A limited liability partnership files its federal tax return on Form 1065, an informational return that reports the LLP’s income, deductions, and credits but does not itself produce a tax bill. The partnership then issues each partner a Schedule K-1 showing that partner’s share of every item, and the partners report those amounts on their personal Form 1040 returns and pay tax at their individual rates.1Internal Revenue Service. About Form 1065, U.S. Return of Partnership Income The federal return is due March 15 for calendar-year LLPs, and the moving parts that cause problems are almost always the same: self-employment tax, loss limits, and the interaction with state filings.
Why the LLP Itself Owes No Federal Income Tax
The IRS treats an LLP the same way it treats most partnerships. All income, losses, deductions, and credits pass through to the individual partners, who pick them up on their personal returns.1Internal Revenue Service. About Form 1065, U.S. Return of Partnership Income That is what makes Form 1065 an informational filing: it tells the IRS what the business did and how the results were divided, but the check, if any, comes from the partners.
The partnership agreement controls how income and losses are split. The allocation does not have to be equal. One partner might take 60% and another 40%, as long as the split has substantial economic effect under the tax code. Whatever the arrangement, each partner’s share lands on that partner’s own Schedule K-1.
One boundary worth naming: an LLP can elect to be taxed as a corporation by filing Form 8832, in which case it files Form 1120 instead and none of what follows applies.2Internal Revenue Service. About Form 8832, Entity Classification Election The rest of this article assumes the LLP is filing as a partnership, which is the default.
What Goes on Form 1065
The point of the form is to calculate the partnership’s net income and then break it into categories so each partner knows exactly what to report.
Ordinary Business Income
Start with gross receipts from sales or services. If the LLP sells products, subtract cost of goods sold to get gross profit. From there, deduct ordinary operating expenses: wages paid to non-partner employees, rent, repairs, depreciation, insurance, and similar costs. Guaranteed payments made to partners for services or the use of capital are also deducted at this level.1Internal Revenue Service. About Form 1065, U.S. Return of Partnership Income The bottom line is the partnership’s ordinary business income or loss.
Separately Stated Items
Not everything gets folded into ordinary business income. Items that face special rules or limitations at the partner level have to be reported on their own. That includes interest and dividend income, capital gains and losses, Section 179 expense deductions, charitable contributions, and foreign taxes paid. These flow through Schedule K and out to each partner’s K-1 as separate lines.1Internal Revenue Service. About Form 1065, U.S. Return of Partnership Income Keeping them separate is what lets each partner apply the correct personal limits. Charitable contribution caps, for example, apply at the individual level, not the partnership level.
Partner Capital Accounts
The partnership has to maintain a capital account for each partner, tracking contributions, share of income and losses, and withdrawals. This is reported on each K-1 using the tax basis method, and a beginning-to-ending reconciliation of all capital accounts is attached to Form 1065. Getting this right matters because the capital account is the foundation for a partner’s tax basis, which directly limits how much loss that partner can deduct.
What Partners Do With the K-1
Once Form 1065 is finalized, the partnership files the K-1s with the IRS and furnishes a copy to each partner. Partners generally report their share of ordinary business income on Schedule E of Form 1040, and separately stated items go on the schedules that fit them: Schedule D for capital gains, Schedule A for charitable contributions if the partner itemizes, and so on.
The Qualified Business Income Deduction
Partners may qualify for a deduction worth up to 20% of their share of the partnership’s qualified business income under Section 199A.3Internal Revenue Service. Qualified Business Income Deduction It is claimed on the personal return, not at the partnership level. It reduces taxable income without reducing adjusted gross income, and a partner does not have to itemize to take it.
The deduction phases out for specified service businesses (law, accounting, health care, consulting, and similar fields) once a partner’s taxable income crosses certain thresholds. Above those thresholds, wage and property limitations also apply. Since many LLPs are professional services firms, this phase-out hits a lot of partners. The K-1 carries the information needed, but the actual computation happens on Form 8995 or 8995-A attached to the partner’s return.
