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A Guide to Partnership Taxes: Essential Forms and Filing Tips for 2024

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Running a business with a partner can be a great way to combine skills, share responsibilities, and grow faster. However, concerning taxes, partnerships have unique requirements that can be confusing if you’re new to them. This blog will simplify the partnership tax rules, explain which forms you must fill out, and offer helpful tips on managing partnership taxes effectively.

What is a Partnership?

A partnership is a type of business in which two or more people share ownership. Each partner contributes something to the company, whether money, labor, property, or skills. In return, they share the business’s profits and losses. Partnerships do not pay income taxes. Instead, the income “passes through” the company to the partners, who report it on their tax returns.

How Are Partnerships Taxed?

Since the partnership doesn’t pay taxes directly, it must file an informational return with the IRS that reports all the business’s income, deductions, gains, losses, etc. Each partner then receives a Schedule K-1 form from the partnership that shows their share of the business’s income and losses, which they must report on their tax returns.

What are guaranteed payments in a partnership?

Guaranteed payments are those made by a partnership to a partner for services or capital investment, regardless of the partnership’s income. These payments are considered an expense for the partnership and ordinary income for the partner, who must pay self-employment tax on these earnings.

Essential Tax Forms for Partnerships

  • Form 1065: U.S. Return of Partnership Income
This is the main tax form for partnerships. Form 1065 reports the business’s income, gains, losses, deductions, and credits. It helps the IRS understand the partnership’s financial operations. Although the form does not result in a tax payment, it’s crucial to determine each partner’s tax liability based on their share of the business income.
  • Schedule K-1 (Form 1065): Partner’s Share of Income, Deductions, Credits, etc.
Each partner receives a Schedule K-1 from the partnership. This form breaks down each partner’s share of the partnership’s income or loss. Partners use the information on K-1 to fill out their personal tax returns.
  • Form 1040: Individual Income Tax Return and Schedule E (Supplemental Income and Loss)
Each partner must report their earnings from the partnership on their tax return using Form 1040 and attach Schedule E. Schedule E is where they list income or losses from real estate, partnerships, S corporations, trusts, etc.

Filing Requirements and Deadlines

Partnerships must file Form 1065 by the 15th day of the third month after the end of their tax year. Most partnerships have a deadline of March 15th if they operate on a calendar year. If the deadline falls on a weekend or holiday, the due date is the next business day.

Common Deductions for Partnerships

Partnerships can deduct certain expenses from their income, lowering the taxable income passed through to partners. Common deductions include:
  • Business Expenses are the ordinary and necessary expenses for running the business, such as rent, utilities, supplies, and salaries paid to employees.
  • Travel Expenses: Costs for business travel, such as flights, hotels, and meals, can be deducted.
  • Interest and Taxes: Interest on business loans and state taxes related to the business can be deducted.

Tips for Managing Partnership Taxes

Keep Detailed Records

Maintaining accurate and detailed records of all business transactions, including income, expenses, and deductions, is crucial. Good records can make tax filing more accessible and help support deductions if the IRS asks.

Understand How Payments Affect Your Taxes

Payments to partners can be complex. Regular distributions are typically not taxable as the income is already reported on the partner’s tax return. However, guaranteed payments to partners for services or capital are considered deductible expenses by the partnership and must be reported as income by the partner.

Use Tax Software or a Tax Professional

Partnership taxes can be complicated, especially if the partnership has many partners or deals with large amounts of money or complex transactions. Using reliable tax software for business taxes or hiring a tax professional can help ensure your taxes are filed correctly and on time. Understanding these basics about partnership taxes can help you handle your responsibilities effectively and take advantage of available benefits. If you’re considering tackling your partnership taxes and feeling overwhelmed, our partner, LegalZoom, can help simplify the process. LegalZoom offers services that can take the stress out of tax season for your partnership, ensuring everything is done accurately and on time. Using LegalZoom for Partnership Taxes:
  1. Expert Help: LegalZoom has a team of tax professionals who understand the ins and outs of partnership taxes and can guide you through the filing process.
  2. Accuracy: They use up-to-date tax software that reduces the risk of errors on your tax forms, helping you avoid potential penalties and interest for incorrect filings.
  3. Time-Saving: Instead of spending hours figuring out what forms you need and how to fill them out, LegalZoom can handle all the paperwork, giving you more time to focus on running your business.
  4. Peace of Mind: Knowing that professionals are handling your taxes can relieve the stress of wondering whether you’ve done everything correctly.
How LegalZoom Can Help with Your Partnership Taxation: LegalZoom will walk you through collecting all necessary financial documents and then take care of filling out and filing your Form 1065 and preparing Schedule K-1s for each partner. They can also help you understand your potential deductions and how to plan for next year’s taxes, ensuring you’re compliant and optimizing your tax responsibilities. Manage Your Taxed with LegalZoom Now 

FAQs About Tax Information for Partnerships

  • What happens if a partnership doesn’t make any profit?

    Even if your partnership doesn’t make a profit, you still need to file Form 1065. This form shows the IRS how much the business made and spent during the year. Filing, even without profit, is essential because it reports how losses are shared among the partners, which can be used to offset other income on their tax returns.

  • Are partnerships required to file taxes quarterly?

    Partnerships themselves don’t pay taxes, but partners may need to make quarterly estimated tax payments if they expect to owe $1,000 or more when their return is filed. This includes their share of the partnership’s income and any other income they have.

  • How does a partner’s withdrawal from the partnership affect taxes?

    When a partner leaves a partnership, the partnership may need to reassess and redistribute partnership assets, which can trigger gains or losses that need to be reported. The departing partner must report any gain or loss from their withdrawal on their tax return based on their final K-1 form issued by the partnership.

  • How do partnerships handle state taxes?

    Partnerships may need to file state tax returns and pay state taxes depending on where they operate and generate income. Each state has different rules about how partnerships are taxed. Often, partnerships must file in every state where they have a physical presence or earn income. Partners should also report their share of this state income on their personal state tax returns.

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