A partnership is defined as a relationship between two or more persons who join to carry on a trade or business, contributing money, property, labor, or skill, and sharing in profits and losses. Partnership types include limited partnerships (LP) and limited liability partnerships (LLP), each with distinct liability structures. A two or more member LLC is treated as a partnership for federal tax purposes unless it elects to be treated as a corporation.

Partnerships must file Form 1065, U.S. Return of Partnership Income. Key parts of Form 1065 includes:

  • Header information, check-the-box elections
  • Part I Income, Part II Deductions
  • Schedule B
  • Schedule K, Schedules K-1
  • Schedule L
  • Schedules M-1 and M-2

Part I of Form 1065 reports the partnership’s total income, including gross receipts, returns, cost of goods sold, and other income items.

Part II details the partnership’s deductions, including salaries, guaranteed payments, rent, certain interest, and other business expenses. Generally, Part I and Part II do not include items that must be reported separately on Schedule K and K-1.

Schedule B consists of thirty-one questions aimed at collecting information about the partnership, including partnership type, size, ownership structure, certain tax elections and transactions undertaken.

Schedule K provides a summary of the partnership’s financial results including

  1. ordinary income/loss per page 1 of the return (i.e., total income less total deductions) and
  2. separately stated items

Ordinary income/loss is taken from line 23 Ordinary business income (loss), page 1 Form 1065. The reason for separately stated items is that they are subject to rules and limitations that can differ for each partner and must be applied at the partner level.