What are the tax filing rules for individuals whose only income is a loss from a 1065 partnership?
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If an individual’s only income for the year is a loss from a partnership (reported on Form 1065, Schedule K-1), the requirement to file a federal income tax return depends on whether their gross income meets or exceeds the filing threshold for their filing status and age.
Key Points:
1. Partnership Losses and Gross Income
- A partnership is a pass-through entity: it does not pay tax itself, but passes income, deductions, gains, and losses to its partners, who report their distributive share on their own returns.
- If the only item reported to the individual is a loss (i.e., negative income), then their gross income for the year is $0 (or less, but negative gross income is treated as $0 for filing threshold purposes).
2. Filing Thresholds
- The IRS requires individuals to file a return if their gross income is at least as much as the standard deduction for their filing status and age (with some exceptions for dependents, self-employment, etc.).
- For 2025, the standard deduction (and thus the general filing threshold) is:
- Single, under 65: $15,750
- Married filing jointly, both under 65: $31,500
- Head of household, under 65: $23,625
- (Higher thresholds apply if age 65 or older; see table for details).
3. What Counts as Gross Income?
- Gross income includes all income received in the form of money, goods, property, and services that are not exempt from tax.
- A loss from a partnership is not gross income; it is a negative number and does not count toward the filing threshold.
4. Filing Requirement for Only a Partnership Loss
- If the individual has no other income (wages, interest, dividends, etc.) and only a partnership loss, their gross income is $0.
- Since $0 is below all filing thresholds, they are not required to file a federal income tax return solely due to the partnership loss.
5. Exceptions—When Filing May Still Be Required
- If the individual is subject to other filing requirements (e.g., self-employment tax, advance premium tax credit reconciliation, additional taxes on retirement accounts, etc.), they may still need to file even if their gross income is below the threshold.
- If the individual wants to claim a refund of any withheld tax or refundable credits, they must file a return.
6. Carryforward of Partnership Losses
- If the individual does not file a return, they cannot claim the partnership loss for the year, nor can they carry it forward to offset future income. To preserve the loss for future use, they must file a return reporting the loss.
7. State Tax Returns
- State filing requirements may differ. Some states require a return even if there is a loss, or for other reasons. Check state rules.
Summary: If an individual’s only income is a loss from a partnership (reported on Form 1065, Schedule K-1), and they have no other income, they are not required to file a federal income tax return because their gross income is $0, which is below the filing threshold for all filing statuses. However, if they wish to claim the loss for future years, or are subject to other filing requirements, they should file a return.
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