"Final K-1" Checkbox on Schedule K-1 (Form 1065)

[skywire]

• What does the IRS intend it to mean? In other words, what rule is a partnership supposed to follow in deciding whether to check it or not?
• How are partnerships observed to use it in the wild? In other words, do they sometimes get it wrong?
• How, if at all, should I allow it to influence my responses in the TurboTax K-1 interview? Does TurboTax refrain from asking the user about it because (see second bullet) it is unhelpful? What does TurboTax mean by "This partnership ended in ...."?

[SusanY1]

You will check the box "this is the final K-1" if the partnership is filing its last return because it was dissolved before the end of the tax filing year. 

If you are the partnership creating the K-1 you would provide the date the partnership was dissolved and indicate that it this is the final time the partnership is filing a return.

If you are entering a K-1 on your personal tax return, you will check it and enter the date if that information is provided on the K-1you have received.  

The IRS is asking here if it's the last time the partnership is issuing a K-1 (and filing a 1065).  There are some instances where an individual taxpayer may be getting the last K-1 they will receive for a particular entity (such as after the taxpayer has sold interest in a publicly traded partnership), but the box isn't used in that instance. 

[Mike9241]

another way to get a final K-1 is to completely dispose of your interest in the partnership. 

[rlottsman]

To receive a Final K-1, your "partnership" has merged or been exchanged for a Cuspid number.   The settlement date is shown at the top of the FORM-1065 "Beginning 01/01/2023 Ending 00/00/2023."  This will be the last K-1you will file from this company.  Going forward, look for the company's interest or dividends to be reported via your brokerage account's  FORM-1099-INT or FORM-1099-DIV.  

[skywire]

SusanY1, are you saying that publicly traded partnerships reliably check the Final K-1 checkbox on a K-1 that they issue to a taxpayer when and only when they are dissolving? And thus not, as so many people in the Community and other places online say, also when the partnership continues but the taxpayer has fully disposed of their interest in the partnership during the tax year?

Please allow me to point out that the taxpayer does not complete a K-1. And the TurboTax K-1 interview does not offer the taxpayer a checkbox labeled "Final K-1". What they do offer is a checkbox on the Describe the Partnership page labeled "This partnership ended in ...." Many people in the Community and elsewhere online claim that the taxpayer should check that checkbox when they have fully disposed of their interest even though the partnership has not ended. Are they right or wrong?

Thanks

[skywire]

Is there *anyone* who knows the answers to my questions (see bullet points in the OP) and is willing to answer them?

[skywire]

Thanks for your partial answer to one of the questions I asked.

[PatriciaV · Accepted solution]

What does the IRS intend it to mean? In other words, what rule is a partnership supposed to follow in deciding whether to check it or not?

If the partnership will not file another tax return in the future, the return itself is marked "Final." This designation also checks the "Final K-1" box on the partner's Schedule K-1. The IRS is then aware that no future tax returns are expected from the partnership.

If only Schedule K-1 is marked "final," the partner will not receive this form in the future. The IRS is aware that the partner has left the partnership.

How are partnerships observed to use it in the wild? In other words, do they sometimes get it wrong?

Yes, partnership returns are prepared by humans using software. Errors can and do occur but not often.

How, if at all, should I allow it to influence my responses in the TurboTax K-1 interview? Does TurboTax refrain from asking the user about it because (see second bullet) it is unhelpful? What does TurboTax mean by "This partnership ended in ...."?

TurboTax uses check the box "This partnership ended..." in place of "Final K-1" The interpretation is that the partner's investment in the partnership has ended. Perhaps the wording of this option could be improved in the future.

@skywire 

[RB287a]

Just a warning here on one facet that's somewhat grayed over in IRS docs and isn't always brought to light in tax software. To explain the solution to this warning is my understanding that a Partnership or LLC can keep their Partnership or LLC open, existing, etc until the very end of the final calendar (or Fiscal) year as long as the partners, members, and operating agreements agree tasks at hand. They could still need time to close out accounts, finish other tasks, decide new possible ventures etc. Whether the LLC sells stock or distributes assets doesn't necessarily mean the LLC must be closed early in the final year.
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But having said that just as a warning to anyone that isn't aware of the Final calendar year date facet, when dissolving a Partnership (or LLC). Specifically the final 1065 calendar ending date at the top of the form 1065. This is important because the IRS requires the partnership (or LLC) to file a final 1065 return earlier based on date of dissolution. I had this facet explained to me by a CPA, but I don't readily see it in all the IRS docs. Here's the thing.
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* Partners (or Members) need to think carefully about what date they really need to dissolve a Partnership or LLC in their final year. And if they don't have to dissolve sooner then they should put the Final calendar year ending date (at top of Form 1065) as Year ending Dec 30, of that final tax year. That way you can file the 1065 at the normal time in spring of the following year. When software, IRS Forms etc are available.
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This is also important because the IRS requires the partnership (or LLC) to file a final 1065 return based on date of dissolution. That means the partnership’s Tax Year ends on its date of termination, and it must file its final 1065 return by the 15th day of third month after that date. NOT the standard March 15 as a normal calendar yr 1065 due date.
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Say if they put on June 13, Tax Year ending date (at top of Form 1065 or any date prior to Dec 30, Tax Year) then the IRS requires the partnership's 1065 filed by the 15th day of third month after that date.
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And if they fail to file by the above said date then the fines are EXPENSIVE for each member accruing each month. Depending on the amount of time the 1065 is late and the number of members it can be a fine in the thousands over several months.
I looked online at,
https://www.irs.gov/businesses/small-businesses-self-employed/closing-a-business
I pasted this right off their page
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You must file Form 1065, U.S. Return of Partnership Income, for the year you close your business.
When you file, you must:
Report capital gains and losses on Schedule D (Form 1065).
Check the “final return” box (it’s near the top of the front page of the return, below the name and address).
Check the “final K-1” box on Schedule K-1 PDF.
You may also need to file these other forms with your Form 1065:
Form 4797, Sales of Business Property, for each year your partnership sells or exchanges property used in the business. You also need to file this form if closing your business causes business use of an eligible property under Section 179 to drop to 50% or less.
Form 8594, Asset Acquisition Statement, if you sell your business.
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That's it, just says for the year you close. That's easy to misunderstand if all you've ever done is file the 1065 by March 15 the following year.
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I really had to search over several IRS links before I found this.
https://www.irs.gov/instructions/i1065#en_US_2024_publink11392vd0e711
Termination of the Partnership
A partnership terminates when all its operations are discontinued and no part of any business, financial operation, or venture is continued by any of its partners in a partnership.
The partnership’s tax year ends on the date of termination which is the date the partnership winds up its affairs. Special rules apply in the case of a merger, consolidation, or division of a partnership. See Regulations sections 1.708-1(c) and (d) for details. Also see IRS.gov/newsroom/questions-and-ans[product key removed]ical-terminations-internal-revenue-code-irc-sec-708.
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I saw nothing about the expensive monthly fines of hundreds per month per member. NOR did it state the obvious solution of just keeping the LLC open until December 30. If for no other reason than just waiting till all the forms and software are available for the current tax year. Anyhow just seemed pretty incredulous to me.