U.S. Return of Partnership Income

By: Sonia Lee Ng, CPA

Date: September 8, 2025

Form 1065

This is an information return that partnerships file to report their income, gains, losses, deductions, credits, and other items. Partnerships do not pay federal income tax, but instead, these items are "passed through" to partners, who report them on their personal tax returns.

Who must file?

General Partnerships, Limited Partnerships or Limited Liability Partnerships

Due Date:

March 15 (or the next business day if weekend/holiday) unless extended.

Extensions: File Form 7004 to request an automatic 6-month extension. For a partnership with a calendar year ending December 31, the deadline for filing with extension is September 15 (or the next business day if weekend/holiday)

Form 1065 Structure

• Page 1: Income, Deductions, and Tax Payments

• Schedule B: Other Information

• Schedule K: Partners' Distributive Share Items

• Schedule L: Balance Sheet

• Schedule M-1: Reconciliation of Income

• Schedule M-2: Analysis of Partners' Capital Accounts

Page 1: Income, Deductions, and Tax Information

Header Information: Partnership name, address, EIN, date established, accounting method.

Schedule B: Other Information

Yes/No questions about:

• Type of entity

• Accounting methods

• Foreign accounts or activities

• Ownership and partners

• Questions about payments to foreign persons or related party transactions

Schedule K: Partners' Distributive Share Items

Summarizes total partnership items to allocate to partners, including:

• Ordinary business income (loss)

• Net rental real estate income/loss

• Other rental income/loss

• Interest, dividends, capital gains/losses

• Deductions: Section 179, charitable contributions, other deductions

• Foreign transactions

• Alternative Minimum Tax (AMT) items

• Credits and other tax items

Schedule L: Balance Sheet

• Shows assets, liabilities, and partners' capital accounts at the beginning and end of the year.

• Must reconcile with the partnership's books

Schedule M-1: Reconciliation of Income

• Reconciles book income to tax income

• Adjustments for permanent and temporary differences between accounting records and taxable income

Schedule M-2: Analysis of Partners' Capital Accounts

Tracks changes in partners' capital during the year:

• Beginning capital balance

• Contributions

• Net income/loss

• Distributions

• Ending capital balance

Schedule K-1 (Form 1065)

• This form is issued to each partner to report their share of income, deductions, credits, and other items.

• Partners use K-1 to report these items on their personal tax returns (Form 1040)

Partnership Basis

Partnership Basis

The partnership basis is the tax value a partner has in their investment in a partnership. It determines:

• How much loss a partner can deduct on their personal tax return

• How much gain or loss is recognized when a partner sells or disposes of their interest.

• How distributions (cash or property) are taxed

Initial Basis

• Initial money and property contributed by a partner to the partnership

• If you invest cash, your basis increases by the cash amount

• If you contribute property, your basis is generally the adjusted tax basis of the property

Adjustments to Basis

Transactions that occur after the initial investment. These are annual changes in the partner's basis for the following:

Increases

• Share of partnership income (ordinary business income, rental income, interest, dividends, capital gains)

• Additional capital contributions by the partner

Decreases

• Share of partnership losses (limited to basis)

• Distributions of cash or property from the partnership

• Share of deductions (i.e., Section 179)

  
  

Uses of Basis in Partnership

• Loss limitation: A partner can deduct losses only up to his/her basis in the partnership

• Distribution Taxability:

  • Cash Distributions generally reduce basis and are not taxable if they don't exceed basis

  • Distributions in excess of basis are taxable as capital gains.

• Sale or Transfer of Partnership Interest: Gain or loss is calculated as selling price minus adjusted basis

Disclaimer

The information provided in this material is for general informational purposes only and should not be considered tax, legal, or accounting advice. Every taxpayer’s situation is unique, and laws or regulations may change over time. You should consult with a qualified tax professional, attorney, or accountant before making decisions based on this information.

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