The flow of a partnership return

From 1065 to K-1

WRITTEN BY: TONY  |  August 17, 2026

Partnerships are pass-through entities. This means that unlike C corporations, they are not subject to a separate entity-level income tax. Partnership income passes down to the individual partner's tax return, where they pay tax on their share of partnership income on their Form 1040 (personal income tax return).Form 1065 informational return
Partnerships file Form 1065 (partnership income tax return), an informational return containing the financial results of the partnership for the tax year.

Schedule K summary of partnership income items
Schedule K is a summary schedule of all the partners' shares of income, deductions, and credits.Schedule K-1 partner distributive share
Schedule K-1 is the information return provided to each person who was a partner at any time during the partnership's tax year. It reports each specific partner’s distributive share of partnership income, deductions, credits, and other tax-related items from Schedule K. While the partnership itself generally does not pay income tax, the partners are liable for tax on their shares of the partnership's results, regardless of whether those amounts were actually distributed to them.Next steps
We offer bookkeeping and tax services for partnerships and other pass-through business entities. You can learn more about the services we offer and request a consultation on our website, lilacfinancial.org.

Partnership outside basis

A complex area of tax accounting that impacts your ability to deduct business losses

WRITTEN BY: TONY  |  August 3, 2026

Outside basis is a fundamental concept to partnership tax accounting. In simple terms, it is the partner's personal after-tax foundation or tax investment in their business interest. It is impacted by contributions you make to the partnership, distributions you take from the partnership, your share of partnership income, as well as your share of certain types of business debts assumed by the partnership.Whereas inside basis is the partnership's tracking of the assets it owns in its accounting system, outside basis is the partner's individual tax measurement that lives outside of the partnership's accounting system.Outside basis is one of the key calculations made to determine whether you can deduct a business loss or if a partner distribution is tax free. It is important that basis is properly tracked to ensure your tax return is prepared accurately and to prevent surprise tax bills.Calculating outside basis
The formulas for calculating initial outside basis and the outside basis at year-end are actually quite complicated. I wrote out a couple formulas in the small print below. As with many tax topics, what starts as a simple concept can have lots of exceptions or minute fine details that you have to consider when performing a calculation. Thankfully, that's where we can help!

Next steps
We are here to assist you in reporting income and deductions correctly on your return, including monitoring of basis for pass-through business taxation. You can learn more about the services we offer and request a consultation on our website, lilacfinancial.org.

Rental income 14-day tax-exempt income rule

Also known as the "Augusta Rule", this provision allows you to earn tax-free rental income

WRITTEN BY: TONY  |  July 24, 2026

If you live in a cute area, you might want to consider renting out your property for a week or two during the year for some extra money.The IRS allows you to exclude rental revenue if you rent out a personal dwelling unit for 14 days or fewer in the calendar year. It needs to be a dwelling unit that you use as a residence.If you meet the requirements, you don't have to report the income on your tax return. You do not get to deduct the expenses related to the rental, but some would say that's a fair trade off.If you rent it out for 15 days or more, this provision does not apply.Next steps
We are here to help you report rental income and deductions correctly on your return. You can learn more about the services we offer and request a consultation on our website, lilacfinancial.org.

S corp verification

CP261 notice or S corp verification letter 385C

WRITTEN BY: TONY  |  July 13, 2026

If you own an S corporation, we request your CP261 notice (S corporation approval letter) during the onboarding process. This is part of our due diligence requirements.You can only request the IRS to provide a CP261 notice to you if you were never sent one. They will typically not provide a duplicate copy if you lost the CP261 notice. If lost, you will need to request a 385C Letter instead (also called an S corporation verification letter).Requesting a 385C S corporation verification letter
We recommend calling as early in the morning as possible since you may need to wait on hold. You can use the hold assist feature on your iPhone or Android phone to alert you when the representative is ready to speak to you. That makes calls to government agencies a lot less tedious in my experience.The IRS business line number: 1-800-829-4933Call instructions
After confirming the language you would like to use, you will either be directed to a new AI phone system or the old system. The new AI phone system will ask you to say what you need. You can sometimes hang up and call back to get the original phone system, which asks you to press the options below after you confirm your language preference. If you are stuck with the AI phone system where you have to speak your request, say "385C Letter" or "S corporation verification letter" and try to work with it to get to a representative. If you get the original system where you can just push buttons on your keypad to confirm your options, follow the instructions below:

Managing multi-factor authentication

Some accounts require you to authenticate any login by a third-party user.

