At this time of year, we prepare a lot of 1065 and 8865 forms for U.S. and foreign partnerships. A common question is when it would be appropriate to file a Form 1065 for a foreign partnership.
Typically, a foreign partnership with U.S. partners would not file a U.S. tax return. Instead, the U.S. partners would attach Form 8865 to their U.S. income tax return, assuming they qualify as one of the categories of 8865 filers.
There are, however, a couple of instances in which a foreign partnership would file a Form 1065:
- Income from U.S. Sources: Section 6031(e)(2) may require a foreign partnership to file a Form 1065 in a tax year where (A) the partnership has gross income derived from sources within the United States, or (B) gross income connected with a trade or business conducted in the U.S. This is outlined in the Form 1065 instructions. In our practice we often see partnerships that are organized outside of the U.S. but have passive U.S. investments and are, therefore, required to file a Form 1065 and issue K-1s to the U.S. partners.
- Reporting simplification: A foreign partnership may choose to file Form 1065 instead of Form 8865 to simplify reporting for its U.S. partners. If the foreign partnership were to file a Form 1065, it would then provide a K-1 to its partners. Those partners would still need to attach a Form 8865 to their U.S. income tax return. However, certain schedules of the Form 8865 would not be needed. The Form 8865 instructions discuss this option and outline the appropriate schedules that need to be attached to the U.S. partner’s income tax return.
For questions about this issue or other international tax matters, please contact our international tax professionals.
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