Business Name and Time Period Across the Top

http://www.glowwordbooks.com/blog/2012/12/28/example-1065-how-to-do-taxes-for-llc/

I had a hard time completing my LLC 1065 Annual Taxes even though we are a small business without any “difficult” expenses (like amortization). Hiring a tax professional was out of our price range, so I muddled through it myself. I couldn’t find any sample 1065 forms to get my feet on the ground, so I decided to write one.

I’m not a tax adviser (and don’t even play one on TV). There are lots of reasons your form would look different than mine AND most importantly I had no idea what I was doing. This blog post is an example 1065 form to help you understand the basics about how it works. Think of it as the dummy’s dummy’s dummy’s guide.

I found it helpful to prepare an income statement, balance sheet and capital account report before I even got started with the 1065. Many fields on the 1065 mimic those forms and you need all the numbers. (Plus, there are lots of resources online around how to do them, so it was a friendly place to start.)

Income Statement

A simple Income Statement has:

·  business name and time period across the top

·  a section with all of your revenue (what you took in). I divided mine by month because we get monthly royalty checks.

·  a section with all of your expenses (what you spent). We broke our expenses into the categories our tax software had: Accounting, Advertising, Amortization, Bank fees, Commissions, Contracted services, Credit card fees, Gifts, Insurance, Janitorial, Legal/professional fees, Organizational costs before factoring deduction, Postage, Professional dues/subscriptions, Supplies, Telephone, Travel and entertainment expense subject to 50% limitation, Travel and entertainment expense not subject to limitations, Utilities, Vehicle Expense

We decided not to make any business travel/entertainment expenses because I didn’t know how to do that properly. It also seemed like the kind of “write-offs” that could attract red flags and I didn’t want any red flags in my 1065.

We thankfully had nothing to amortize because that requires extra paperwork. (Amortizing or depreciating means you take a really expensive cost and pay for it over many years… but most importantly, it means more paperwork.).

We had lots of extra fees like Copyrights, ISBN numbers, and Award entries that I didn’t know what to do with so I made up additional categories such as Other: Copyrights

Capital Accounts

The purpose of capital accounts is to manage how much each partner contributed and received from the business. I think it has to do with being taxed differently if you’re earning back money you sunk into the business vs a bona fide profit, but that’s my guess.

I found it easiest to keep track of my capital accounts on a spreadsheet.

I made a new spreadsheet for each partner in the LLC and recorded when partners contributed money to the business. When the business lost money, that decreased everyone’s capital accounts because their share of the business was now worth less (because the business was worth less). When the business made money, the net income is credited among the capital accounts because their share of the business is now worth more. If you ever pay a dividend to the members, that debits their capital account because you’re taking money out of the business (and putting it directly into the pockets of the owners).

I don’t think this is 100% accurate, but an easy way for me to think about Capital Accounts is that Capital Accounts are the day to day details of the Shareholder’s Equity section of the balance sheet. For simple businesses, the total value of every partner’s capital account will probably equal the Shareholder’s equity section of the balance sheet.

Balance Sheet

A balance sheet is a snapshot of your company at a given time. Your company has to buy stuff (with money/credit/bartering with rubber bands) and your company sells stuff. This form balances what you buy (your assets) with where you get the money (liabilities or shareholder’s equity). Liability means your business took on debt to make a purchase and shareholder’s equity meant the owners kicked in some money. The asset side of the balance sheet must always equal the liabilities/shareholder’s equity side. In other words, for each purchase you have to record what you purchased and where the money came from.

Let’s talk assets first. My company has $50 in cold hard cash. Since our books are eBooks and print on demand, we don’t have any inventory. The assets are broken into short term assets:

·  Cash on Hand (cold hard cash, $50)

·  Accounts Receivable (money you are owed from customers)

·  Inventory (books that we have printed and awaiting sale – $0 because we have no books left in stock)

There are also long term assets such as land, building and furniture. I currently don’t have any of those for my business.

On the liabilities side, we have $50 that we haven’t distributed to the owners (but it’s rightfully theirs), so I placed that under Shareholder Equity. Some other examples of liabilities would be:
* Accounts Payable (bills we have we haven’t paid yet)
* Mortgage

This is a snapshot of my business on December 31st, the end of our tax year. If I had done this snapshot six-months earlier, I may have had $250 in Cash on Hand and Shareholder’s Equity… but we spent $200 on marketing efforts that burned up our cash and shareholder’s equity… so now we’re at $50 and $50.

We didn’t personally take out any loans, so all of our money came from Shareholder Equity. The capital accounts section provide a lot of detail into this shareholder’s equity entry.

Sample 1065

A, B, and C you’ll have to lookup in the 1065 Instruction Manual’s “Codes for Principal Business Activity and Principal Product or Service”

If you don’t have an EIN, you can apply online for free. If you don’t have one, you ought to get one since they’re like a Social Security number for a business.

Box G: I chose initial return because this was the initial return for the year.

Box H: How do you track your bills? Do you record a bill when you actually go out and make a purchase (Cash) or when the bill arrives in your mailbox? (Accrual)

Box I: You’ll probably have to create a K-1 for each partner, so list the number of partners in your LLC

1a: We don’t directly process Visa, MasterCard or Paypal, so I didn’t use any Merchant Cards. This is only if you receive payments from Credit Cards or similar services.

1b: Since we get paid from Amazon, I entered all of our Sales Receipts in 1b.

2: Amazon processes all of our transactions, makes all of our products and deposits our commission into my bank account, so I left 2 blank.

