What is Schedule C (Form 1065)?
Schedule C (Form 1065), Additional Information for Schedule M-3 Filers, is an IRS form used by some taxpayers who file Schedule M-3 (Form 1065), Net Income (Loss) Reconciliation for Certain Partnerships to provide answers to additional questions.
The IRS defines a partnership as two or more persons carrying trade or business together. Each person or partner shall contribute money, labor, skill, or property, and they expect that they will receive economic benefits and also expect losses.
Taxpayers who filed Form 1065, US Return of Partnership Income, and Schedule M-3 (Form 1065) are required to complete the IRS Form 1065 Schedule C and attach it to their federal tax return.
Form 1065 is an IRS form used for declaring profits, losses, deductions, and credits of a business partnership. This form provides the IRS with an overview of the partnership’s financial status for the year.
Partners need to report their shares of income from the partnership on their tax returns and pay for the taxes due. Whether the earnings were distributed or not, partners must still pay their income tax on their earnings.
All domestic partnerships are required to fill out Form 1065 before filing the Schedule C Form 1065. These partnerships include limited liability corporations (LLCs) that are classified as domestic partnerships and have headquarters in the US.
Aside from domestic partnerships, foreign partnerships must also file Form 1065. Partnerships need to lay down significant information about their financial statuses, such as gross receipts and sales, deductions, and operating expenses. However, foreign partnerships earning less than $20,000 in the United States or partnerships receiving less than one percent of their income in the United States may not need to file.
Hence, before filling out Schedule C (Form 1065), make sure that you fall under the required persons or partnerships in filing Form 1065. Before filing Form 1065, you may also need to fill out other forms as may be necessary, such as Form 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts, or Form 4562, Depreciation and Amortization.
The IRS updated the processes for tax years ending on December 31, 2014, or later. The IRS provided exemptions for partnerships for filing Schedule C (Form 1065):
- Partnerships that are required to file Schedule M3 and have total assets of less than $50 million at the end of the tax year; or
- Partnerships that are not required to file Schedule M-3 and voluntarily filed Schedule M-3.
You may download a PDF copy of Form 1065 Schedule C on the IRS website. But you may also electronically fill it out on PDFRun for your convenience.
How to fill out Schedule C (Form 1065)?
Provide the necessary information in filling out Schedule C Form 1065. Make sure that every piece of information you enter is true, accurate, and correct.
Name of partnership
Enter the name of the partnership.
Employer Identification Number
Enter the employer identification number.
The next few items require you to mark “Yes” or “No” to determine if the following situations apply to you.
Mark “Yes” to determine if there were any transfers between the partnership and its partners subject to the disclosure requirements of Regulations section 1.707-8 at any time during the tax year. Otherwise, mark “No.”
Disclosure is required through the following instances:
- There are transfers to a partner made within two years of a transfer of property by the partner to the partnership;
- Debt is incurred by a partner within two years of the earlier of:
- A written agreement to transfer; or
- A transfer of property securing the debt, if the debt is treated as a qualified liability; or
- Transfers from a partnership to a partner occur which are equivalent to those listed in the first and second instances above.
A partner must disclose the transferor partner’s return using Form 8275, Disclosure Statement, or an attachment providing the same information. However, if more than one partner transfers property to a partnership under a plan, the disclosure may be done by a partnership instead of each partner.
Mark “Yes” to determine if any amount reported on Schedule M-3, Part II, lines 7 or 8, column (d), reflected allocations to this partnership from another partnership of income, gain, loss, deduction, or credit that are disproportionate to this partnership’s share of capital in that partnership or its ratio for sharing other items of that partnership.
Otherwise, mark “No.”
Mark “Yes” to determine if the partnership sold, exchanged, or transferred any interest in an intangible asset to a related person as defined in sections 267(b) and 707(b)(1) at any time during the tax year. Otherwise, mark “No.”
Mark “Yes” to determine if the partnership acquired any interest in an intangible asset from a related person as defined in sections 267(b) and 707(b)(1). Otherwise, mark “No.”
Mark “Yes” to determine if the partnership made any change in accounting principles for financial accounting purposes at any time during the tax year. Otherwise, mark “No.”
According to the IRS instruction, the term “change in accounting principle” is defined as a change from a generally accepted accounting principle to another generally accepted accounting principle as described in “Statement of Financial Accounting Standards No. 154 - Accounting Changes and Error Corrections.”
Mark “Yes” to determine if the partnership made any change in a method of accounting for US income tax purposes at any time during the tax year. Otherwise, mark “No.”
If you are requesting a change in method of accounting, file Form 3115, Application for Change in Accounting Method.
How to file Schedule C (Form 1065)?
Schedule C Form 1065 must be attached to Form 1065 and filed by the partnership on the 15th day of the third month following the date its tax year ended. The due date is March 15 for calendar year partnerships. However, if the due date falls on a weekend or legal holiday, it may be filed on the next business day.
Partnerships with more than 100 partners are required to file IRS Form 1065 Schedule C electronically. However, make sure to use legitimate tax software accredited with the IRS.