If you are filing IRS Form 1065 for your partnership, you might have to file a state partnership return as well—but this can depend on where your business is located. While the federal government manages the income reporting through the IRS, every state individually has its own partnership tax laws and filing requirements. It is very important to know all of them in order to not miss any compliance requirements.
Every State Has Different Filing Requirements
Unlike the federal tax system, there is no uniform standard for state tax filing. There are states which require partnerships to file an annual return regardless of whether any taxes are owed. There are some states which require an annual return only if there is certain activity, or if there is a partner residing in the state.
For example:
- Most partnerships operating within California are required to file Form 565, even in the absence of income.
- New York issues a mandate for filing if a partnership has any type of income, gain, loss, or deduction from sources within New York.
- Texas may not have a state income tax, but there are still franchise reports that partnerships need to file even without a state income tax
When Are You Required to File?
Your business may need a state partnership return if it:
- Operates within the state or conducts business there.
- Has a physical location and/or employees in the state.
- Receives income sourced from the state.
- Maintains partners who are residents of the state.
In some cases, multiple state filings may be required if your partnership does business in more than one state.
Pass-Through Entity Taxes
Certain states have adopted a pass-through entity (PTE) tax election where the partnership pays income tax at the entity level on behalf of the partners. This is often an attempt to mitigate the federal SALT (State and Local Tax) deduction cap. If allowed or required by your state, such elections may necessitate additional forms or returns.
In Summary
In numerous scenarios, it is necessary to file a state partnership return. That said, requirements can differ from one state to another. Not meeting filing requirements can attract penalties and interest. To circumvent unexpected outcomes, it is advisable to check the relevant state’s tax agency or seek advice from a tax practitioner experienced with multi-state filings. Complying with federal and state obligations maintains your partnership’s good standing and helps avoid expensive errors.
If you need expert assistance, our dedicated team at Dimov Tax is ready. Reach out to us today for professional services in terms of Form 1065.