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hello welcome back in this video i'm showing you exactly how to file your small business tax return if you're a multi-member llc or just a multi-owner business so you would default to be a partnership in either case you need to file form 1065 partnership business tax return in this video i'm going to show you exactly how to do that with the software i recommend using called taxact before we jump in if you're new here my name is amanda and you're watching the business finance coach where i simplify all these technicalities of business to help you succeed because i truly believe that the world needs your business and you should not be held back or overwhelmed by these aspects of our civilized society so with that let's get started with how to file your form 1065 partnership business tax return if we look at my cheat sheet here we can see llc's are disregarded entities if we have a multi-member llc that means there's two or more owners and they're taxed like a partnership so both llc's and partnerships are all tax like partnerships so if you start a business with someone else and you form no business you default to be a partnership okay as well and you'd file to form 1065 too so this is a separate business tax return form 1065 you can see this here and this is the return we'll go over today and how you fill it out using tax act i highly recommend taxact over anything else i'll go into why in a separate video we'll leave that out of this video but before we jump in i want to explain a few things so that they're clear as we're updating the form and tax act with a partnership business tax return the business is filing its own tax form that's what form 1065 is it reports everything that's going on in the business but the business doesn't actually pay taxes there are some sections about taxes on form 1065 but those aren't commonly used those are exceptions to the general rule the general rule is that the business pays no tax all of the information on that form 1065 business tax return about the business flows through or passes through to the owners on schedule k ones so attached to the form 1065 in the back is a schedule k one for each owner in the business based on their share of the business they have all of the activity in the business reported to them on a schedule k1 the total of all the scheduled k1s equals the form 1065. and so the business must file its tax return by march 15th for a regular calendar year but you can file an extension however keep in mind that each owner needs their schedule k1 from the business to report on their personal tax form form 1040. just like you get a w-2 when you work a job and then you put that on your personal tax form same thing with being an owner or a member in a multi-order business you're going to get a schedule k1 that you then report for your personal tax form so the owners can't file their taxes until the business files its taxes and so that's how the business pays no tax instead the owners pay the taxes for the business activity based on how it accumulates with all of their investments and all the businesses they own personally so let's jump in to using taxact to fill out this return and you can e-file it using tax act as well you'll see here we're at taxact.com and we'll head into business taxes and i'll include a link for this in the description below as well you come down to partnership and click get started and this what i'm going to go through shows you how to do the tax forms online now i'm logged in but you are going to have to set up an account and they also have you verify your email and or your phone number and they send you a code that you then have to verify and put in so the 2020 tax return isn't available yet so we're going to use 2019 you can click add a 2019 return to start a new return once you do so you're going to see it listed here like this one and you can come back in to edit this description or open the tax return or remove the return so i'm going to go ahead and open it and go back in and this is what it looks like when you log in you can tell what year you're in up here in the top left we've got a 2019 tax return online business that's the edition of tax act form 1065. so our first section is basic info and we have all of these little sections we can jump to then we have k1 wizard that's what i was talking about the schedule k ones that are attached to the return and so that's basically going to be the information for each owner then we have this federal section income deductions pass-through items so this is all of the activity of the business that's going to come from your accounting records and then you have state specific information which is just extra stuff right because all the activity from federal will flow to the state this is just extra information that's needed for the specific state returns then we'll review the return you can look at reports alerts and then file the return this is where you can e-file you can pay-per-file you can print the return you can file an extension or amend the return which means you already filed it and it was accepted and now you need to make a change so you're going to submit amended return and that's all so you want to start at basic info and come down here and click continue and go through and answer all of the questions so this is where you get started with the business name a dba then we have the address and an employer identification number which you have to have for a multi-member llc or a partnership business because there's no other number to represent the business but if you don't have an ein because you didn't have employees you can get one yourself at the irs website i have a video on this that we will link below phone number principal business activity what is the activity in my example that i've made up here i'm using my online business so i said online education the principal product or service i sell is e-courses so just you know apply your situation it's a very broad categorization and then you need to check this box if you have a specified service trade or business and