The question asks whether the partnership meets four conditions at once. If it does, three schedules and two fields drop away. Everything else stays.
This guide is for partnership owners, LLCs taxed as partnerships, bookkeepers, and Australian businesses or advisers handling US partnership reporting. It covers the four tests, what each answer triggers, and the records that support your conclusion.
Key Takeaways
- All four conditions must be met. Passing the receipts and asset limits alone is not enough.
- A "Yes" removes Schedules L, M-1, and M-2, but not Form 1065, Schedule B, Schedule K, or the K-1s.
- Keep ledgers, K-1 delivery proof, and your Schedule M-3 analysis on file.
- Check the instructions for the relevant tax year before you answer.
Form 1065 and Schedule B: Where Question 4 Fits
What Form 1065 does
The IRS describes Form 1065 as "an information return" used to report the income, gains, losses, deductions, credits, and other information from a partnership's operations. The partnership generally pays no tax itself. Profits and losses pass through to the partners, who use their Schedule K-1 figures on their own returns.
LLCs classified as partnerships for federal tax purposes have the same filing requirements as domestic partnerships. Foreign partnerships can also have filing obligations.
Under the 2025 instructions, a foreign partnership generally must file if it has US-source gross income or income effectively connected with a US trade or business, even if all its members are foreign persons. This matters for Australian groups with US activity.
Where Schedule B and Question 4 sit
Schedule B is headed "Other Information." It asks about structure, ownership, foreign activity, and other compliance matters. Question 4 sits on page 2 of that schedule. It is not a separate form and not a standalone filing.
Exception, not exemption
A partnership that qualifies may omit certain schedules. It still completes and files the required parts of Form 1065 and furnishes every required Schedule K-1.
Schedule B Question 4: The Four Requirements
The 2025 form asks: "Does the partnership satisfy all four of the following conditions?" It is all-or-nothing. Here are the conditions in the IRS's words:
| Part | Condition |
|---|---|
| 4a | Total receipts for the tax year were less than $250,000 |
| 4b | Total assets at the end of the tax year were less than $1 million |
| 4c | Schedules K-1 are filed with the return and furnished to partners on or before the due date (including extensions) |
| 4d | The partnership is not filing and is not required to file Schedule M-3 |
The dollar figures here are US figures and apply in US dollars. Confirm them against the instructions for your tax year.
The receipts test
"Total receipts" is not net profit. It is a gross measure. Under the 2025 instructions, it adds up:
- Gross receipts or sales (page 1, line 1a)
- Other income (page 1, lines 4 through 7)
- Income on Schedule K, lines 3a, 5, 6a, and 7
- Income or net gain on Schedule K, lines 8, 9a, 10, and 11
- Income or net gain on Form 8825, lines 2, 21, and 22a
Reconcile the total to the books and the return. A partnership with thin margins can still blow past $250,000 in receipts.
The asset test
Total assets means the amount that would be reported in item F on page 1 of Form 1065, measured at year end. It is not revenue, not net worth, and not just cash. Support it with the year-end balance sheet and trial balance.
The Schedule K-1 timing test
Two things must happen by the return's due date, extensions included: K-1s are filed with the return, and they are furnished to partners. Preparing a K-1 is not the same as filing it, and filing it is not the same as delivering it to the partner.
Late delivery to even one partner can turn the answer to "No." Extensions help, but only if the K-1s actually go out by the extended date.
The Schedule M-3 test
The partnership must neither file nor be required to file Schedule M-3. This is separate from the first two tests. The Schedule M-3 instructions require it if any one of these applies:
- Year-end total assets of $10 million or more
- Adjusted total assets of $10 million or more
- Total receipts of $35 million or more
- A reportable entity partner owning 50% or more of capital, profit, or loss on any day of the year
Voluntary filing also counts. A partnership that files M-3 by choice fails 4d.
What Happens When You Answer "Yes" or "No"?
If the answer is "Yes"
The IRS states that the partnership is not required to complete Schedules L, M-1, and M-2, item F on page 1, or item L on Schedule K-1. Here is what each omitted schedule does:
- Schedule L: balance sheets per books
- Schedule M-1: reconciles book income to tax income
- Schedule M-2: analyses changes in partners' capital accounts
If the answer is "No"
Failing any one condition generally means completing the applicable schedules.
Consider a partnership with $180,000 in receipts and $600,000 in assets. It passes both dollar tests. But one K-1 reached a partner after the extended due date. The answer is "No," and Schedules L, M-1, and M-2 are required.
The same result follows if a partnership under both thresholds files Schedule M-3 voluntarily.
Omitting Schedule L is not omitting the books
A "Yes" answer removes a schedule, not the obligation to keep records. Ledgers, balance sheets, and capital account records still matter for partner reporting, audits, financing, and later years. The instructions say records must be kept as long as they may be needed for administering any provision of the Code.
