IRS Form 1065 and Your LLC – How Much in Penalties?!@*#?!
The IRS requires an April 15 due date for personal tax returns (1040) and corporate returns (1120) but the due date for LLC or partnerships (Form 1065) is a month earlier, on March 15. The penalties for late filing are surprisingly high, and if you receive a notice with a penalty amount, you might be shocked. Here’s more information about the 1065 and what to do if you get a letter notifying you about a penalty your company needs to pay.
What Is IRS Form 1065?
Form 1065 is an Internal Revenue Service (IRS) tax form that partnerships and limited liability companies (LLCs) use to report their income, gains, losses, deductions, and credits. Partnerships do not pay taxes on their income; instead, they pass their profits or losses through to their partners, who report them on their individual tax returns.
Form 1065 is a complex form, and there are many different schedules and attachments that may be required. Some of the most common schedules include:
Schedule K-1: This schedule reports each partner's share of the partnership's income, gains, losses, deductions, and credits.
Schedule L: This schedule provides a detailed financial statement of the partnership's assets, liabilities, and equity.
Schedule M-1: This schedule reconciles the partnership's book income with its taxable income.
Schedule M-2: This schedule provides additional information about the partnership's items of income, deductions, and credits.
In addition to Form 1065, partnerships and LLCs may also be required to file other forms, such as:
Form 8832: This form is used to elect how the partnership or LLC will be taxed.
Form 1099-MISC: This form is used to report payments of $600 or more made to non-employees during the year.
Form W-2: This form is used to report wages paid to employees during the year.
When Is IRS Form 1065 Due?
The due date for filing Form 1065 is the 15th day of the third month following the end of the partnership's tax year. For example, if the partnership's tax year ends on December 31, 2023, Form 1065 is due on March 15, 2024.
Here are some tips for completing Form 1065:
Start early; Filing Form 1065 can be a complex process, so it is important to start early and give yourself plenty of time to complete the form.
Get help from a tax professional: If you are not familiar with Form 1065, or if you have questions, get help from a tax professional.
Keep good records: You will need to keep good records of the partnership's income, expenses, and other financial transactions. These records will be necessary to complete Form 1065.
When Can I Find the Forms to Complete IRS Form 1065?
Form 1065 is an important tax form for partnerships and LLCs. By following these tips, you can help to ensure that your form is filed on time and that it is complete.
Here are some additional resources that you may find helpful:
IRS Publication 541, Partnerships:
IRS Form 8832, Entity Classification Election
IRS Form W-2
As the IRS explains, “A penalty is assessed against the partnership if it is required to file a partnership return and it (a) fails to file the return by the due date, including extensions, or (b) files a return that fails to show all the information required, unless such failure is due to reasonable cause. The penalty is $205 for each month or part of a month (for a maximum of 12 months) the failure continues, multiplied by the total number of persons who were partners in the partnership during any part of the partnership's tax year for which the return is due.”
In 2020 and beyond, with all the confusion over changes to deadlines with Covid-19, I suspect many LLC owners are going to be hit with this penalty. Here’s an example: Our Company, LLC, owned by two members, filed their LLC’s 1065 in early July, mistakenly thinking that the Covid-19-related extension given to individuals (Form 1040) and Corporations (Form 1120) applied to them as well. In reality, the IRS did not extend the LLC deadline, which is normally March 15 rather than April 15.*
In late July, Our Company, LLC receives a CP notice from the IRS with a penalty of $1,640. The IRS considered their 1065 return to be four months late – March, April, May, June, because it counts part of a month – so with two owners the penalty is 2 times $205 times 4 or $1,640. Ouch.
If you are facing this situation, the IRS recommends that you, “send the IRS an explanation and the Service will determine if the explanation meets reasonable-cause criteria.” Explain your reasonable cause to the IRS. If you just started your LLC and this is the first year you needed to submit a 1065, or if you’ve been filing for a while and have always been on time in the past, it is likely that the IRS will grant an abatement of the penalty. Respond to the CP notice with a letter of explanation and a request for the penalty to be forgiven.
Best of luck to you – we all need some extra help, consideration, and breaks.
*Note – The reasoning behind why 1065s are due a month earlier (due March 15) than personal or corporate returns (due April 15) is because partnerships and LLCs that file on the 1065 are pass-through entities that don’t actually pay the tax with that 1065 return but rather send the losses/gains/tax owed through to the owners, who then include that on their personal 1040 return. So the thinking is that the 1065 needs to be done a month early so that the necessary information can be sent (via a form called a K-1) to the owners or members in time to include on their personal returns.
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Kathryn Hauer, a Certified Financial Planner™, adjunct professor, and financial literacy educator has written numerous articles and several books including the “11-Step, DIY, Comprehensive Financial Plan Workbook” and “Financial Advice for Blue Collar America.” She works to help clients and readers understand and act on complex financial information to keep them and their money safe. She functions as a strong advocate and guiding light for her clients as they move through a murky and unfamiliar financial world. Learn more at her website.