Who Must Sign

General Partner or LLC Member

Form 1065-B is not considered to be a return unless it is signed. One general partner or LLC member must sign the return. If a receiver, trustee in bankruptcy, or assignee controls the organization's property or business, that person must sign the return.

Paid Preparer's Information

If a partner or an employee of the partnership completes Form 1065-B, the paid preparer's space should remain blank. In addition, anyone who prepares Form 1065-B but does not charge the partnership should not complete this section.

Generally, anyone who is paid to prepare the partnership return must:

• Sign the return, by hand, in the space provided for the preparer's signature. Signature stamps or labels are not acceptable.
• Fill in the other blanks in the Paid Preparer's Use Only area of the return.
• Give the partnership a copy of the return in addition to the copy to be filed with the IRS.

Paid Preparer Authorization

If the partnership wants to allow the paid preparer to discuss its 2002 Form 1065-B with the IRS, check the Yes box in the signature area of the return. The authorization applies only to the individual whose signature appears in the Paid Preparer's Use Only section of its return. It does not apply to the firm, if any, shown in the section.

If the Yes box is checked, the partnership is authorizing the IRS to call the paid preparer to answer any questions that may arise during the processing of its return. The partnership is also authorizing the paid preparer to:

• Give the IRS any information that is missing from its return,
• Call the IRS for information about the processing of its return, and
• Respond to certain IRS notices that the partnership has shared with the preparer about math errors and return preparation. The notices will not be sent to the preparer.

The partnership is not authorizing the paid preparer to bind the partnership to anything or otherwise represent the partnership before the IRS. If the partnership wants to expand the paid preparer's authorization, see Pub. 947, Practice Before the IRS and Power of Attorney.

The authorization cannot be revoked. However, the authorization will automatically end no later than the due date (excluding extensions) for filing the 2003 return.

Interest and Penalties

Interest

Interest is charged on taxes not paid by the due date, even if an extension of time to file is granted. Interest is also charged from the due date (including extensions) to the date of payment on the failure to file penalty, the accuracy-related penalty, and the fraud penalty. The interest charged is figured at a rate determined under section 6621.

Late Filing of Return

A penalty is assessed against the partnership if it is required to file a partnership return and it (a) fails to file the return by the due date, including extensions, or (b) files a return that fails to show all the information required, unless such failure is due to reasonable cause. If the failure is due to reasonable cause, attach an explanation to the partnership return. If no tax is due, the penalty is $50 for each month or part of a month (for a maximum of 5 months) the failure continues, multiplied by the total number of persons who were partners in the partnership during any part of the partnership's tax year for which the return is due. If tax is due, the penalty is the amount stated above plus 5% of the unpaid tax for each month or part of a month the return is late, up to a maximum of 25% of the unpaid tax. If the return is more than 60 days late, the minimum penalty is $100 or the balance of the tax due on the return, whichever is smaller.

Late Payment of Tax

A partnership that does not pay the tax when due generally may have to pay a penalty of ½ of 1% a month or part of a month for each month the tax is not paid, up to a maximum of 25%. The penalty is imposed on the net amount due. The penalty will not be imposed if the partnership can show that failure to pay on time was due to reasonable cause.

Failure To Furnish Information Timely

For each failure to furnish Schedule K-1 to a partner when due and each failure to include on Schedule K-1 all the information required to be shown (or the inclusion of incorrect information), a $50 penalty may be imposed with respect to each Schedule K-1 for which a failure occurs. The maximum penalty is $100,000 for all such failures during a calendar year. If the requirement to report correct information is intentionally disregarded, each $50 penalty is increased to $100 or, if greater, 10% of the aggregate amount of items required to be reported, and the $100,000 maximum does not apply.

Trust Fund Recovery Penalty

This penalty may apply if certain excise, income, social security, and Medicare taxes that must be collected or withheld are not collected or withheld, or these taxes are not paid. These taxes are generally reported on:

• Form 720, Quarterly Federal Excise Tax Return;
• Form 941, Employer's Quarterly Federal Tax Return;
• Form 943, Employer's Annual Tax Return for Agricultural Employees; or
• Form 945, Annual Return of Withheld Federal Income Tax.

