Completing Form 1065 can be tricky if you have many different types of partners—family members, landowners, and hired hands—contributing to your operation. Here’s how it works.
If you run your ag operation as a partnership, you’ll need to file Form 1065 each year. The information on Form 1065 (Return of Partnership Income) passes through to the personal tax returns of each partner, helping to determine what they owe in taxes.
Completing Form 1065 can be tricky if you have many different types of partners—family members, landowners, and hired hands—contributing to your operation. And, depending on your particular situation, you may need to file a balance sheet (Schedule L) with your return.
This guide covers all the essentials: What Form 1065 does, how it connects to other forms like Form 1040 and Schedule K-1, and what you need to do to file it accurately and on time.
What is Form 1065?
Partnerships file Form 1065 each year to report their financial activity. That includes:
Gross receipts
Operating expenses
Net ordinary business income or loss
Any other income (dividends, capital gains, etc.)
The partnership itself doesn’t pay taxes on its income. Because a partnership is a pass-through entity, all tax obligations ‘pass through’ to partners.
Each partner’s share of the partnership’s gain or loss is reported on Schedule K-1. You file one copy of each K-1 with the IRS, and send another copy to the relevant partner.
Who needs to file Form 1065?
All partnerships, whether general or limited, must file a Form 1065.
A general partnership (GP) is often formed automatically when two or more people go into business together. Partners in a general partnership have no liability protection. Both play active roles in the business, and both—unless the partnership agreement states otherwise—have equal management rights.
A limited partnership (LP) is registered at the state level with a Certificate of Limited Partnership. In a limited partnership, general partners manage the business while limited partners serve as passive investors. Limited partners have special liability protection—they can’t lose more money than they have invested in the business.
Because of the two different classes of partners, their different levels of liability, and the paperwork necessary to register at the state level, an LP has higher administrative demands than a GP.
Whether a partnership is general or limited, it must file Form 1065 and Schedule K-1s.
Finally, by default, a multi-member LLC is taxed as a partnership, meaning it must file Form 1065 and Schedule K-1s each year.
Form 1065 vs. Form 1040
A partnership must file Form 1065. And generally, each individual partner must file Form 1040—a personal tax return.
(In some cases, an LLC or a C corporation may act as a partner, in which case they fulfill their own respective filing requirements (eg. Form 1120-S for an LLC electing S corp status, Form 1120 for a C corp).)
Income or loss from a partnership’s Form 1065 is reported on each partner’s Schedule K-1.
Schedule K-1
Each partner’s Schedule K-1 includes:
Basic partner information: Name, address, identification number; whether the partner is general or limited; their profit, loss, and capital percentages at the beginning and end of the year
Partner’s capital account: Beginning capital account, ending capital account, contributions during the year, share of income or loss, withdrawals and distributions
Ordinary business income (loss): Total income from the partnership, most often used to complete Schedule E of Form 1040 (see below)
Separately stated items: Income, deductions, or credits which affect each partner’s return differently, including capital gains and losses, Section 179 elections, and general business credits
Partner’s share of liabilities: Used to calculate the partner’s basis in the partnership, which determines the percentage of income or loss they report
Other items: Including basis limitations, tax exempt income, and passive activity information
State-specific information: Including state tax credits or addbacks, and withholdings if the partner is a non-resident
The ordinary business income or loss reported on Schedule K-1 flows through to the individual partner’s tax return. Here’s how that works for a partner who files Form 1040:
The partnership issues the partner a Schedule K-1
The partner enters their income or loss—reported on Schedule K-1—as ordinary business income (loss) on Part II of Schedule E of Form 1040. The total amount appears on line 41
The total from line 41 is entered on line 5 of Schedule 1
The total partnership income from line 5 is added to any other income or loss (including farm income), and the total is entered on line 10
The amount on line 10 flows through to line 8 of Form 1040 (“Additional income from Schedule 1”).
Other information on a partner’s return goes to different tax forms. These may or may not be required—it depends on the specifics of the partnership:
Self-employment earnings are reported on Schedule SE
Interest income is reported on Schedule B, then Form 1040
Capital gains are reported on Schedule D and Form 8949
The Section 179 deduction is reported on Form 4562
Passive activity limitations are reported on Form 8582
Tax credits are reported on their relevant forms (eg. Form 3800 for the general business credit)
Schedule K-1 is due to be delivered to partners on or before the filing date for Form 1065. (More information on filing dates below.)
Does Form 1065 require a balance sheet?
Some partnerships are required by the IRS to file Schedule L of Form 1065, a balance sheet.
If your partnership qualifies as a small partnership, you don’t need to file Schedule L. By working through Schedule B, you can determine whether you qualify. But in general your partnership is considered small so long as it meets all of the following criteria:
Income less than $250,000
Assets valued less than $1 million at the end of the year
All Schedule K-1s were provided to partners in a timely manner
Also, if any partners individually fail to meet any of these criteria, you are no longer considered a small partnership and must file Schedule L.
