Partnerships do not pay federal income tax. Instead, the partnership income, losses, deductions, and credit are passed to the partners themselves, who report these amounts and pay taxes on them, as part of their personal income tax.
Although partnerships are not taxed, they must file a tax return each year, unless the company has no revenues or expenditures. The returns will show the total income, deductions, and credit. The partnership must prepare schedules that show the share of income or loss of each partner. They may also have to file state tax returns and pay certain state taxes.
These are the five steps for tax preparation service for partnership.
- Prepare Form 1065, the U.S return of partnership income
Every partnership must prepare a federal partnership tax return on internal revenue servicer 1065 Form. On this form, you will be required to provide the total income and loss of the partnership. You will List deductions, such as salaries, payments to partners, rent, repairs, taxes, depreciation and compensation programs for employees. Total income of the partnership, minus deductions, is its regular income.
You must fill out the forms 1065. Schedule B includes a series of questions about your partnership, from the type of partners to ownership of corporate shares to types of distributions made. Schedule K is the schedule of income and expenditure that forms the basis for the K-1 forms that will be issued to shareholders. Schedule L is a balance sheet. Some partnership is also required to complete schedules M-1, M-2, and M-3.
The return must be signed by a general partner.
- Prepare Schedule K-1
Partnerships are required to complete a federal schedule K-1, the share of income for partners, deductions, credits etc., for each person who was a partner at any time during the year.
The k-1 form shows the partner’s name, address and a percentage of profits, losses, assets and liabilities of a partner. It lists the partner’s share of business income and loss, rental income or loss, and interest income. It also includes the partner’s self-employment income, credits, and distributions.
Once you have prepared a schedule K-1, you must send a copy to each partner no later than March 15. Partners can use the form K-1 for the preparation of their personal tax returns.
- File Form 1065 and copies of the forms K-1
Partnerships must submit copies of K-1 forms with their form 1065. The filing deadline for submission of form 1065 is dated April 15. Most partnerships can submit forms electronically or by mail.
- File state tax returns
Your state may require partnerships to file state tax returns. Depending on the state, partnerships may be required to pay franchise, excise and sales tax. You can find the tax requirements for your state online.
- File personal tax returns
If you’re a general or limited partner, you should declare your share of the partnership income or loss on your federal tax return. The Schedule K-1 you received from the partnership contains the information you need to do this.
Also, if you are a general partner, your partnership income will be generally considered as self-employment income. This will be reported on your personal tax forms and calculate self-employment tax by using form SE.
Limited partner’s income are regarded as passive income because they are not involved in the running of the business.
Filing partnership taxes is a multi-step process and you may want to consult an accountant or invest in tax preparation professionals to help you complete your return. To avoid penalties for late filing, be sure to comply with both federal and state deadlines.
You can speak to a tax professional through Green Tree Tax business legal plan for a low flat fee. You will be satisfied with our tax preparation service for partnership.