The trust fund recovery penalty may be imposed on all persons who are determined by the IRS to have been responsible for collecting, accounting for, and paying over these taxes, and who acted willfully in not doing so. The penalty is equal to the unpaid trust fund tax. See the instructions for Form 720; Pub. 15, Circular E, Employer's Tax Guide; or Pub. 51, Circular A, Agricultural Employer's Tax Guide, for more details, including the definition of a responsible person.

Accounting Methods

Figure ordinary income using the method of accounting regularly used in keeping the partnership's books and records. Generally, permissible methods include:

• Cash,
• Accrual, or
• Any other method authorized by the Internal Revenue Code.

In all cases, the method used must clearly reflect income.

Generally, a partnership may not use the cash method of accounting if (a) it has at least one corporate partner, average annual gross receipts of more than $5 million, and it is not a farming business or (b) it is a tax shelter (as defined in section 448(d)(3)). See section 448 for details. If inventories are required, the accrual method must be used for sales and purchases of merchandise. However, qualifying taxpayers and eligible businesses of qualifying small business taxpayers are excepted from using the accrual method and may account for inventoriable items as materials and supplies that are not incidental. For more details, see Schedule A - Cost of Goods Sold, on page 18.

Accrual method.   Under the accrual method, an amount is includible in income when:

• All the events have occurred that fix the right to receive the income which is the earliest of the date: (a) the required performance takes place, (b) payment is due, or (c) payment is received, and
• The amount can be determined with reasonable accuracy.

See Regulations section 1.451-1(a) for details.

Generally, an accrual basis taxpayer can deduct accrued expenses in the tax year in which:

• All events that determine liability have occurred,
• The amount of the liability can be figured with reasonable accuracy, and
• Economic performance takes place with respect to the expense.

There are exceptions to the economic performance rule for certain items, including recurring expenses. See section 461(h) and the related regulations for the rules for determining when economic performance takes place.

Nonaccrual-experience method.   Accrual method partnerships are not required to accrue certain amounts to be received from the performance of services that, on the basis of their experience, will not be collected, if:

• The services are in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, or consulting or
• The partnership's average annual gross receipts or the 3 prior tax years does not exceed $5 million.

This provision does not apply to any amount if interest is required to be paid on the amount or if there is any penalty for failure to timely pay the amount. For information, see Chapter 11 of Pub. 535, Business Expenses.

Percentage of completion method.   Long-term contracts (except for certain real property construction contracts) must generally be accounted for using the percentage of completion method described in section 460. See section 460 for general rules on long-term contracts.

Mark-to-market accounting.

Dealers in securities must use the mark-to-market accounting method described in section 475. Under this method, any security that is inventory to the dealer must be included in inventory at its fair market value (FMV). Any security that is not inventory and that is held at the close of the tax year is treated as sold at its FMV on the last business day of the tax year, and any gain or loss must be taken into account in determining gross income. The gain or loss taken into account is generally treated as ordinary gain or loss. For details, including exceptions, see section 475 and the related regulations.

Dealers in commodities and traders in securities and commodities may elect to use the mark-to-market accounting method. To make the election, the partnership must file a statement describing the election, the first tax year the election is to be effective, and, in the case of an election for traders in securities or commodities, the trade or business for which the election is made. The statement must be filed by the due date (not including extensions) of the partnership return for the tax year immediately preceding the election year and attached to that return, or if applicable, to a request for an extension of time to file that return. For more details, see Rev. Proc. 99-17, 1999-1 C.B. 503, and sections 475(e) and (f).

Change in accounting method.

Generally, the partnership must get IRS consent to change its method of accounting used to report income (for income as a whole or for any material item). To do so, it must file Form 3115, Application for Change in Accounting Method. However, there are new procedures under which a partnership may obtain automatic consent to certain changes in accounting method. See Rev. Proc. 2002-9, 2002-3 I.R.B. 327 as modified by Rev. Proc. 2002-19, 2002-13 I.R.B. 696 and Rev. Proc. 2002-54, 2002-35 I.R.B. 432. For more information, see Form 3115 and Pub. 538, Accounting Periods and Methods.

Certain partnerships that are qualifying taxpayers or small business taxpayers that want to use the cash method for an eligible trade or business (described on page 18) may get an automatic consent to change their method of accounting. For details, see Rev. Proc. 2001-10, 2001-2 I.R.B. 272, Rev. Proc. 2002-28, and Form 3115.