this has to do with section 199a which is the 20 deduction of income and i have other videos that go over that so i will link those as well but the business has to report to the partners each owner if they qualify for this or not so you can always click the little information search in the help center or check out my videos for more information but basically examples of a specified trade or business include but not limited to health law accounting actuarial services performing arts consulting which is a lot athletics financial services and brokerage services so if you are in one of those categories you need to check this box if not you might want to do a little more research and definitely leaving it unchecked is favorable if you're above the 157 000 for single or double that for married couples you know if you're not this then that's advantageous we'll click continue now the business activity code just look through and find what applies to you these are old categories from business for the last hundred years so they haven't really been modernized so that's why it can feel like you know they're not really relevant but there's always an other services section so you can always select that you can always leave none selected as well and they're going to use the miscellaneous code again once you update this for one year it should save your selections for the next year which is nice you need to be clear on the date your business started so in this case 1 1 2019 i'm saying we started on the first a lot of businesses do but you need to get that date clear when did the business start so this is asking if you have a calendar year and a calendar year is january 1 through 12 31 versus a fiscal year is different dates or you might have a short year if you lost an owner and the business actually kind of ends it has a short year for the time it had more partners than the time it had less partners so i'm going to leave the calendar year that's the most common i've selected that this is an initial year return next year i would select nothing unless of course we had a name change or we decided to end the business and it was the final year continue generally these questions will be left blank it's generally best to not aggregate or group activities at the entity level that's often the most advantageous thing at-risk rules and passive activity rules generally will not apply to you so long as you're the one that's invested in the business and you have everything to lose and therefore you'd be able to deduct any loss that you end up with in the business but that's what those rules are about we'll click continue since we don't want to aggregate if you're a tax shelter meaning that you actually hide taxes from the owners then you should know and you would enter your registration number are you required to file m3 so i'm gonna pop over here to the partnership 1065 return this is 2019. so page one is the ordinary business income and then we have a bunch of questions and these are all the questions on schedule b under our basic section which is coming next then we get schedule k which is all the items that are reported on the schedule k1 and then our last page is a reconciliation from book numbers for the accounting to the tax numbers we have schedule l which is a balance sheet schedule m1 and m2 but we also have this schedule m3 which is a separate schedule and it goes into more detail to reconcile what is in the accounting books and what's on the tax return and we're only required to file this though if any of these are true sales for the business is more than 35 million assets at the end of the year are 10 million or more total adjusted assets which is just another calculation is 10 million or more or the business has a reportable entity partner which basically means that that partner owns that much of another business that meets one of these requirements so most of us are not gonna have to check this box to say that we are required to file m3 i just left this as selected it should generally know which irs service center applies now the accounting method i have another video on this so i'll link that below but most small businesses are going to select cash method which means that you're going to report your sales based on when you got the cash right not based on when you had the sale you're counting your sales is when you get the cash and your expenses is when you pay the cash so i'm gonna select continue now schedule b what comes next under this other info section is a ton of questions and basically most of these questions have to do with foreign activity as well as if you have assets that you put in the business so what type of entity is filing this return if i'm an llc and in this case we have an llc we're going to say domestic llc company if you're a partnership and you actually filed paperwork to form your partnership then you may be aware if one of these other types of partnerships apply if you just started a business with someone else then you'd be the first selection otherwise if you're a foreign business then you'd select as applicable now they're going to get into all of the questions on schedule b and if we check out the form 1065 page two you can see all of these questions that come next and you can also look at the 2019 or whatever year form 1065 instructions which go line by line through all of the questions and they're numbered accordingly so i recommend going through all the questions and answering them but generally most of this stuff doesn't really apply to my smaller businesses you know one person but a couple or a few people you know most of this stuff isn't going to apply so this is asking about foreign ownership this is asking about indirect ownership this is asking about the business actually owning the voting power in a corporation or directly owning the corporation ownership of a foreign domestic partnership or trust now this question is about schedule l m1 and m2 so that was the last page of our 1065. here's our schedule k and then here's page five so most people do need to fill this one out let's look at the requirements so do we satisfy