Creating a basic tax return for a partnership is done in the Business program of TaxSlayer Pro by following the steps below. To assist your preparation you should review the IRS instructions here as they provide line by line details for how to complete the return.
A partnership return has four basic areas that may need to be completed:
- Enter basic information about the partnership into the return (Steps 1- 8);
- Enter income, deductions, and other items being distributed to the individual partners (Steps 9-16);
- Enter the information on the Schedules K-1 for the individual partners (Steps 17-23); and
- When applicable enter the Balance Sheet and reconcile Book Income (Loss) to the tax return (Steps 24-27).
Step 1 – From the Quick Menu of TaxSlayer Pro, select Business, then select Partnership Return.
Step 2 – Enter the partnership's EIN. You will be asked about creating a new return. Click YES.
Step 3 – Company Information
Enter the partnership’s name, date business started, and its address, then click OK.
Step 4 – Name & Address Menu
Continue entering information about the partnership, including the signing partner's name, title, and contact phone number. The signing partner is the partner that is responsible for filing the tax return, and the return cannot be electronically filed without this information.
Also in this menu you can enter an e-mail address for correspondence from the IRS to the partnership, if desired. When finished, click Exit to be taken to the Heading Information Menu.
Step 5 – Heading Information Menu
Total Assets - You don't need to make an entry here. This amount will pull from the balance sheet (Schedule L) if it's completed. If the partnership has assets of at least $1 million or gross receipts of at least $250,000, you are required to complete a balance sheet with the return (Step 24 below). If you are not required to complete a balance sheet (Schedule L), no entry will be made here.
Fiscal Year - If the partnership does not operate on a calendar year basis, or had a short year that did not end on December 31, enter the beginning and ending dates of its fiscal year.
Don't make an entry here if the partnership operates on a calendar year or if the partnership began in the current year and its year ends on December 31. Entering dates when they shouldn't be entered may cause the return to reject if the tax reporting period on the return differs from what the IRS has in its records.
Step 6 – Other Categories
In order to electronically file the return, you must enter a valid Business Activity Code. Other important information includes the Principal Business Activity, Principal Product or Service, and the Method of Accounting (Cash, Accrual, or Other). Once you have finished with this menu and everything is correct, exit the Heading Information Menu and return to the Main Menu of the return.
Step 7 – Schedule B
From the Main Menu of the return select Schedule B – Other Information. You should review and answer each question found on Schedule B. The answers to the questions in this section will control what sections of the return need completion.
Type of Entity - Several different types of entities can file a 1065 return, including domestic partnerships (both general and limited), foreign partnerships, and domestic limited liability companies.
The remaining items in this menu should be reviewed for accuracy to ensure the default answer of No is correct. Pay special attention to Does This partnership Meet All Four Requirements?. If the partnership’s total receipts were less than $250,000 for the tax year, the partnership’s total assets were less than $1 million at the end of the tax year, Schedule K-1’s are filed with the return and furnished to the partners on or before the due date (including extensions), and the partnership is not filing or required to file Schedule M-3, answer this question YES. In doing so you will not have to complete Schedule L (Balance Sheet), Schedule M-1 (Reconciliation of Income), and Schedule M-2 (Analysis of Partner’s Capital Accounts).
Step 8 – Schedule B Additional
From the Schedule B – Other Information Menu, select Additional Other Information. Review each question in this section to see if the default answer is correct for the partnership. You must enter either the Partnership Representative information or indicate the partnership elects out of the centralized partnership audit regime. Known prior to 2018 as the "Tax Matters Partner", the Partnership Representative is the designated individual who receives tax notifications from the IRS, has the authority to enter in to tax agreements on behalf of the partnership, and is responsible for keeping all partners informed of any applicable tax issues. (See here for more information about this individual, and see here for more information about the centralized partnership audit regime.) Once you have completed this section and if everything is correct, exit back to the Main Menu of the return.
Note: In the following Steps 9-16, you will enter the income, deductions and certain distributive share items that will be passed through to the respective partners. You should skip any step in this section that is not applicable to the partnership and only complete those items that are necessary for the return.
Step 9 – Income
From the Main Menu of the return select Income. Enter the partnership's trade or business activity income. Rental income, portfolio income, and other passive income isn't reported here. These items are distributive items that are allocated directly to the partners on Schedule K and will be entered later in the return.
In this section you are entering the operating income that relates to the partnership business activity. (Many of the items entered in this section are similar to what an individual taxpayer would enter on Schedule C (Form 1040).) The income reported in this section may be subject to self-employment tax, which will be reviewed in Step 23.
