Intro to Corporate Taxes:

Tax Consequences of Terminating a Partnership

In the eyes of the IRS, a partnership is terminated 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 OR at least 50% of the total interest in partnership capital and profits is sold or exchanged within a 12-month period, including a sale or exchange to another partner. If this occurs in the middle of the tax year and your client is left with a short tax year then you have to file form 1065. This will inform the IRS that your client’s partnership has ended as well as the date of termination of operations.

This form is usually filed at the end of every tax year as information for the IRS. The return is due the 15th day of the fourth month following the date of termination. If your client requires an extension then fill out the form 8736. This will provide them with a three-month extension. If your client needs more time then you can write a statement to the IRS explaining their circumstances.

The conversion of a partnership into a limited liability company that is classified as a partnership for federal tax purposes does not terminate the partnership. The conversion is not a sale, exchange, or liquidation of any partnership interest, the partnership's tax year does not end, and the LLC can continue to use the partnership's taxpayer identification number. This means that in the eyes of the IRS the partnership still exists and you don’t need to file a form 1065.