How to File Partnership Taxes: A Guide to Federal and State Returns

Key takeaways

• Partnerships must file an annual return (Form 1065) by March 15 if their fiscal (tax) year ends in December, or by the 15th three months after their fiscal year ends. For example, if your partnership's tax year ends in September, file by December 15th.
• Partnerships don't pay federal income tax, but partners do. Each partner files a Schedule K-1 to show their share of partnership income, losses, and deductions.
• Each state has its own filing requirements that can vary significantly from other state or federal requirements.
• General partners typically pay self-employment tax on their share of partnership income.
• Late filing penalties can reach $210 per partner per month, making timely compliance essential.
• Special elections (choices that partners can make in how they file taxes or calculate deductions) may allow partnerships to simplify filing requirements or reduce tax burdens.

What is partnership for tax purposes?

Partnerships need to prepare and submit an annual information return (Form 1065) with the Internal Revenue Service (IRS). The return details its income, deductions, gains, losses, and more from that year's business activities. However, partnerships don't pay federal income taxes as an entity.

Instead, partnerships operate on a "pass-through" taxation system. That means all income, expenses, and credits flow through to the individual partners, who report and pay their share on their individual income tax returns (Schedule K-1).

Who files a partnership tax return?

• Active partnerships. Partnership with income, expenses, or activity during the tax year must file Form 1065, regardless of whether the partnership generated a profit or loss. This is true even if the partnership had minimal activity or lost more money than they made throughout the year.
• Multiple-member or multi-member LLCs. The IRS automatically considers multiple-member LLCs as partnerships for federal tax purposes. However, LLCs can choose to file as corporations instead. Single-member LLCs are disregarded entities in the eyes of the IRS, meaning they aren't separate from the business owner and don't file partnership returns.
• Inactive partnerships. Partnerships that stopped operating but still had income or expenses during the tax year also need to file a partnership return. In other words, partnerships in the process of dissolution (formally ending) still need to file returns until they've distributed assets and formally terminated the partnership.

Key tax forms for partnerships

The primary federal forms for partnerships are Form 1065 and Schedule K-1, plus various supporting forms (called schedules) that address different aspects of your business' assets and activity.

State requirements depend on where your partnership lives. Many states require their own separate partnership return that may or may not follow federal guidelines. 

Federal forms (Form 1065, Schedule K-1, and other schedules)

Form 1065, "U.S. Return of Partnership Income," is a partnership's primary federal tax form. It includes several separate sections (called “schedules” by the IRS).

• Schedule B contains detailed questions about the partnership's structure, including partner types and ownership information.
• Schedule K summarizes the partnership's income, deductions, and credits that pass through to partners. It forms the foundation for individual K-1 forms.
• Schedule K-1, "Partner's Share of Income, Deductions, Credits, etc.," details information about each partner and their share of income, losses, deductions, and credits. Each person who was a partner at any time during the tax year needs to complete this form. 

There may be other required forms if the partnership's total receipts were above $250,000 or total assets were more than $1 million.

• Schedule L provides a balance sheet showing the partnership's assets, liabilities, and capital accounts.
• Schedules M-1 and M-2 reconcile book and tax income and analyze changes in partners' capital accounts. Large partnerships may need to complete this form.
• Schedule M-3 provides more detailed book-tax reconciliation information and is mostly for partners that are foreign entities with 50% or more ownership interest or partnerships with $10 million or more total assets at the end of the tax year.

Note: Partnerships will also need to pay employment taxes if they have employees, including Social Security, unemployment, and Medicare taxes. They will also need to pay excise taxes if they sell certain regulated goods or services.

State tax requirements for partnerships

Local partnership tax requirements vary across jurisdictions. While many states require partnerships to file information returns similar to Form 1065, others offer or impose entity-level taxes that partnerships pay directly. 

Here are some examples:

• Georgia requires partnerships to file Form 700 if they're required to file federal Form 1065 and have Georgia-sourced income, own property in Georgia, or have partners based in Georgia. But, the state also offers a pass-through entity tax election that allows partnerships to pay Georgia income tax at the entity level, which may reduce the overall tax burden for partners.
• California partnerships must file Form 565, which is similar to Form 1065, while partners need to file a Schedule K-1 565 to report their individual gains and losses. The state also collects an $800 annual business tax on limited partnerships and LLCs. 
• New York requires partnerships with income from New York sources or New York resident partners to file Form IT-204, Partnership Return, unless they have no income or elect to file as a corporation. 

Always check with your state's Department of Revenue for current requirements, as regulations may change. You can also consult a business attorney or tax professional about your local tax requirements.

How to file partnership taxes: A step-by-step guide

The process can take several weeks or more depending on the complexity of your partnership, so start early to avoid errors or missed deadlines.

