Overview

Small partnerships do not generally pay income tax at the entity level. Instead, a partnership files an information return (Form 1065) that reports the business’s income, deductions, credits, and other tax items; those items “pass through” to the partners, who report them on their individual tax returns using Schedule K‑1. This pass‑through framework creates obligations for the partnership (timely filing, accurate K‑1s, and recordkeeping) and for each partner (reporting income and paying any resulting tax, including possible self‑employment tax).

(See the IRS overview on Form 1065 and partnerships for authoritative guidance: https://www.irs.gov/forms-pubs/about-form-1065 and https://www.irs.gov/businesses/small-businesses-self-employed/partnerships.)

In my 15+ years preparing returns for small business owners, I’ve seen the same practical issues repeat: late or missing K‑1s that delay partners’ personal filings, incorrect allocations that trigger IRS notices, and insufficient recordkeeping that makes basis calculations difficult. The guidance below focuses on the forms, deadlines, filing options, and best practices that save time and reduce audit risk.

Key forms and filings

  • Form 1065 (U.S. Return of Partnership Income): the primary partnership information return. The partnership reports income, deductions, credits, capital account changes, and balance‑sheet items here. (FinHelp has a dedicated page on Form 1065: U.S. Return of Partnership Income).

  • Schedule K‑1 (Form 1065): issued to each partner to report their share of ordinary business income, guaranteed payments, separately stated items (e.g., capital gains, tax credits), and partner‑level deductions. Partners use the K‑1 to complete their Form 1040 (and schedules such as Schedule SE for self‑employment tax when applicable). For background, see our article What is a K‑1?.

  • Form 7004: if you need more time to file Form 1065, use Form 7004 to request an automatic extension of time to file (it extends filing, not payment). FinHelp’s guide to Form 7004 explains how extensions work and important caveats: https://finhelp.io/glossary/form-7004-application-for-automatic-extension-of-time-to-file-certain-business-income-tax-returns/.

  • Schedule SE (Form 1040) and Form 1040 for partners: partners use Schedule SE to calculate self‑employment tax on guaranteed payments and active business income when applicable.

  • Form 8865 (if relevant): for U.S. persons with respect to certain foreign partnerships.

  • State filings: many states require a partnership return or an informational filing; state deadlines and requirements differ.

Deadlines and timing

  • Federal: Form 1065 is generally due by the 15th day of the third month after the partnership’s tax year ends — for calendar‑year partnerships that is March 15. If that date falls on a weekend or legal holiday, the deadline shifts to the next business day. Use Form 7004 to request an extension (typically six months for calendar‑year partnerships). Note: Form 7004 extends the time to file the return, not the time to pay any taxes that may be owed at the partner level.

  • Partner personal returns: partners need their K‑1s in time to file their Form 1040. A late Form 1065 or corrected K‑1s can force partners to file extensions on their personal returns.

  • Penalties: the IRS can assess penalties for late filing and for failing to provide correct K‑1s. Penalty amounts are calculated per partner and are periodically adjusted for inflation; consult the IRS penalty guidance and your tax advisor for current amounts (IRS partnership penalty information: https://www.irs.gov/businesses/small-businesses-self-employed/partnerships).

How allocations, basis, and capital accounts work (practical explanation)

A partnership agreement governs how income, loss, credits, and distributions are allocated. However, to be respected by the IRS, allocations must have substantial economic effect or meet regulatory safe harbors. Partners should track the following at year‑end:

  • Each partner’s capital account (per the partnership’s accounting method)
  • Each partner’s outside basis (what the partner has invested adjusted for income, losses, distributions, and liabilities)
  • Any deficit capital accounts and basis limitations that restrict loss deduction at the partner level

Why it matters: partners can’t deduct partnership losses on their personal returns beyond their outside basis (and at-risk and passive activity limitations where applicable). In my practice, inaccurate outside basis records are one of the most frequent causes of amended returns and audit adjustments.