What stays on the return
Question 4 does not remove:
- The core Form 1065 information
- Schedule B
- Schedule K, which all partnerships must complete
- Each required Schedule K-1
Other schedules may still apply because of foreign transactions, ownership structure, or tax elections. Question 4 settles three schedules, not the whole return.
How to Evaluate and Document Question 4
Gather the financial information
Build a short checklist:
- Gross receipts and other income for the year
- Year-end total assets
- General ledger, profit and loss statement, trial balance, and year-end balance sheet
- Tax-year start and end dates
- Your Schedule M-3 analysis
Tie both the receipts and asset figures back to the ledger and trial balance. If they do not reconcile, fix that before answering.
Verify Schedule K-1 compliance
Confirm the partner count, the number of K-1s needed, the filing date, any valid extension, and the date each K-1 was furnished. Keep proof such as delivery confirmations, electronic transmission records, partner portal logs, or written acknowledgements. No single delivery method is universally required.
Confirm Schedule M-3 status
Check the current-year M-3 instructions. Do not rely on last year's return, and do not assume last year's position carries forward. Asset levels, receipts, or a new corporate partner can change the answer.
Apply the four-step decision process
- Test total receipts.
- Test year-end total assets.
- Confirm K-1s were filed with the return and furnished on time.
- Confirm Schedule M-3 is neither filed nor required.
One failed step changes the result. Review the applicable schedules before finalizing.
Keep a support file
Save the calculations, source reports, K-1 delivery evidence, M-3 analysis, and the instructions you used. Unusual ownership, amended returns, short tax years, foreign partners, or changed accounting records warrant review by a qualified tax professional.
Filing, Deadlines, and Related Compliance Considerations
Form 1065 is generally due on the 15th day of the third month after year end. For calendar-year partnerships, that is 15 March. When the date falls on a weekend or holiday, the next business day applies. The 2025 instructions list 16 March 2026 for calendar-year 2025 returns.
Form 7004 generally gives a six-month automatic extension to file. It does not extend time to pay. Partnerships keeping books and records outside the US and Puerto Rico have a separate automatic extension to the 15th day of the sixth month, with a qualifying statement attached.
An extension helps the K-1 timing test, but it does not make a partnership eligible for "Yes." Filing and furnishing must both happen by the extended date.
Related compliance points include:
- E-filing: partnerships filing 10 or more returns of any type in a year, or with more than 100 partners, must e-file Form 1065
- Foreign reporting: additional forms may attach
- K-1 delivery: confirm requirements for the year
Penalties for 2026 filings (calendar-year 2025 returns) include:
- Late or incomplete return: $255 per partner per month, up to 12 months, under section 6698
- Failure to furnish a correct K-1: $340 per statement under section 6722
- Failure to e-file when required: $340 per return under section 6721
Reasonable-cause relief may apply. Check the current rules before relying on these figures.
Common Mistakes and When to Seek Help
Watch for these errors:
- Treating Question 4 as optional
- Testing only receipts and assets
- Using net income instead of total receipts
- Confusing year-end assets with capital
- Overlooking Schedule M-3, including voluntary filing
- Assuming "no Schedule L" means "no balance sheet records"
Get a US tax professional's review when the partnership has:
- Foreign partners or cross-border activity
- Complex ownership structures
- An uncertain Schedule M-3 position
- Missing K-1 delivery evidence
- Records that do not reconcile
VJM Global, a chartered accountant firm, supports Australian and international businesses with accounting outsourcing, tax compliance, and financial reporting tied to US partnership obligations. Scope depends on the engagement and current IRS requirements.
Frequently Asked Questions
What is question 4 on Form 1065?
Schedule B Question 4 tests four conditions: receipts under $250,000, assets under $1 million, timely K-1 filing and furnishing, and no Schedule M-3. The result determines whether Schedules L, M-1, and M-2 are required.
What is the filing requirement for Form 1065?
Every domestic partnership must file unless it has no income and no deductible expenditures or credits. LLCs taxed as partnerships follow the same rules. Check the instructions for foreign, inactive, and specially classified entities.
Is a balance sheet required on Form 1065?
Schedule L is the balance sheet schedule, and a "Yes" to all four parts of Question 4 allows you to omit it. The partnership's underlying accounting records are still needed.
What must be reported on Schedule B (Form 1065)?
Schedule B is the "Other Information" section. It covers structure, ownership, foreign activity, filing matters, and tax compliance questions, including Question 4.
Who must file Schedule B (Form 1065)?
Partnerships required to file Form 1065 complete Schedule B as part of that return. It is not a standalone filing. The current-year instructions control the details.
