Articles · Basics · Partnerships and Form 1065
Form 1065 Basics: How Partnerships Are Taxed
A partnership is not a taxpayer for federal income tax purposes. It files Form 1065 to report results, and its partners pay the tax.
The basic flow
The return calculates ordinary business income and lists separately stated items, such as capital gains and charitable contributions, on Schedule K. Each partner's share then goes on a Schedule K-1.
A calendar-year return is generally due March 15. Late filing penalties are calculated per partner, per month, so even a small partnership can face a meaningful charge.
Allocations and guaranteed payments
Partners can agree to allocate items in ways that differ from their ownership, subject to Section 704(b). Guaranteed payments are amounts paid for services or capital regardless of profit. The partnership deducts them and the partner reports them as ordinary income.
Capital accounts and basis
A capital account tracks what a partner has put in, earned, and taken out. Form 1065 requires tax-basis capital reporting on Schedule K-1. A partner's outside basis is a separate figure that also includes a share of liabilities.
Distributions are generally tax-free up to outside basis, so tracking both figures is essential.
Key takeaways
- Partners, not the partnership, pay the income tax.
- Separately stated items keep their character.
- Capital accounts and outside basis are different.
For general education only, not tax advice. Tax law changes often, so confirm current rules and amounts with primary sources.