A partnership is a business that’s co-owned but not set up formally to be a corporation or an LLC. In a partnership, all things are equal among partners, in terms of responsibility and profits. In corporations and LLCs, this is not necessarily the case. You must register your partnership with your state, and you should get a tax ID from the IRS. As far as setup goes, a partnership is much simpler and less expensive to start than a corporation.
IRS Form 1065 and Partnership Income
Also, you must file IRS Form 1065, U.S. Return of Partnership Income. This is an informational return, since income taxes of a partnership are paid via the partners’ individual tax returns. Form 1065 shows income and deductions, which includes expenses. Partners don’t get wages, they get “distributed shares of partnership profits”. After IRS Form 1065 has been completed, and the partnership’s taxable income has been figured, that amount gets divided evenly among partners, slapped onto a Schedule K for each partner, and that divided income will be taxed on each partner’s individual income tax return, IRS 1040.
Getting an IRS Extension for IRS Form 1065
IRS Form 1065 is due April 15, just like individual income tax returns. However, you can get a five-month extension if you need more time to file your IRS Form 1065. Use IRS Form 7004, which can be submitted electronically to the IRS.
If you don’t file your form 1065 on time, the partnership will have to pay $195 for each month it’s late.
How to File IRS Form 1065 Electronically
If your partnership has more than 100 partners, you are required to file your IRS Form 1065 electronically. Go here on the IRS website for a list of online companies that will help you e-file IRS form 1065.
If you really have a problem with e-filing form 1065, you can try writing a letter to the IRS to get a waiver. You’ll have to explain why filing electronically would be a problem, a hardship. Here’s the address if you want to give it a whirl:
Internal Revenue Service
Ogden Submission Processing Center
Mail Stop 1057
Ogden, UT 84201
Attn: Form 1065 e-file Waiver Request
IRS Form 1065 and the Schedule K
Once you’ve filled out IRS form 1065, you must issue Schedule K forms to each partner, and the partnership will have to pay $100 for each Schedule K that’s not issued or that is issued incomplete. The upper limit on this penalty is so high: $15. million. Imagine having to pay all that stupidity in penalties just because you didn’t file a simple piece of paper. Of course, not filing Schedule Ks means partners save big time on their income taxes, that’s why the penalty is so high.