Step 1: Gather important financial records

First, collect all the financial documents you'll need to prepare your tax returns. Some essential records include the following:

• Profit and loss statements
• Balance sheets
• Bank statements
• Receipts for business expenses
• Written evidence of partner contributions or distributions throughout the year

It helps to organize your records by category, such as ordinary business income from operations, rental income from partnership-owned properties, interest and dividend income, and capital gains or losses from asset sales.

Then, document all business deductions and maintain detailed records of each partner's capital account activity, including initial contributions, additional investments, allocated income or losses, and distributions. 

Step 2: Prepare and complete Form 1065

Next, tackle Form 1065.

• The basic information section will include the partnership's name, address, employer identification number (EIN), and business activity code.
• The income section asks you to report ordinary business income, rental income, interest, dividends, and capital gains or losses.

Complete the schedules that are relevant to your business.

• Schedule B requires detailed answers about the partnership's structure, ownership, and business activities.
• Schedule K summarizes income, deductions, and credits that pass through to partners.
• Schedule L, M-1, and M-2 are only necessary for businesses with total receipts over $250,000, total assets worth more than $1 million, and foreign entities with more than 50% ownership interest. Partnerships that didn't complete and attach their Schedule K-1s will also need to complete this section.

Don't forget to calculate eligible deductions. These may include rent, repairs, bad debts, taxes, interest expense, depreciation, and employee benefit programs. The difference between total income and deductions makes up the partnership's ordinary business income or loss.

Note: Either a partner or LLC member needs to sign Form 1065 to validate it.

Step 3: Prepare and distribute Schedule K-1 to each partner

Create a separate Schedule K-1 for every person who was a partner during any part of the tax year. Include each partner's name, address, tax identification number, and percentage share of profits, losses, capital, and liabilities.

Allocate the partnership's income, deductions, and credits to each partner based on their ownership percentage or the partnership agreement's special allocation provisions. Report each partner's share of ordinary business income, rental income, interest, dividends, capital gains, and self-employment income.

Once you've completed each Schedule K-1 form and attached a copy to the partnership return, make sure to mail them to partners by March 15, so that they have ample time to prepare their personal tax returns by the April 15 deadline. Include a cover letter explaining any unusual items or providing additional information partners need for their personal returns. 

Step 4: File federal and state tax returns

Submit Form 1065 and copies of all Schedule K-1 forms to the IRS by March 15 for calendar-year partnerships or by the 15th day of the third month after your fiscal year ends for other partnerships. Most partnerships can file electronically through the IRS, tax preparation software, or with the help of qualified tax professionals, which typically results in faster processing and confirmation of receipt.

Then, file required state partnership returns according to each state's specific deadlines and requirements. Some states accept federal extensions automatically, while others require separate extension requests or don't allow extensions at all. Pay any required state taxes or fees along with the returns.

If you need additional time, file Form 7004 by March 15. You can file online and it gives you an automatic six-month extension to September 15, though any tax payments owed are still due by the original March 15 deadline.

Step 5: Each partner files their personal tax return

Partners use information from their Schedule K-1 forms to complete their personal tax returns, but don't attach this form to your tax return unless you're required to—just keep it in your records. Report partnership income, losses, deductions, and credits on various forms and schedules attached to Form 1040.

Partners that receive property as payment for their contributions to the partnership will need to file Form 7217 along with their annual tax return. The form is called "Partner’s Report of Property Distributed by a Partnership."

General partners typically report their share of partnership income as self-employment income on Schedule SE, calculating and paying self-employment tax on their allocated earnings. Limited partners generally aren't subject to self-employment tax unless they receive guaranteed payments for services performed.

Note: Partners may need to make quarterly estimated tax payments throughout the year. Consult a tax professional to determine how much you might need to pay.

Allocating profits, losses, and deductions among partners

Partnership allocations dictate how the business splits income, losses, deductions, and credits among partners for tax purposes. These allocations can follow the partners' ownership percentages or use special allocation methods outlined in the partnership agreement.

• Default allocation: When the partnership agreement doesn't specify how to allocate income, losses, and deductions, they're split based on each partner's ownership percentage.
• Special allocations: Partners can agree on how to split income, losses, and deductions in their partnership agreement.
• Guaranteed payments: These are fixed amounts that a partnership pays its partners based on funds or services they provide, regardless of the partnership's profitability.

However, the IRS requires those splits to reflect the economic reality of the partnership. In other words, partners can't simply manipulate allocations to get a better tax deal. There needs to be a real economic reason behind how partners divide profits and losses.

Special elections and partnership tax options

Partnerships may be able to choose certain tax options ("elections") that can affect how they file taxes and how much they owe. These choices may save money or simplify the filing process, but they usually have to meet a certain deadline and all the partners may have to agree.

• Section 754 election lets a partnership adjust the value of its assets for tax purposes when a partner leaves, sells their share, or gets a distribution.
• Section 761 election lets investment partnerships elect out of certain partnership tax rules if they meet specific requirements.
• Pass-through entity tax elections allow partnerships to pay state income tax at the entity level rather than having partners pay individually.
• Different accounting methods, depreciation methods, or inventory valuation methods can impact tax liability and filing requirements.

