report the cost of goods sold to the IRS via Form 1125-A. In general, if a partnership also maintains an inventory, it must file the 1125-A form to report the income from inventory sales
What's Form 8890?
Form 8890, also known as the Business Interest Expenses form, is for an individual, partnership, S corporation or corporation with business interest expenses. Besides, you'll need to file Form 8890 if you or the partnership have a disallowed business interest expense from the previous year or an excess business interest expense from the prior or current year.
A partnership passes its income to the partners, so the partnership must file the IRS 8890 form. However, the partnerships must allocate excess taxable or business interest income to its owners.
What's Form 8865?
It's essentially for U.S. citizens who have a stake in foreign partnerships. Form 8865 is used to report controlled foreign partnerships, transfers to foreign partnerships and acquisitions and changes in foreign partnership interests or disposition.
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