Common partnership filing scenarios and tips

  1. New partnership in first year
  • Obtain an EIN (required for Form 1065).
  • Choose a tax year (calendar year is common for small partnerships).
  • Keep detailed capital contribution records and note initial partner basis entries.
  1. Partnerships with guaranteed payments
  • Guaranteed payments to partners (for services or capital) are reported on Form 1065 and are taxable to the receiving partner as ordinary income; they are also generally subject to self‑employment tax (Schedule SE).
  1. Partnerships that pay wages
  • If the partnership has employees, it must withhold and deposit payroll taxes, file Form 941/944, and issue W‑2s.
  1. Changes during the year (admissions, withdrawals, sales)
  • Transactions that change ownership require careful tracking of partner basis, potential gains/losses on distributions or transfers, and may require amended K‑1s.

Recordkeeping and documentation (what I require from clients)

From my work preparing returns for small partnerships, I recommend maintaining:

  • A complete general ledger and bank reconciliations
  • Schedules of fixed assets and depreciation (Form 4562 considerations)
  • Documentation of loans between partners and the partnership (terms, interest, repayments)
  • Signed partnership agreement and any amendments
  • Year‑end capital account and outside basis schedules for each partner

Good records make preparing Form 1065 and K‑1s straightforward and reduce the chance of IRS adjustments.

E‑filing and software

The IRS encourages electronic filing for partnership returns. E‑filing improves processing speed and reduces errors compared with paper returns. Many tax software providers support Form 1065 and K‑1 generation; whether to use software or a tax professional depends on complexity. My approach is to use software for straightforward partnerships and a full tax professional review when the partnership has multi‑state activity, foreign partners, or complex allocations.

Audit and post‑filing issues

  • Centralized Partnership Audit Regime (CPAR): since 2018, CPAR changed how partnership audits are conducted at the federal level; the partnership may be liable for adjustments at the partnership level unless an election is made to push adjustments to partners or the partnership elects out when eligible. See FinHelp’s page on the Centralized Partnership Audit Regime for more on this topic.

  • Corrected K‑1s: if you discover an error after issuance, issue corrected K‑1s promptly. Partners who filed using incorrect K‑1s may need to amend their personal returns.

Common mistakes and how to avoid them

  • Missing the filing deadline. Use calendar alerts and Form 7004 if you need extra time.
  • Incomplete or incorrect K‑1s. Reconcile partnership totals to the Form 1065 and verify partners’ identifying information and ownership percentages.
  • Neglecting partner basis calculations. Maintain a running basis schedule each year and reconcile with distributions and taxable income.
  • Treating guaranteed payments incorrectly. Record and report guaranteed payments as required; partners may owe self‑employment tax on them.

Practical checklist for filing a partnership return

  • Confirm EIN and taxpayer information
  • Collect partner identifying information: SSN/EIN, tax addresses, ownership percentages, and dates of admission
  • Reconcile income and expense accounts to bank statements
  • Prepare capital account and outside basis schedules for each partner
  • Prepare and review Form 1065 and each Schedule K‑1
  • File Form 1065 by March 15 (or request an extension with Form 7004)
  • Deliver Schedule K‑1s to partners in time for them to file personal returns

When to get professional help

Consider a tax professional experienced with partnerships if any of the following apply:

  • The partnership has multi‑state nexus or foreign partners/transactions
  • There are complex allocations, special allocations, or guaranteed payments
  • You’re subject to the Centralized Partnership Audit Regime and need planning
  • You plan a partner buy‑in or buy‑out, or have significant non‑cash contributions

In my practice, early engagement (quarterly reviews) prevents year‑end surprises and gives partners time to plan for estimated tax payments.

Resources and authoritative guidance

For additional practical reading on allocations and compliance, see FinHelp’s related guides: What is a K‑1?, Form 1065: U.S. Return of Partnership Income, and Form 7004 — Application for Automatic Extension.

Professional disclaimer

This article is educational and general in nature and does not constitute individualized tax advice. Rules that apply to partnerships involve facts and circumstances that affect tax outcomes. Consult a qualified tax professional or CPA to address your partnership’s specific situation.