all four requirements one the total sales were less than 250 000 two partnerships total assets at the end of the year were less than one million three the partnership is not filing or required to file schedule m3 we talked about that one and four schedule k-1s are filed with the return and furnished to the partners given to them on or before the due date including any extensions for the partnership return so basically this is an incentive to file on time because if you meet all four of these requirements you don't need to complete page five if you don't file the return on time then you have to fill out page five and if that's the reason you're filling out these schedules then you select this box as well i'm just saying no although i'm probably going to do a separate video going over how to complete those schedules so check that out if you're a publicly traded partnership that means that the business is traded on the stock market just like corporations and it means it's generally a really big business so you would know did anyone forgive or cancel debt that is considered income to you which is why they're asking this question and now for the rest of the questions they're either about property transactions or very specific situations that often don't apply to small businesses and so i've just stuck with no for all of those questions with one exception of startup costs so we're gonna jump to that question and just to stop on one question on the way when it comes to your basis in things in the partnership when things really get more complicated is when you're contributing assets to the business and taking assets out and there's a lot of elections that can be made there's a lot more going on that it's really not appropriate for a business owner to be diying it it's even not appropriate for a lot of tax professionals that maybe don't have experience in these types of things to be doing the tax return for it they're just not going to be familiar with all of the rules and all the elections and all the strategy and planning that can go into that so that's something to keep in mind this question will apply to a lot of people which is did the business make any payments during the year that would require them to file form 1099. so if you pay anyone other than a corporation more than 600 during the year for doing something for you then you need to say yes and then the next question if you say yes is did you or will you file the 1099s and of course you need to say yes and be sure to do that and i have videos showing you exactly how to do that which we'll link below this question is asking our foreign partners governments this question is asking are any of the partners of the business foreign governments i'm sure you'd be aware if that's the case the partnership representative is something that's replaced the tax partner and this is a position for a tax pro who can really represent the business and negotiate with the irs in the event of an audit however you don't have to worry about any of this because it is an exception for businesses with less than 100 partners which is probably you if you're watching this video a qualified opportunity fund one thing to be aware of is that it's asking if your business is this which your business is not this but just so that you're aware there are these funds that have been created out of the 2017 tax cuts and jobs act that allow some businesses to get certified as a qualified opportunity fund which means that people can have capital gains from the stock market or from any capital gain activity invest them in your business and not have to pay taxes on those gains if they stay invested in the business for 10 years however there's a ton that goes into certifying and you know there's nothing to say that the business is going to be successful so but i thought that was an interesting you know thing to come out of the 2017 tax cuts and jobs act okay so that's it for our basic info section now we're to the k1 wizard so this is where we're going to set up those k1s basically we're going gonna enter the information for each partner we're gonna come down and click continue we have two options when it comes to adding partners we can answer questions like we've been doing or we can enter numbers directly on the schedule k ones so you can see i have two partners here we can go ahead and click add a schedule k1 if you want to add a new partner and the quick entry is you just enter everything directly on the schedule k1 but the step-by-step guidance allows you to make selections like this so you select the type of partner member owner this is in general it's often probably going to be an individual with my small businesses you need to enter the social security number or you have to get an individual taxpayer identification number itin if they're not someone who can have a social security number you're going to enter their general info their name their address their state of residency their classification so if you have an llc you need to know that paperwork that formed the llc with the state was the member manager box checked or was the manager managed box checked if member managed was checked then you need to select this first option if manager managed was checked then you can just select llc member otherwise if it's a partner then you would select the first option or if they're a limited partner more like an investing partner than that limited partner option domestic partner means that they're a us partner versus if they're not they'd be a foreign and then whether they're active or passive in the business if they're active that means they work in the business if they're passive that means they don't work in the business this is the same selection we made for the return is it an initial year is it a final year are we amending or is there a retirement plan kind of a random option now we're going to enter the ownership percentages so at the beginning of the year what was this partners ownership percentage in profit sharing what about loss sharing generally and often these are you know 50 50 partners 20 30 partners and it's just all