It's important to carefully consider these elections with professional guidance.

Tax deadlines, extensions, and penalties

It's essential to understand these deadlines so that you can plan accordingly, maintain compliance, and avoid unnecessary penalty costs.

Federal filing deadlines

If any of these dates falls on a Saturday, Sunday, or legal holiday, you have until the next day that isn't a Saturday, Sunday, or legal holiday to file.

• Form 1065: March 15 for calendar-year partnerships or the 15th day of the third month after their tax year ends for fiscal-year partnerships.
• Schedule K-1 forms: March 15 for calendar-year partnerships or the 15th day of the third month after their tax year ends for fiscal-year partnerships. Attach copies to the return and mail to each partner.
• Form 1040: April 15 for calendar-year filers or or the 15th day of the fourth month after your tax year ends for fiscal-year filers.
• Form 7217: April 15 for calendar-year filers or or the 15th day of the fourth month after your tax year ends for fiscal-year filers. File along with your individual tax return if you received property (rather than money) as payment for your services to the partnership.

Penalties

• Form 1065: $245 per month, multiplied by the number of partners for each month that the return is late (up to 12 months). For example: a partnership with five partners and a return that's three months late would pay a penalty of $3,675 ($245 × 5 partners × 3 months).
• Schedule K-1 forms: $330 per form, per failure. Failures include not providing a Schedule K-1 form to partners on time or failing to attach the forms to your partnership return. The penalty increases to $660 or more if you intentionally provide incorrect information.
• Form 1040: Usually 5% of the amount due for each month your return is late.

Extensions

• Form 7004 extends the filing deadline for business tax returns by six months, though any tax payments are still due by March 15 or your fiscal-year deadline to avoid interest charges.
• Form 4868 extends the filing deadline for individual tax returns by six months, though any tax payments are still due by April 15 or your fiscal-year deadline to avoid interest charges.

Partnership tax filing FAQs

What is the deadline for partnership tax returns in 2025?

Partnership tax returns (Form 1065) are due March 15 for calendar-year partnerships. Fiscal-year partnerships must file by the 15th day of the third month after their tax year ends. Partnerships can obtain an automatic six-month extension by filing Form 7004, extending the deadline by six months. However, tax payments are still due on the original deadline.

Do partnerships pay federal income tax?

No, partnerships don't pay federal income tax at the entity level. Meaning the business itself doesn't pay federal income tax. Instead, partnerships "pass" gains, losses, deductions, and credits to individual partners who report these items on their personal tax returns. However, partnerships must still file annual information returns (Form 1065) to report their financial activity.

What happens if a partnership doesn't file a tax return?

Partnerships that fail to file required tax returns face penalties of $245 per partner per month, up to 12 months. For example, a partnership with four partners that files six months late would owe $5,880 in penalties. The IRS adds additional penalties for failure to provide Schedule K-1 forms.

Can an LLC file as a partnership?

Multiple-member LLCs automatically file as partnerships for federal tax purposes unless they elect to file as a corporation instead. LLCs that file as a partnership must file Form 1065 and provide Schedule K-1 forms to members. Single-member LLCs, however, are disregarded entities according to the IRS and don't file partnership returns.

What is a guaranteed payment to a partner?

A guaranteed payment is compensation that a partner receives in exchange for services or capital (funds), regardless of how much income the partnership makes. The partnership can typically deduct these payments. Because guaranteed payments face self-employment tax for general partners, they need to report them separately on Schedule K-1.

Are K-1 forms required for all partners?

Yes, partnerships must prepare Schedule K-1 forms for every individual or entity that was a partner at any time during the tax year, even if they had minimal ownership or were partners for only part of the year.

How do state requirements differ from federal requirements?

State tax requirements for partnerships vary significantly by jurisdiction. Some states don't require an income tax return, while others require separate partnership returns and may impose additional business taxes.

How do I file an extension for a partnership return?

File Form 7004, Application for Automatic Extension of Time to File Certain Business Income Tax, Information, and Other Returns, by your partnership tax return deadline. This provides an automatic six-month extension. No explanation is required, but any taxes owed are still due by the original deadline to avoid interest charges.

How LegalZoom can help with partnership tax filing

LegalZoom's comprehensive formation services can help ensure your business keeps efficient records for tax season and is compliant. We can help you draft detailed partnership agreements that clearly specify profit and loss allocation methods to reduce confusion during tax season.

If you already have a partnership agreement, we can connect you with experienced attorneys who can review your agreement to ensure it includes necessary tax elections and allocation provisions that align with your business goals. Our bookkeeping services can help you stay organized from the start, making annual tax filing more straightforward.

Jane Haskins, Esq., contributed to this article.