Schedule L
Schedule L lists all of your partnership’s assets and liabilities and each partner’s capital account. You prepare Schedule L on a book basis (reporting the figures recorded on the books) as opposed to a tax basis (reporting the figures reported on your tax return).
If you file Schedule L, you must include two additional schedules:
Schedule M-1, which reconciles the assets on the books with the assets in your bank account; and
Schedule M-2, which explains changes to each partner’s capital account over the course of the year
Special considerations for ag operation partnerships
Provided your books are up to date, and especially if you get help from a professional tax preparer, Form 1065 and its supporting schedules should be no obstacle to you filing your partnership’s taxes accurately and on time.
However, there are few special considerations ag producers need to take into account when it comes to Form 1065:
Partnership agreements
Particularly in family-run ag operations, it’s common for general partnerships to operate without a written partnership agreement. But that can cause problems: Without a former partnership agreement to support them, the IRS may judge allocations to lack a substantial economic effect. The IRS could then reallocate tax items in line with their own interpretation, creating unpredictable tax situations for all partners involved.
A partnership agreement also lays the ground rules in case disputes ever arise over ownership of livestock or equipment. Creating a partnership agreement now can save your operation a lot of headaches later on.
Inventory methods
It’s crucial that every partner uses the same method for valuing their inventory. That’s particularly the case in livestock operations with multiple owners. Each partner’s inventory helps to determine their basis in the partnership. When inventory methods don’t match up, it’s almost impossible to calculate partners’ bases.
Income averaging
This is a pretty straightforward rule, but one that could cause you some difficulty if it’s your first year filing as a partnership. Individual partners may use income averaging with Schedule J to calculate their tax obligations, but the partnership itself may not.
Material participation
Partners who do not participate materially in the ag operation are subject to passive activity loss limitations. If you’re unfamiliar with the subject, How to File Form 8582 for Passive Activity Losses will give you a complete breakdown.
Partner allocation
Determining each partner’s allocation can be especially tricky for family-run ag operations, where different family members—in addition to hired help, landowners, and investors—all participate in different ways.
For instance, in a limited partnership, a limited partner loses their liability protection if they participate in the management of the business. You could have a situation where a retired rancher forms a partnership with his children who are taking over the ranch. So long as he participates only as a landowner, he can remain a limited partner and his assets are protected. But if he helps to oversee the operation, he could be considered a general partner and lose protection of his assets—including the family ranch.
In complex and high-stakes scenarios like these, it’s best to consult with a lawyer for help planning and forming the partnership, and to get support from tax professionals when filing Form 1065 and reporting each partner’s allocation.
Self-employment tax
The income of all general partners is subject to self-employment tax. So are guaranteed payments. And self-employment tax also typically applies in crop-share rental agreements. Many partners in ag operations fail to file and pay income tax on their earnings, leading to incorrect filing and IRS penalties, so carefully tracking your income—and making sure you understand which taxes you owe on it—is key.
Partner basis
Each partner’s basis in the partnership determines how income or losses pass through to their individual tax returns. But partnership bases can change due to distributions, inventory valuation, land improvements, and long-term capital assets. By carefully tracking each partner’s basis—which means keeping up with bookkeeping and managerial accounting—you can avoid filing an inaccurate tax return for your partnership and creating tax problems for your partners.
Government payments
Disaster relief, agriculture risk coverage (ARC), price loss coverage (PLC), conservation payments, crop insurance proceeds, and other government payments each have their own rules for how they are taxed. It’s important to make sure they’re classified properly when completing Schedule 1065. Also, keep an eye on your partners. If they make certain elections themselves—like crop insurance deferral, for example—it could interfere with your partnership’s reporting.
Form 1065 filing date and late filing penalties
Form 1065 is due on the 15th day of the third month after the close of the partnership’s financial year. In most cases, that means March 15th. If the 15th falls on a weekend or holiday, the deadline moves ahead to the next business day.
Schedule K-1 is due on the same day. Remember, one copy of each Schedule K-1 goes to the IRS while another copy goes to the relevant partner.
If you’ve fallen behind on accounting, you can file for a partnership return tax extension with Form 7004. This extends your tax deadline six months, to September 15th (or the next business day).
Late filing penalties
If you’re late filing Form 1065, each partner must pay a penalty.
The penalty is $245 per month, per partner, to a maximum of 12 months. That includes partial months, and it includes penalties for late K-1 filings.
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This resource is provided for general informational purposes only. It does not constitute professional legal advice and may not apply to your specific situation. Consult with professional legal counsel before making any decisions about your business.