going to be the same percentage which is the easier way to go so then we'll enter our ending percentages and then we get into weighted percentages and this comes in and there's a bunch of worksheets that they refer to here when things get more complicated than that you know if you're using different allocations for different things and if you have partners coming and going then this can get more complicated and the weighted percentage allocation rules might apply so you would need to calculate this using this work street in the instructions but in our cases with a 50 50 owner it's just going to be the 50 and they're we'll keep this simple beginning capital in this case at the beginning of the year was when we started the business so this is going to be the amount that was contributed by this owner on the operating agreement so joe schmoe contributed five thousand dollars in capital per the operating agreement and during the year joe also contributed five thousand now as far as withdrawals he took a cash distribution throughout the year of 30 000 this these are rules subject to built-in gain recognizing gain on property transactions taking property in and out of the business property distribution if the business actually gave him property so generally this stuff is not applying to my smaller people this again is that same question about grouping activities you know do we have more than one activity for our risk rules or passive income rules generally no now they're asking okay well if joe contributed property which he didn't so we'll leave it at no but if he did did it have a built-in gain or loss why would you have a built-in gain or loss let's say joe's father gave him this property or joe's father sold him this property and because it was a related party sale he couldn't recognize the loss and so the loss was built into the basis that joe had in this property and then joe gave the property to the business so that's a built-in gain or loss guaranteed payments are payments that the owner has to receive regardless of how well the business does and they're allocated for in the operating agreement i go into this in more detail in other videos but in this case we'll say that we didn't have any guaranteed payments for joe he got his 30 000 distribution and though he got health insurance so the business got him health insurance and health insurance is treated as a guaranteed payment for partners so we put that ten thousand dollars in there and then we have sally sally is not an active partner like joe joe is an active partner sally's not let's take a look at the schedule k1 so if i come into quick entry as opposed to the step-by-step now we're able to see directly on the k1 the information about the partner partner name address the different selections here the weights and averages of ownership our beginning capital account ending capital account and here's our part three schedule k here's our ordinary business income or loss in box one and we don't have much else going on to flow through so that's our main option here and that's going to be common for a lot of people most people will have box 14 as well for self-employment earnings but sally is a non-active non-managing member okay so next to get to that ordinary income section we're gonna head into federal and this is where we can see a summary of the topics here and we can head into the income section because i've already gone through answering all the questions once we get to see a summary of net sales cost of goods sold ordinary income or loss from other partnerships estates trust so is this business invested in other businesses or did we get k1s from other businesses net farming profit or loss other gains in losses so if the business owns investments or other types of investments that would have income or losses or any other income not listed so we can go in and review any section and update the number of gross receipts returns and allowances you really shouldn't have as a cash basis counting you know using cash method you shouldn't have returns and allowances now we'll head on to deductions so you can see our guaranteed payments to the partner for health insurance automatically came through i added in some taxes and licenses we have our startup costs which we can go over how to enter the startup costs so we enter a description for our startup costs we enter the date that the business started that's the date we get to begin deducting startup costs using amortization we put in the total amount of our startup costs and we'll be able to deduct up to five thousand dollars up front first and then the rest is amortized over 180 months and i have another video that goes into detail on this and a spreadsheet template so i'll leave that for you to check out if you think this applies to you but these are the selections you make code section 195 for business startup costs the period is 17 years or 180 months and then we enter continue this is the amount that we get to actually deduct up front which is 5 000 and they talk about the limitation you have to apply the limitation yourself which is if you spent more than 50 000 in total expenses then there starts to be a limitation and again i go over that in that video so i won't go too deep into it now this section you're going to use if you say used a tax preparer for last year and then you're trying to do your taxes yourself this year and your business started a few years ago this is where you would enter information about the prior amortization that the business has taken and this is a summary of our entry of the startup costs so we get 5 000 and then 294 dollars per year okay now we're back to our deductions and we have this list we have other deductions so we can come into the other deductions section non-entertainment meals so that's meals that are because you're traveling they will be limited by 50 but you enter the total amount in the software accounting fees advertising bank fees commissions contract services so if i use something like upwork insurance business insurance and so you can just find a way to you know fit all your expenses into the categories