Self-Employment Tax and Guaranteed Payments
General partners in an LLP owe self-employment tax on their distributive share of the partnership’s ordinary business income plus any guaranteed payments they receive. The rate is 15.3%: 12.4% for Social Security and 2.9% for Medicare. It is calculated on Schedule SE attached to Form 1040.4Internal Revenue Service. Instructions for Schedule SE (Form 1040)
The Social Security portion only applies up to an annual wage base that the IRS adjusts each year for inflation. Earnings above the cap are exempt from the 12.4% but still hit by the 2.9% Medicare portion. High earners also face an additional 0.9% Medicare surtax on self-employment income above $200,000 for single filers or $250,000 for joint filers. Partners can deduct the employer-equivalent half of their self-employment tax as an adjustment to income.
Guaranteed payments deserve their own note. They are set amounts paid to a partner for services or use of capital regardless of whether the partnership turned a profit. The LLP deducts them when calculating ordinary business income, and the partner reports them as fully taxable income subject to self-employment tax. They appear on the K-1 as a separate line and end up on both Schedule E and Schedule SE.
Self-Employed Health Insurance
General partners who pay their own health insurance premiums can claim the self-employed health insurance deduction, covering up to 100% of premiums for medical, dental, and qualifying long-term care coverage for themselves, a spouse, and dependents. It is an adjustment on Schedule 1 of Form 1040 and is available whether or not the partner itemizes. A partner is not eligible for the deduction during any month they had access to a subsidized health plan through a spouse’s employer or another job.
Losses on the K-1 Are Not Automatically Deductible
Three separate hurdles sit between a loss on the K-1 and a usable loss deduction, and they have to be cleared in order.
Basis
A partner cannot deduct losses greater than their adjusted tax basis in the partnership. Basis starts with the initial investment, goes up with income allocations and additional contributions, and comes down with losses, distributions, and withdrawals. If the K-1 shows a $50,000 loss but basis is only $30,000, the deduction is capped at $30,000. The remaining $20,000 is suspended and carries forward until basis increases through new contributions or future income.
At-Risk
Even with enough basis, a partner can only deduct losses to the extent they are “at risk” in the activity. The at-risk amount generally includes contributed money plus the partner’s share of partnership debts for which they bear personal economic risk. Nonrecourse debt, where the lender can only look to partnership assets, generally does not increase the at-risk amount. Losses above the at-risk amount are suspended until that position grows.
Passive Activity
The last hurdle catches partners who do not materially participate in the LLP’s business. A passive investor’s share of partnership losses can only offset other passive income. Unused passive losses carry forward until the partner either generates passive income or disposes of their entire partnership interest. Partners who work in the business on a regular, continuous, and substantial basis are treated as active and can deduct losses against any income.
Filing Deadlines and Extensions
Form 1065 is due on the 15th day of the third month after the LLP’s tax year ends. For a calendar-year partnership, that is March 15.1Internal Revenue Service. About Form 1065, U.S. Return of Partnership Income The early date exists so partners have K-1s in hand to prepare their April 15 personal returns.
If the partnership needs more time, it can file Form 7004 by March 15 for an automatic six-month extension to September 15.5Internal Revenue Service. About Form 7004, Application for Automatic Extension of Time To File Certain Business Income Tax, Information, and Other Returns The extension is time to file, not time to pay any taxes owed. Partners still waiting on a late K-1 may need to extend their own return on Form 4868.
The filing obligation applies even if the LLP had zero income and zero activity for the year. Skipping the return because the partnership was dormant is one of the most common mistakes, and it triggers the same penalties as any other late filing.
Penalties for Late or Incomplete Filing
The IRS imposes a penalty for each month (or partial month) that Form 1065 is late, multiplied by the number of partners during any part of the tax year. A partnership with no tax liability still owes this penalty for a late return. For an LLP with five partners that files three months late, the total climbs quickly.
On top of the filing penalty, any partner who underpays their individual estimated taxes because the K-1 arrived late faces their own underpayment penalty and interest. For the quarter beginning January 1, 2026, the IRS charges 7% interest on individual underpayments.6Internal Revenue Service. Determination of Rate of Interest (Rev. Rul. 2025-22) The partnership can face additional penalties if it fails to furnish correct K-1s to partners or to the IRS. An incomplete filing, even if timely, can be treated as no filing at all for penalty purposes, so every required schedule and attachment needs to go in with the return. Partnerships with 100 or more partners are generally required to e-file.
