Form 1065: Guide for American Expats with Partnership Income 

According to IRS Statistics of Income data, hundreds of thousands of Americans abroad file partnership-related tax forms annually, with most successfully reducing or eliminating their US tax liability through the strategic use of expat protections. 

Form 1065 is an information return that partnerships file to report income, but here’s the relief: partnerships themselves don’t pay federal income tax. Instead, all profits and losses pass through to individual partners via Schedule K-1. As an American expat with partnership income, you’ll report your K-1 amounts on your personal return alongside other foreign income, where you can typically apply the Foreign Earned Income Exclusion (up to $130,000 for 2025) or Foreign Tax Credit to reduce or eliminate what you owe. 

What is Form 1065 for? 

Form 1065 is used to report the income of every domestic partnership and every foreign partnership doing business in the U.S. or getting income from U.S. sources, according to the IRS official guidelines. Think of it as the partnership’s annual financial report to the IRS, detailing income, expenses, gains, losses, deductions, and credits. 

For American expats, Form 1065 becomes relevant in several scenarios: 

• US Partnerships: If you’re a partner in a US-based business while living abroad, that partnership files Form 1065 and issues you a Schedule K-1 showing your share of income and losses. You’ll report this on your individual expat tax return alongside any foreign income. 
• Foreign Partnerships with US Income: Foreign partnerships generally must file Form 1065 if they have gross income effectively connected with US business conduct or income from US sources. If your overseas partnership receives US-sourced income, Form 1065 filing may be required. 
• Multi-Member LLCs: If you’re involved in a Limited Liability Company with multiple members that hasn’t elected corporate taxation, it defaults to partnership tax treatment and files Form 1065. 

The partnership uses Form 1065 to prepare Schedule K-1 forms for each partner. Your Schedule K-1 details your allocated share of partnership income, which you then report on your Form 1040. This pass-through structure means you’re taxed on your share of partnership profits regardless of whether you actually received distributions. 

Does every LLC have to file a 1065? 

Not every LLC files Form 1065. The answer depends entirely on how your LLC is structured and classified for tax purposes. 

• Single-Member LLCs: Single-member LLCs need Form 1040 to report annual income and Schedule C to report profit and loss information. They’re treated as “disregarded entities” for tax purposes, meaning the owner reports business income and expenses directly on their personal tax return using Schedule C. If you own a single-member foreign LLC, you may also need to file Form 8858 for foreign disregarded entity reporting. 
• Multi-Member LLCs: LLCs have choices on how they are to be taxed. These include being taxed as a sole proprietorship (one owner), partnership (multiple owners), S corporation (one or more owners) or C corporation (one or more owners). By default, multi-member LLCs are taxed as partnerships and must file Form 1065. 
• Corporate Elections: If an LLC elects to be taxed as a C corporation (using Form 8832), it files Form 1120 instead. If it elects S corporation status (using Form 2553), it files Form 1120S. 

For expats, this distinction matters significantly. Suppose you’re a single-member LLC owner living abroad. In that case, you might qualify for the Foreign Earned Income Exclusion on your Schedule C income. Multi-member LLC partnership income flows through to your K-1, where expat protections may still apply depending on the nature of the income. 

Do I Need to File a Form 1065 with No Income? 

According to the IRS Instructions for Form 1065, you would not be required to file a partnership return if there has been no income or deductions: “Except as provided below, every domestic partnership must file Form 1065, unless it neither receives income nor incurs any expenditures treated as deductions or credits for federal income tax purposes”. 

This means you can skip Form 1065 if your partnership or multi-member LLC had absolutely no activity during the tax year – no income AND no expenses that could be claimed as deductions or credits. 

However, several factors complicate this for expats: 

Best Practice Considerations:

We usually recommend people file Form 1065s for each year the entity is in existence both as a matter of best practice and so that the IRS doesn’t come asking you why you didn’t file one. Many tax professionals suggest filing even zero-income returns to maintain clear records and avoid IRS inquiries. 

State Requirements:

Some states require LLC annual reports or filings regardless of activity level, which can create expenses that trigger federal filing requirements. 

Hidden Expenses:

Common partnership expenses that might require filing include: 

• State registration or annual fees 
• Professional services (legal, accounting) 
• Bank account maintenance fees 
• Insurance premiums 
• Setup or organizational costs 

Foreign Considerations:

If you’re operating a business abroad, even minimal activity like opening foreign bank accounts, paying foreign registration fees, or incurring startup costs could create deductible expenses requiring Form 1065 filing. 

Is Form 1065 the same as Form 1040? 

Form 1065 and Form 1040 serve completely different purposes and are filed by different entities. 

• Form 1065: Form 1065 is an information return used to report the income, gains, losses, deductions, credits, and other information from the operation of a partnership. It’s filed by partnerships and multi-member LLCs to report business activity, but doesn’t calculate tax owed. 
• Form 1040: This is your individual income tax return, where you actually calculate and pay your personal income taxes, including your share of partnership income received via Schedule K-1. 