Step 10 – Deductions
From the Main Menu of the tax return select Deductions. Enter only trade or business activity deductions and expenses.
Guaranteed Payments to Partners - If the partnership has operating income, enter any Guaranteed Payments made to partners for services to the partnership. This total includes amounts paid by the partnership during the tax year for insurance that constitutes medical care for a partner as well as their spouse, dependents, and children under age 27 who aren't dependents. If the partnership does not have any operating income or only has rental, portfolio, or passive income, Guaranteed Payments should not be entered here but only be entered on Schedule K (Step 11).
When you make an entry in Guaranteed Payments you will be asked if you would like to carry the amount entered to Schedule K. Generally, the answer to this question is YES, however the amount entered will not automatically carry to the individual partner’s K-1s. Such payments to the individual partners typically are not made in proportion to their ownership share, so as a result when you get to Step 22 you will need to allocate the amount of the Guaranteed Payments to the appropriate partner(s) K-1s.
As with the Income items entered in Step 9, you do not report any rental activity expenses, deductions allocable to portfolio income, or non-deductible expenses in this section. Once you have entered all expenses and deductions related to the business activity income, exit the menu.
Step 11 - Schedule K Income
From the Main Menu of the tax return select Schedule K – Distributive Share Items, then Income (Loss). Enter any income or loss for any rental real estate activities as well as any portfolio activities such as taxable interest, dividends, royalties, or capital gains that the partnership received. It is on this menu that you will enter Guaranteed Payments made to partners when the partnership does not have operating business activities. Guaranteed Payments entered directly in Schedule K receive the same treatment on the partner’s individual tax return, but the payments will not be factored into the partnership's net income or loss for the year. Regardless of where the Guarantee Payments are entered on the return, when you get to Step 22, you will allocate the amount of the Guaranteed Payments to the appropriate partner’s K-1s. Once you have entered all income items, exit the Income (Loss) Menu to return to the Schedule K Menu.
Step 12 - Schedule K Deductions
From the Schedule K Menu, select Deductions. Enter certain deductions associated with the partnership that are given special treatment on the partner’s individual tax return. These types of deductions include Section 179 expense, contributions, and investment expenses. Be sure to review the Other Deductions menu. Once you have entered all the Deductions, exit back to the Schedule K Menu.
Step 13 - Schedule K Credits
From the Schedule K Menu, review the items in the Credits menu, Foreign Transactions Menu, and the Alternative Minimum Tax Menu (which include Depletion and Oil & Gas activities). Each of these sections of the Schedule K involve technical items in their respective areas that will be passed through to the individual partners on their K-1. You should refer to the IRS instructions for specific information on the items to be entered in this section.
Step 14 - Schedule K Self-Employment
From the Schedule K Menu, select Self Employment. The partnership's net profit or loss will carry here, but you'll want to review the menu for any adjustments. Additionally, enter the gross farming and fishing income as well as gross nonfarm income for partners who need this info when preparing Schedule SE in their individual tax return.
Step 15 - Schedule K Other
From the Schedule K Menu, select Other. The items in this section will impact the basis of the individual partners in the partnership. It is in this section that you will enter tax exempt income and nondeductible expenses. You will also enter the total cash distributions to the partners and the fair market value of any property that is withdrawn or otherwise distributed to all of the partners.
2018 tax year and forward - Be sure to enter the Section 199A information for each partner to use in calculating QBID on their individual return. See here for information on the Section 199A entries.
Step 16 - Schedule K Automatic Distribution
At this stage of the return all of the income, deductions, and credits for the partnership should have been entered in the return. Next, a Schedule K-1 must be created for each partner so that the information in the Schedule K menu can be distributed to each as appropriate. Before doing that, you'll want to assess whether or not you want the program to distribute the Schedule K information to the K-1s or if you will make the entries in each K-1.
Automatically Distribute Sch K Information? - Note that in the Schedule K Menu, Yes is the default answer to this question, allowing the program to distribute the items entered in Schedule K to each partner’s Schedule K-1. Most of the time automatic distribution is appropriate, however in some situations distributing the Schedule K information to the K-1s is best done manually, e.g., when there are many partners and one or more of their percentages of profit, loss, and capital have changed more than once during a year. Answer this question No to manually complete each partner's Schedule K-1 if appropriate.