9-22: We don’t pay salaries, rent an office, charge consumers directly (and thus tax them) or have any expensive items we depreciate, so I got to leave the entire deductions section blank.

1065 Schedule B

1: What kind of business did you legally form? We formed an LLC.

2: Roughly: Were any of your business owners not real people? (Companies can own other companies).

3a: Roughly: Did a foreign business own 50% of your business?
3b: Roughly: Does an individual that is a reportable entity own 50% of your business?
Direct or Indirect 50% ownerships means if you add your shares of the company + your wife’s + your kid’s (etc), does it all add up to more than 50% of the company? I’m not 100% sure on this line, but I believe a normal person generally isn’t a “reportable entity” if you look closely at the IRS definition of a “reportable entity”. (A reportable entity must fill out a schedule M-3 and I don’t know of a case where an INDIVIDUAL is responsible for an M-3… but again, I’m not tax expert :) If that’s correct, then it’s possible to answer “no” to this question even if you own 50+% of the business because you’re not required as an individual to fill out an M-3.

If you do answer yes, then you have to fill out a schedule B-1, schedule M-3 and a reportable entities letter. I wasn’t 100% sure on this question, so I answered yes my first couple years. However this year, I’m answering “no” because I don’t think I actually am a reportable entity. We’ll see how this year’s filing goes… cross your fingers for me!

4a: Roughly: Does your company own lots of another company’s stock? (You’re probably not searching for an example 1065 like this webpage if you do!)

5. Did you file an 8893? Well, did you?

6d. There are some “other” reasons you’re required to file an M-3 that are worth reading into: particularly if any “reportable entities” are involved.

7. Are you publicly traded?

8. Were you debts reduced somehow?

9. The first page of the 8918 instructions describe who Material Advisers are.

10. Do you have a foreign bank account or stock?

11. Did you do anything with foreign trusts?

12.754 elections allow you to equalize the difference between inside and outside basis. If that means nothing to you, skip this question.

13. Roughly: were you trading property?

14. Tenancy in common roughly means two people or businesses owning property together.

15. Look into this one further if you own any foreign things.

16. Did any foreigners own part of this business?

18. 1099′s usually refer to hiring contractors (or being paid more than $600 as a contractor). It can also deal with earning interest (from a savings account for example). Turbotax has a good explanation if this sounds interesting.

19. Are you a director of a foreign company?

1065 Schedule K

This form mirrors the first page of the 1065. We made $50 and took in $500, so I copied those values over. We didn’t use many of the other fields on the first page, so I left them blank here as well.

1065 Schedule K-1

You’ll need to fill out a K-1 for each partner. The number you fill out should match the 1065 form, page 1, box I.

A. Same number from 1065 form, page 1, box D

B. Your address

C. Where are you sending your 1065? (Which IRS service center?)

D. Is your business publicly held?

E. Partner’s Social Security Number (if American) or ITIN (if foreign)

F. Partner’s address.

G. When you formed your partnership, was this partner a full partnership member or do they have restrictions and limitations on them?

H. Is the partner an American or Foreigner?

I. Is this partner a individual or business? If a business, what kind of business?

J. This box is where the capital account (prepared at the start of this webpage) comes in handy. The government wants to know what percent of the business they owned at the start and end of the business. Refer to my “Capital Accounts” section at the top of this post.

K. I don’t know.

L, Start with the capital account from last year’s K-1. Add in any money the partner contributed towards the business because that made the business more valuable. Add this partner’s share of the year’s profits or subtract this year’s share of the loss. Subtract any distributions paid out because those took value away from the business. What is the sum of all of that? (Note: On my form, the profit/loss for all of the partners for this year added up to 1065 Page 5 Line 1 — the net income/loss… but that is because we only have Individual General Partners in our LLC. Section L of the K-1 should mimic the capital account you completed earlier.)

GAAP vs Tax Basis determines how your depreciation and inventory is managed. Tax Basis is easier and doesn’t account for as many different factors as GAAP. If you haven’t been following GAAP standards throughout the year, then you’re probably on Tax Basis or you’ve been foolish not to follow all their standards.

M. You can check “No” if this partner did not contribute any property.

1. This partner’s share of the profits/loss. Typically you take the company’s net income/loss (1065 Page 5 Line 1) and multiply it by this partner’s share of the profit (K-1 Box J).

14.A. The same as Box 1

14.C. Your company’s income before deductions (1065 Page 1 Line 8) times this partner’s share of the profit (K-1 Box J).

If your company uses royalties, foreign transactions or any of the other fields on lines 1-14, you’ll need to fill them out. My simple example does not.

Since my LLC had two partners, I also had to fill out a K-1 for Sally. My partners split profits and losses evenly, so her form would look identical to Steve’s (except, of course, for her name, address, identifying number, etc).

Schedule M-1 or M-3

Many companies would need to submit a schedule M-1… but if you have an “reportable entities” for example, you need to fill out an M-3 instead of an M-1. You can also voluntarily choose to fill out an M-3 instead of an M-1 as well if you don’t like spending time with your family.

Of all the forms I had to fill out, this one was the hardest for me to understand. It was difficult because I felt like 99% of the form didn’t apply to my simple situation. If you do have to fill it out, think of it as a very complicated version of the balance sheet I described earlier in this guide.

A, B and C: Are you dealing with a million dollar company?

D. I checked yes because my LLC members control a 50% stake.

Part I 1a, I did not file a 10-K.

1b. I did not prepare a certified audit.

1c. Since didn’t make a 10-k or certified audit, I prepared my own income statement (see start of this post).

2. The date for the income statement should match the income statement you provide and the dates across the top of your 1065 Form.