urgent ...pls help.. US tax issue

The schedule L of the 1065 is the balance sheet as it is reflected in your books. You enter the numbers pretty much as they appear on your balance sheet. Your have to enter the beginning and the ending of the tax year. There are some calculations you have to do. Schedule M-1 is a reconciliation of income/loss per books with income/loss per return. You might have not much to put in there. For example, if you had to pay a tax penalty for filing a return late, you deduct it from your business (books) but it is not deductible from your tax return. This is were you reconcile the amounts that you cannot deduct on your tax return from what you deducted on your books.Some of the common once are 50% meals deductions, guranteed payments, accumulated vacation expenses and so on. You can get some information from the irs website how to fill it out, but you might need some help doing this. Schedule M2 is just an analysis of the Partner's captial accounts. I would suggest that you have your 1065 done at least once by a professional, so you can see how this numbers come together. I hope this helps.

If you, or they, read the instructions for form 1065, you'll find the exceptions to having to fill in these schedules, so probably the partnership didn't meet the requirements not to use them. ChEAr$, Harlan Lunsford, EA n LA

They have a bigger problem. They should never have filed a partnership return. They should have filed a Schedule C attached to their Form 1040.

They have a bigger problem. They should never have filed a partnership return. They should have filed a Schedule C attached to their Form 1040.

Why Sschedule C if they were conducting business as a partnership? ChEAr$, Harlan Lunsford, EA n LA

The above is usually wrong. The only time a husband and wife can file a Schedule C for a jointly owned business is when they live in a community property state. Otherwise, a partnership return is the correct way to go. Ira Smilovitz

Not necessarily, unless they live in a community-property state. In most states, a partnership return is correct for a family business.

It seems to me that if both are working at the business, you need to file a partnership return regardless of whether you are in a community property state, otherwise you may be evading self-employment tax, and you definitely are not correctly reporting self-employment taxes.

Steve