Step 17 - Schedule K-1
From the Schedule K Menu, select Schedule K-1 Input. Click New, click the type of entity that describes this partner, and enter the remaining information about the partner.
Step 18 - Other Partner Information
Enter this partner's beginning and ending percentages for profit sharing, loss sharing, and capital. In many instances the ownership percentages will be the same at both the beginning and at the end of the year.
A change in ownership or in the percentage of ownership can affect the allocation and distribution of profit, loss, and other items. For this reason, you will also enter the Number of Days the beginning percentage of ownership is to be applied to this partner.
- If the percentages remained the same for the entire tax year, enter 365 (even if this is an initial return and the business operated for less than 365 days).
- If the percentages changed once during the year, you will have to calculate the actual number of days that the beginning percentage of ownership was in effect. This entry will allow the program to calculate the correct distribution of income, deductions, and other distributions to each partner.
- If the percentages changed more than once during the year, it is best to not use automatic distribution and instead calculate each partner's percentages and amounts to be distributed separately. Spreadsheet software is helpful.
Also enter the beginning Capital Contributions for this partner. In this menu you also have the option to enter certain income, distributions, and/or withdrawals, or you can enter these items later at Step 20. Once you exit this menu you will be at the individual partner’s K-1 menu.
Step 19 – Individual Partner’s K-1 Menu
Review the partner’s information, enter the partner’s basis information, and if you're not using automatic distribution make any adjustments necessary.
Other Information - In this menu, you can enter certain less common items that typically involve a publicly traded partnership, a foreign partner, and nonrecourse/qualified recourse and recourse financing. You can also indicate in this menu if the Schedule K-1 is the final K-1 or an amended K-1.
Step 20 – Analysis of Partner's Capital Account
The second section to review in the individual partner's K-1 Menu is the Analysis of Partner’s Capital Account where you enter information about the partner's basis in the partnership. The beginning capital balance (entered in Step 18) will pull to this menu. Enter any additional capital contributions the partner made during the year as well as any withdrawals that this partner received.
Step 21 – Partner's Adjusted Basis Worksheet
The third section to review in the individual partner's K-1 menu is the Partner's Adjusted Basis Worksheet. In this menu you can make entries regarding an individual partner's basis in the partnership. The Basis Worksheet is given to the individual partner with their K-1 as a record of their basis in the partnership. Many items automatically pull to the worksheet, however you can enter any other items that increased or decreased this partner’s basis during the year.
Step 22 – Distributive Share Items
The fourth section to review in the individual partner's K-1 menu includes the items being distributed to the partner. From the individual partner’s K-1 menu select Distributive Share Items. These items have been allocated to the partner automatically based on the percentage of ownership and profit (loss) that was entered earlier in Step 18, except for the Guaranteed Payments that this partner received.
Guaranteed Payments aren't automatically allocated based on the pre-selected percentages because in practice they are typically allocated differently among the partners than by their ownership percentages. Accordingly, you will have to enter the actual amount of Guaranteed Payments that each partner received by selecting from the Individual Partner’s K-1 Menu:
- Distributive Share Items
- Income (Loss)
- Guaranteed Payments
When you enter the Guaranteed Payments Menu, you will receive a prompt informing you that the Guaranteed Payments will carry to the Self-Employment Menu and you may need to adjust this amount on that menu for a limited partner. For general partners, Guaranteed Payments normally would not be adjusted on the Self-Employment Menu, however for limited partners Guaranteed Payments are generally treated as self-employment earnings only when the payments are for services they actually rendered to, or on behalf of, the partnership. If the Guaranteed Payment amount that pulls to the Self-Employment Menu needs to be adjusted, see Step 23.
Step 23 - Self-Employment Menu
The fifth and final section to complete in the individual's K-1 is the Self-Employment Menu. This menu needs to be review for each partner for any appropriate adjustments. The program will automatically pull self-employment earnings to this menu.
For a general partner the net earnings (loss) from self-employment that pulls to this menu includes their share of the partnership’s income (loss), but it does not include dividends and/or interest. Dividends and interest usually are not considered self-employment income unless they are received in the course of a trade or business, such as a dealer in stocks or securities. Also for a general partner, rental income from real estate and royalty income is not normally included in their self-employment income except when those items are received in the course of a trade or business, and thus they do not automatically pull to the Self-Employment Menu.
For a Limited Partner, their share of partnership income (loss) is not normally included in net earnings (loss) from self-employment and none of this income will automatically pull to the Self-Employment Menu.