Estimated Tax Payments
No employer withholds income or self-employment tax from partnership distributions, so partners are generally responsible for quarterly estimated payments to the IRS on Form 1040-ES. The due dates are April 15, June 15, September 15, and January 15 of the following year. Missing them produces an underpayment penalty even if the full amount is paid with the April return.
A common safe harbor is to pay at least 100% of the prior year’s total tax liability (110% for higher-income taxpayers) in four equal installments. First-year partners often underestimate this obligation because they have no prior-year baseline. A rough income projection after the first quarter can head off a surprise bill.
Fixing a Return After It Is Filed
If the LLP finds an error after filing, the correction path depends on whether the partnership is subject to the centralized audit rules under the Bipartisan Budget Act of 2015. Most partnerships formed after 2017 with more than one partner fall under those rules by default.
BBA Partnerships
A BBA partnership cannot simply file an amended return. It has to file an Administrative Adjustment Request. Only the partnership representative (or their designated individual if the representative is an entity) can sign and submit an AAR. Electronic filing uses Form 8082 together with a corrected Form 1065. The partnership then furnishes Form 8986 to each affected partner showing their share of the adjustments, rather than issuing corrected K-1s.7Internal Revenue Service. File an Administrative Adjustment Request for a BBA Partnership
Non-BBA Partnerships
Partnerships that elected out of the BBA regime can file a traditional amended return. Electronically, use a corrected Form 1065 with the “Amended return” box checked. On paper, use Form 1065-X. The deadline to amend is generally three years after the later of the filing date or the original due date, not counting extensions.8Internal Revenue Service. Instructions for Form 1065-X, Amended Return or Administrative Adjustment Request (AAR)
State Filings
The federal return handles the IRS side, but most states require their own partnership return, and many mirror the March 15 due date. The rules differ enough that an LLP operating in more than one state has a real compliance burden.
Nexus
An LLP has to file in every state where it has nexus, meaning a sufficient connection to that state’s tax jurisdiction. Physical presence, such as an office or employees, creates nexus everywhere. Many states also have economic nexus thresholds based on revenue or transaction volume, which can pull in an LLP with no physical presence. Thresholds vary by state and get updated often, so an expansion into a new market should trigger a fresh check.
When the partnership operates in several states, it has to allocate and apportion income among them. A partner who is a resident of one state but receives income sourced from another may owe tax in both, though most states offer a credit for taxes paid to other jurisdictions. The LLP typically prepares a state-specific K-1 equivalent for each partner.
Composite Returns and Non-Resident Withholding
Many states let the partnership file a composite return on behalf of non-resident partners. The LLP bundles their income into one return and pays the state tax for them, saving those partners from filing individual returns in every state where the partnership operates.
Some states go further and require the LLP to withhold state income tax on each non-resident partner’s share of income. The partnership remits the withholding, and the partner takes a credit on their own non-resident return. Rates and rules vary significantly by state.
Entity-Level State Taxes
A number of states impose their own entity-level tax or annual fee on partnerships, separate from the income tax the partners owe. These go by different names (franchise tax, annual registration fee, entity-level tax) and range from flat fees to percentage calculations tied to income or capital. Nonpayment can lead the state to suspend or revoke the LLP’s authority to do business. Some of these entity-level taxes have become more popular as a workaround for the federal cap on state and local tax deductions, with states allowing partnerships to elect entity-level payment so partners can claim a corresponding federal deduction.
Records to Keep
The LLP should hold on to all books, records, and supporting documents used to prepare Form 1065. At a minimum, keep them three years from the filing date, which is the standard IRS audit window. If the return understates income by more than 25%, that window stretches to six years. Records tied to property, depreciation, and partnership interest basis should be kept for the life of the asset or the ownership interest, plus at least four more years. Seven years covers most situations comfortably.
Each partner should independently keep copies of every Schedule K-1 for as long as they hold their partnership interest, plus at least four years after they leave. Those K-1s are what makes it possible to calculate gain or loss on an eventual sale of the partnership interest.