The relationship works like this: 

1. Partnership Level: The partnership files Form 1065, reporting total business income, expenses, and other financial details 
2. Individual Level: Each partner receives a Schedule K-1 showing their allocated share of partnership items 
3. Personal Return: Partners report their K-1 information on their Form 1040, where actual tax calculation and payment occur 

For Expats, This Creates a Two-Step Process: 

• Step 1: Form 1065 due March 15 (or September 15 with extension) – filed by the partnership
• Step 2: Form 1040 due June 15 (automatic expat extension) or October 15 (with filed extension) – filed by you individually 

Your Schedule K-1 income integrates with your other expat income sources on Form 1040, where you can apply protections like: 

• Foreign Earned Income Exclusion (up to $130,000 for 2025 tax year) 
• Foreign Tax Credit for taxes paid to your country of residence 
• Foreign housing exclusion or deduction for qualifying housing costs 

Important Distinction: Generally, a partnership doesn’t pay tax on its income but passes through any profits or losses to its partners. The partnership return (1065) doesn’t generate a tax bill, but your individual return (1040) does. 

How Do I File Form 1065 as an Expat Partnership?

Filing Form 1065 while managing an international business presents unique challenges, but the five-page form becomes manageable when you know what information goes where.

Form 1065 Structure and Completion:

Enter partnership name, address, EIN, and tax year. For foreign partnerships, use the foreign address and indicate “Foreign Partnership” clearly. Check applicable boxes for partnership type (general, limited, LLC, etc.).

Page 1 – Income Section: Report all partnership income, including:

• Gross receipts or sales (line 1a)
• Returns and allowances (line 1b)
• Cost of goods sold (line 2)
• Other income (line 8) – includes foreign-source income

Page 2 – Deductions: List ordinary business deductions such as:

• Salaries and wages (line 9)
• Rent (line 16a)
• Foreign taxes paid (line 16d)
• Other deductions (line 20) – specify foreign business expenses

Page 3 – Schedule K Summary:

This critical section summarizes all partnership items that pass through to partners, including:

• Ordinary business income/loss (line 1)
• Net rental real estate income (line 2)
• Interest income (line 5a)
• Foreign taxes paid (line 13g)
• Foreign-source income by category (various lines)

Page 4-5 – Financial Statements:

Complete Schedules L (Balance Sheet), M-1 (book-to-tax reconciliation), and M-2 (partners’ capital accounts). For international partnerships, include foreign assets at fair market value converted to US dollars.

Schedule K-1 Preparation:

Create individual K-1s for each partner showing their allocated share of income, losses, deductions, and credits. Include foreign tax credit information and foreign-source income details each partner needs for their personal returns.

Filing Method: Electronic filing is required for partnerships with 10+ total returns. Others can mail their returns to the appropriate IRS processing center or file electronically.

Partnership Income and Expat Tax Protections 

Understanding how partnership income interacts with expat tax benefits requires careful analysis of income types and sourcing rules. 

Active vs. Passive Income: The Foreign Earned Income Exclusion generally applies only to earned income from active participation in business. If you’re actively involved in partnership operations and physically present outside the US, some partnership income might qualify for exclusion using Form 2555. However, investment income, rental income, and passive partnership distributions typically don’t qualify. 

Foreign Tax Credit Strategy: If your partnership operates in a country with higher tax rates than the US, the Foreign Tax Credit might be more beneficial than the FEIE. You can claim dollar-for-dollar credits for foreign taxes paid on the same income reported on your K-1 using Form 1116. 

Example Scenario: Sarah, a US expat living in Germany, receives a K-1 showing $80,000 in partnership income from her consulting firm. Germany taxes this income at 40%, while her US rate would be 24%. She can use the Foreign Tax Credit to offset most or all of her US tax liability on this income, rather than trying to exclude it under FEIE. 

Common Expat Partnership Scenarios 

US Partnership, Expat Partner

You live abroad but remain a partner in a US-based business. The partnership files Form 1065 in the US, and you receive a K-1. You report this income on your expat return alongside foreign income, potentially qualifying for partial FEIE treatment if you’re actively involved. 

Foreign Partnership, US Partner

Your overseas business partnership might need to file Form 1065 if it has US-sourced income. This commonly happens with consulting firms, e-commerce businesses, or partnerships with US clients. Additionally, you may need to file Form 8865 to report your interest in foreign partnerships, depending on your ownership percentage and control. 

Mixed Operations

Many expat entrepreneurs operate businesses spanning multiple countries. Partnership income sourcing rules become complex, often requiring professional guidance to optimize tax efficiency while maintaining compliance. If you’re considering starting a business overseas, understanding these partnership structures early can help you make informed decisions about entity formation and tax planning. 

Next Steps for Expat Partnership Filing 

Form 1065 compliance while living abroad requires coordination between partnership-level and individual-level tax strategies. The key is ensuring your partnership files are timely and accurate while optimizing your personal expat tax position. 

If you’re dealing with partnership income as an expat, consider these action items: 

1. Confirm Filing Requirements: Determine if your partnership must file Form 1065 based on income and expense activity 
2. Coordinate Timing: Ensure partnership filing deadlines align with your individual expat filing strategy 
3. Plan Tax Efficiency: Analyze whether FEIE, Foreign Tax Credit, or a combination provides optimal tax outcomes 
4. Stay Organized: Maintain detailed records of foreign taxes paid and business activity for accurate reporting 

No matter how late, messy, or complex your partnership return may be, we can help. Greenback’s team of CPAs and Enrolled Agents has comprehensive expertise in both partnership taxation and expat tax compliance. We understand how to navigate the intersection of Form 1065 requirements with expat protections, ensuring you maximize benefits while staying fully compliant. 

If you’re ready to be matched with a Greenback accountant, click the get started button below. For general questions on expat taxes or working with Greenback, contact our Customer Champions.

 

The information provided is for educational purposes only and does not constitute tax advice. Individual tax situations vary, and you should consult with a qualified tax professional about your specific circumstances.