To adjust self-employment income or loss in the partner's Schedule K-1 select:
- Distributive Share Items
- Net Earnings (Loss) from Self-Employment
- Adjustment to Net Earnings (+/-)
For more information on what constitutes income or loss for self-employment, see the IRS instructions for Schedule SE here.
Steps 17-23 will be repeated for each partner until 100% of the ownership of the partnership has been allocated, as well as 100% of all distributive items have been accounted for on the K-1’s.
Steps 24-27 - Additional Forms and Schedules
If in Schedule B at Step 7, you answered Yes to the question "Does This Partnership Meet All Four Requirements?", you can skip Steps 24-27 and proceed to Step 28. You do not have to complete Schedule L, Schedule M-1, and Schedule M-2.
On the other hand, if you answered the question No you are required to complete Schedule L, the balance sheet, and should proceed to Step 24.
Step 24 – Schedule L Assets
From the Main Menu of Form 1065 select Schedule L – Balance Sheet. Working from the partnership's accounting records select each asset as needed and enter the beginning and ending balances. The program will also automatically pull assets to the balance sheet if you're using the Depreciation Module.
For any asset that begins with the word "Other" (Other Current, Other Investments, and Other Assets) you will need to create a record that includes a description as well as an amount. This information will flow to a supplemental statement attached to the balance sheet.
For more information about the balance sheet in a partnership return, see here.
Step 25 – Schedule L Liabilities & Capital
After the assets have been entered on the balance sheet, enter the liabilities and the total partners' capital. Select Total Liabilities & Captl at the bottom of the Schedule L - Assets Menu.
For any liability that begins with the word "Other" (Other Current and Other Liabilities) you will need to create a record that includes a description as well as an amount. This information will flow to a supplemental statement attached to the balance sheet.
The Partners Capital beginning and ending balances should correspond to the sum of each partner's beginning and ending balances in their capital account analysis.
At the bottom of both the Schedule L Liabilities & Capital Menu are two menu lines showing the Total Assets and the Total Liabilities and Capital, and a third menu line shows the difference. The balance sheet is in balance when the difference between the two beginning balances and the two ending balances are both zero.
If the balance sheet is out of balance, check your entries for accuracy. Many out of balance issues are due to expense items reflected in the partnership that are not included in the tax return, reconciled on Schedule M-1.
Step 26 – Schedule M-1 – Reconciliation
You must reconcile any differences between the book income (loss) of the partnership to the income (loss) being reported on the tax return. From the Main Menu of the tax return (Form 1065) select Schedule M-1. Entering this menu creates the schedule, and if Schedule M-1 is required you'll need to create the schedule even if no adjustments will be made.
Adjust any items that are different from book income (loss) to the income (loss) on the tax return. The program will pull many of these items from other areas of the return. The most common item that may need adjustment is depreciation which may be different on the company’s books than on the tax return. This is primarily due to the practice of taking bonus depreciation on a tax return but using more conservative practices on the books of the company. A depreciation adjustment can either increase book income (loss) or decrease book income (loss).
Once these entries have been completed, select Exit to return to the Main Menu. See here for more detailed information about completing Schedule M-1.
Step 27 – Schedule M-2
The final schedule that needs to be included on the tax return is Schedule M-2, Analysis of Partner’s Capital Accounts. From the Main Menu of the tax return (From 1065) select Schedule M-2. As with Schedule M-1, if this schedule is needed you should enter this menu to create the schedule even if no adjustments will be made. Adjustments that need to be made on this menu are limited because the program will automatically pull most items to the schedule. See here for more detailed information about completing Schedule M-2.
Step 28 – Mark Return Electronic
When all entries have been completed on the tax return, from the Main Menu of the tax return (Form 1065), select Mark Return Electronic if you want to e-file the return. If you have failed to enter certain required information the program will prompt you to correct the items before proceeding.
Once you have successfully marked the return for e-file, exit the return to arrive at the Receipt Menu.
Step 29 – Receipt Menu
The Receipt Menu displays an overview of the calculated fees. You have the option to view and edit the invoice and enter payment information.
When you exit the Receipt Menu you will be asked “Are You Ready to Mark the Return Complete?” Answer No if the return is not complete, or Yes to mark the return complete. If the return has been marked for electronic filing, once it is marked complete it will be in the business returns transmission table ready to be electronically filed.
Note: This is a guide on entering Form 1065, US Return of Partnership Income, into the TaxSlayer Pro program. This is not intended as tax advice.