they're fairly broad postage professional dues and subscriptions supplies so this is one of the biggest expense categories you know anything that you don't really see a place for it to fit and it's related to what you are in the business of doing you would generally put that under supplies if you buy assets that would normally have to be depreciated because they are things that you buy to use in the business to make money that will last for more than a year like a computer or equipment those things you don't deduct them and instead you allocate them over a few years according to the irs rules but they added a de minimis rule which means as long as the cost was less than twenty five hundred dollars you don't have to do that you can just enter it under this supplies section so people could end up with a pretty big supplies amount and don't be you know weirded out by the categories in my accounting spreadsheet template you set up accounts for your income in expenses and you describe the expenses however is applicable for your business so that when you look at your income statement report all of these amounts the descriptions for the activity for each month it actually means something to you and then at the end of the year when you're ready to update your tax return you can come over here and these are our schedule k items and these are our expense items on the tax return so there aren't that many this software is actually adding some broad categories for us but you can quickly total up your income and expenses according to the categories over here and you could add in any of the categories that you're seeing in tax act to quickly get those totals and total everything up for you so i'm going to click continue and here is where you can add other categories so you just enter a description other test and [Music] and then we can add another one other two 500 and you can add as many as you need but generally you want to try and fit things into the regular categories now it's giving us the total of our deductions so that we can check it on your accounting record you know we can check that amount right here our net income we can look at our income statement report over here and just double check our net business income so that we know that what we've entered in tax act is correct so then we'll click continue this is a summary of our deductions you can check it over and continue and now we're down to our pass through items so these are our items on schedule k of the tax return so they're going to ask us about rental activities if the business has rental income and expenses if we have any interest in the business dividends so if the business itself has dividends royalty income capital gain distributions meaning they sold investment assets other investments other income other deductions and if we take a peek at the schedule k on our 1065 we are literally going down these topics right here and they're asking us about all of these sections so because we've already covered ordinary business income that's all that's going to apply to most of my business people here these income and deduction categories you still want to answer through all of these questions until you get to the summary and this is where you can again check your ordinary business income real estate rental income or loss other rental income or loss guaranteed payments and just check over your numbers so you can see my schedule k net distributive income or loss is 170 000 so this 160 306 is going to be split 50 50 on each of the owners schedule k-1s from there you want to go through the review section to make sure that there's no red flags that the software has identified you can see they have this alert system here and so they're asking us what we want to review so all alerts is selected so we can head into all alerts so it didn't like my address for some reason it keeps unselecting the state it didn't like that i didn't select a business code down here so we can always come down and select other within this section and continue oh i did select that wrong it should be yes the partnership is not required to file schedule l m1 i misread that funny how the software can read my mind schedule b partnership representative so i thought that we could skip over the partnership representative because if you have a hundred partners or less in the business you don't have to do this but what we can just do is say entity partnership and enter this business name so it would be abc partnership which is the name of this business so it's basically saying that this business is representing itself no one else is and we would enter that information for the address as well the same address and our phone number as well and so that's it for the alerts the next thing is to head into the filing tab you'd select e-file to continue an e-file your return or mail in the paper return to mail it in and they'll provide you with those instructions so we're going to stop here so that i don't have to pay so we won't be able to review the return together but it's quite simple basically we just updated primarily the first page here this is where our income of 200 000 went and then of course our deductions are down here and the net ordinary business income is that 160 000 then that is going to be divided into totals on schedule k all of these questions are answered from going through all those questions and then this ordinary business income from box one is what's divided onto the schedule k ones and these box 14 a will also be updated with the similar amount because if the owner has self-employment taxes on that income so in our example joe schmo would have self-employment taxes and sally wouldn't because she specifically wasn't a member managed business but most small businesses they are member managed and so that's something to consider i go into that in other videos so be sure to check those out so that's all for updating your partnership tax return using tax act i hope you found this video helpful i'd love to hear your questions comments below the video if you're new here consider subscribing and i'll see you next time bye