Example. The partnership changes to the cash method of accounting. It accrued sales in 2001 for which it received payment in 2002. It must report those sales in both years as a result of changing its accounting method and must make a section 481(a) adjustment to prevent duplication of income.

Section 481(a) adjustment.    The partnership may have to make an adjustment to prevent amounts of income or expenses from being duplicated. This is called a section 481(a) adjustment. The section 481(a) adjustment period is generally 1 year for a net negative adjustment and 4 years for a net positive adjustment. However, a partnership may elect to use a 1-year adjustment period if the net section 481(a) adjustment for the change is less than $25,000. The partnership must complete the appropriate lines of Form 3115 to make the election. For more details on the section 481(a) adjustment, see Rev. Proc. 2002-19 as amplified and clarified by Rev. Proc. 2002-54.

Include any net positive section 481(a) adjustment on page 1, line 10. If the net section 481(a) adjustment is negative, report it on Form 1065-B, line 23.

Accounting Periods

A partnership is generally required to have one of the following tax years:

1. The tax year of a majority of its partners (majority tax year).
2. If there is no majority tax year, then the tax year common to all of the partnership's principal partners (partners with an interest of 5% or more in the partnership profits or capital).
3. If there is neither a majority tax year nor a tax year common to all principal partners, then the tax year that results in the least aggregate deferral of income.

   Note:   In determining the tax year of a partnership under 1, 2, or 3 above, the tax years of certain tax-exempt and foreign partners are disregarded. See Regulations section 1.706-1(b) for more details.

4. Some other tax year, if:
   • The partnership can establish that there is a business purpose for the tax year (see Rev. Proc. 2002-39, 2002-22 I.R.B. 1046);
   • The partnership satisfies the 25% gross receipts test for a natural business year other than its required tax year (see Rev. Proc. 2002-38, 2002-2 I.R.B. 1037);
   • The tax year is a grandfathered year (see Rev. Proc. 2002-38); or
   • The partnership elects under section 444 to have a tax year other than a required tax year by filing Form 8716, Election to Have a Tax Year Other Than a Required Tax Year. For a partnership to have this election in effect, it must make the payments required by section 7519 and file Form 8752, Required Payment or Refund Under Section 7519.

A section 444 election ends if a partnership changes its accounting period to its required tax year or some other permitted year or it is penalized for willfully failing to comply with the requirements of section 7519. If the termination results in a short tax year, type or legibly print at the top of the first page of Form 1065-B for the short tax year, SECTION 444 ELECTION TERMINATED.

To change an accounting period, see Pub. 538 and Form 1128, Application To Adopt, Change, or Retain a Tax Year (unless the partnership is making an election under section 444).

Note:   The tax year of a common trust fund must be the calendar year.

Rounding Off to Whole Dollars

You may round off cents to whole dollars on your return and accompanying schedules. To do so, drop amounts under 50 cents and increase amounts from 50 to 99 cents to the next higher dollar.

Recordkeeping

The partnership must keep its records as long as they may be needed for the administration of any provision of the Internal Revenue Code. The partnership usually must keep records that support an item of income, deduction, or credit on the partnership return for 3 years from the date the return is due or is filed, whichever is later. It also must keep records that verify its basis in property for as long as they are needed to figure the basis of the original or replacement property.

The partnership should also keep copies of all returns it has filed. They help in preparing future returns and in making computations when filing an amended return.

Administrative Adjustment Requests

To correct an error on a Form 1065-B already filed, file Form 8082, Notice of Inconsistent Treatment or Administrative Adjustment Request (AAR). Generally, an adjustment to a partnership item requested on Form 8082 will flow through to the partners and be taken into account in determining the amount of the same item for the partnership tax year in which the IRS allows the adjustment. If the income, deductions, credits, or other information provided to any partner on Schedule K-1 are incorrect under section 704 in the partner's distributive share of any partnership item shown on Form 1065-B, file an amended Schedule K-1 (Form 1065-B) for that partner with the Form 8082. Also give a copy of the amended Schedule K-1 to that partner.

See the Form 8082 instructions for details on how to file the amended Form 1065-B.

A change to the partnership's Federal return may affect its state return. This includes changes made as a result of an examination of the partnership return by the IRS. For more information, contact the state tax agency for the state in which the partnership return is filed.

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