How to Handle Form 1065 for Multi-State Partnerships

Running a partnership that operates in multiple states comes with many challenges, one of the biggest being tax compliance. Multi-state partnerships must navigate various state tax laws while ensuring proper reporting to the IRS using Federal Form 1065. This form is essential for reporting a partnership’s income, deductions, and other financial details.

In this blog, we’ll walk through how to file federal Form 1065 for multi-state partnerships, discuss the complexities of state tax filings, and explore strategies for compliance while maximizing tax efficiency.

Understanding Form 1065 for Multi-State Partnerships

Federal Form 1065 is an informational return that partnerships file with the IRS. Although partnerships themselves don’t pay income taxes, they must report their financials, and their income or losses get passed through to individual partners. Each partner then reports their share of income on their personal tax return.

For businesses operating in multiple states, additional state filings are required based on where they conduct business. The challenge is determining which states require filings and how much tax is owed in each state.

Step-by-Step Guide to Filing Federal Form 1065 for Multi-State Partnerships

Step 1: Identify Where Your Partnership Has a Tax Obligation

To determine where your partnership needs to file state tax returns, you must evaluate nexus—a legal term that defines a business’s connection to a state. A partnership is considered to have nexus in a state if it:

✔ Has an office, store, or warehouse in the state
✔ Employs workers who reside or work in the state
✔ Sells products or services in the state
✔ Owns or leases property in the state

Each state has its own definition of nexus, so partnerships should review state tax laws carefully to avoid compliance issues in Federal Form 1065.

Step 2: Determine How to Apportion Income Across States

Once you have identified the states where your partnership has tax obligations, you must apportion income accordingly. Most states use one of the following methods:

1. Single Sales Factor Formula

Many states use a single sales factor, meaning the amount of income taxable in a state is based solely on the percentage of total sales made in that state.

2. Three-Factor Formula (Sales, Payroll, and Property)

Other states use a three-factor formula, which considers:

• Sales in the state compared to total sales
• Payroll in the state compared to total payroll
• Property in the state compared to total property

Each state’s apportionment formula varies, so partnerships must apply the correct calculation for each jurisdiction.

Step 3: Complete and File Federal Form 1065

The IRS requires all partnerships to file Federal Form 1065, even if they operate in only one state. The form includes:

✔ Basic business details (name, EIN, address, business type)
✔ Total partnership income, expenses, and deductions
✔ Tax credits and other adjustments
✔ A Schedule K of federal Form 1065, which summarizes each partner’s share of income and deductions
✔ Individual Schedule K-1 forms, which must be sent to each partner for reporting on their personal tax returns

After completing Federal Form 1065, the next step is filing state returns in all applicable states.

Step 4: File State Partnership Tax Returns

Each state where your partnership has nexus may require a partnership tax return, even if no tax is owed. Some states impose additional filing requirements, such as:

1. Composite Tax Filings – Some states allow partnerships to file a single composite tax return on behalf of non-resident partners instead of requiring them to file separate state returns.

2. Withholding Tax for Non-Resident Partners – Certain states require partnerships to withhold state taxes for partners who don’t reside in that state.

So when filing Federal Form 1065, it’s essential to check each state’s rules and deadlines to avoid penalties.

Step 5: Distribute Schedule K-1 Forms to Partners

Each partner receives a Schedule K-1 Form 1065, which details their share of the partnership’s income, losses, and deductions. Partners must use this form to report their earnings on their personal tax returns.

✔ If a partner lives in a state where the partnership has nexus, they must report income in that state.
✔ If a partner resides in a different state, they may need to file multiple state tax returns to account for income earned from different states.

This can create complex filing situations for partners, making tax planning essential.

Deadlines and Extensions for 1065

When is Form 1065 Due?

The deadline for filing Federal Form 1065 is March 15 for partnerships that operate on a calendar year. If the partnership follows a fiscal year, the return is due on the 15th day of the third month after the fiscal year ends.

However, if the due date falls on a weekend or a legal holiday, the deadline is automatically extended to the next business day. This year, March 15 falls on a Saturday, so the filing deadline is extended to Monday, March 17, 2025.

How to Request an Extension for 1065

If your partnership needs more time, you can file Form 7004 to request a six-month extension for 1065, pushing the due date to September 15. However, this extension only applies to filing, not to tax payments. Any taxes owed must still be paid by the original deadline.

Common Tax Challenges for Multi-State Partnerships

1. Understanding Different State Tax Laws

Each state has unique tax rules and filing requirements. Keeping up with these differences is challenging, especially for partnerships operating in multiple states.

Solution: Work with an experienced tax professional or use tax software designed for multi-state businesses.

2. Apportioning Income Correctly

Incorrectly dividing income among states can lead to overpayment or underpayment of taxes.

Solution: Maintain accurate records of sales, payroll, and property location to apply the correct apportionment formula for each state.

3. Filing Multiple State Return

Multi-state partnerships often need to file multiple partnership tax returns, increasing the administrative burden.

Solution: Automate state filings with accounting software that tracks income by state and generates necessary tax forms.

4. Managing Partner Tax Responsibilities

Partners may have to file taxes in multiple states, depending on their share of income from the partnership.

Solution: Provide partners with clear documentation and guidance on their state tax obligations.

Final Thoughts

Handling Federal Form 1065 for multi-state partnerships is a complex but essential task for tax compliance. By properly understanding the schedules of Form 1065 and understanding how to file it, partnerships can avoid penalties and ensure smooth tax operations.

For those needing more time, filing an extension for 1065 is an option, but it’s always best to prepare in advance. Proper tax planning and professional guidance can help multi-state partnerships stay compliant while optimizing their tax strategy.

By following these steps, your partnership can successfully navigate the challenges of multi-state tax filing and focus on growing the business without unnecessary tax complications.