WRITTEN BY: TONY  |  July 1, 2026

Online platforms typically allow your business to grant accountant or read-only access to online portals.Shared access
We offer full-cycle accounting, bookkeeping and tax services for e-commerce clients. To ensure smooth facilitation of your records, it is imperative to provide accountant level access (or read-only access) to your business platforms. This minimizes the amount of back-and-forth required between you and us during the year, especially during busy periods. Fees are lower for clients who use accounts and portals that allow us to independently pull reports and data. It saves time and reduces the administrative burden needed to manage requests.Different styles of MFA
Some portals allow the accountant to set up their own multi-factor authentication, requiring no assistance from the business owner to get logged in. Older banks and online tools may however require the business owner to authenticate every login.There are a few approaches to efficiently address this issue, and we can explore them together during your onboarding:
- Setting up a shared inbox for access codes to be sent
- Setting up a shared VOIP phone number for access codes to be sent
- Setting up a dedicated meeting time where you will be available to text us your MFA codes for logging in to specific accountsSecurity considerations
Accountant or read-only level access is appropriate for third-parties (like us) to access your records, and serves as an effective internal control to prevent unauthorized changes or business transactions. While MFA can be challenging to set up for certain accounts, you may consider changing your service provider for a specific business account if you find that it cannot effectively handle your business accounting needs with shared access. This could save you time and hassle as you work with an accountant to manage your business finances.Next steps
We help clients stay organized and maintain proper support for their business records during the year. This is crucial for tax and regulatory compliance. You can learn more about the services we offer and book a consultation on our website, lilacfinancial.org.

E-commerce accounting considerations

Selling online expands your reach and has some unique nuances for your business financials.

WRITTEN BY: TONY  |  June 29, 2026

E-commerce platforms allow your business to sell across the country, or even internationally. It is very helpful for small businesses and creators to increase sales when you want to grow beyond the neighborhood shop.Third-party access and reports
We offer full-cycle accounting, bookkeeping and tax services for e-commerce clients. To ensure smooth facilitation of your records, it is imperative to provide accountant level access (or read-only access) to your business platforms (such as Amazon, Shopify, Stripe, Etsy, and PayPal). This minimizes the amount of back-and-forth required between you and us during the year, especially during busy periods. We can pull reports independently to ensure transactions are properly accounted for in your ledger and on your tax filings.Sales tax
We will also review to make sure sales tax is being properly calculated and remitted for your business. Thanks to a US Supreme Court ruling in 2018 (South Dakota vs. Wayfair), the court ruled that states can require out-of-state sellers to collect and remit local sales tax on transactions to customers in their state, regardless of the seller's physical presence in the US. This makes sales tax compliance vital for your small business.Government portals and filings
We assist with sales tax filings during the year. Government portals and accounts typically require a power of attorney form to be on-file in order for your accountant to represent you and access your information. Depending on which apply, we will typically request power of attorney forms from you during the onboarding process. We will also guide you through granting access and the ability to represent you when communicating with governmental authorities. This can significantly reduce your administrative burden in managing sales tax filings during the year.Inventory and COGS
We can help ensure accurate inventory tracking and cost of goods sold (COGS) reporting for your small business. Along with key insights on inventory turnover and selling performance, you will remain compliant with accurate business revenue and gross profit reporting on your tax return.Next steps
We help clients stay organized and maintain proper support for their business records during the year. This is crucial for tax and regulatory compliance. You can learn more about the services we offer and book a consultation on our website, lilacfinancial.org.

Can your accountant pay bills on your behalf?

While it may seem like a rudimentary part of bookkeeping, disbursements are a high-risk area for your business.

WRITTEN BY: TONY  |  June 22, 2026

The business owner (or designated contact within the business) should always review and approve any disbursement. An external firm managing your books can certainly help organize and manage your bills online, prepare them for disbursement, and ensure all relevant documentation and support (such as a vendor W9) is obtained. But a review by the business must take place before funds are disbursed. Once funds are sent out, it can be very difficult to recover them. Having a layer of review by the business is essential to prevent errors or mistaken disbursements.

We offer paperless billpay support, W9 and 1099 management, and accounts payable tracking for small businesses, in addition to our other bookkeeping and tax services. You can learn more about the services we offer and book a consultation on our website: lilacfinancial.org.

Do you need to keep receipts for all business expenses?

It's one of the less glamorous parts of owning a business.

WRITTEN BY: TONY  |  June 15, 2026

The answer is: yes! You need to keep copies of all receipts for business disbursements.We offer full-cycle accounting, bookkeeping and tax services for our clients. During the course of the year, your transactions are posted to various ledgers and organized by category to ensure proper accounting treatment during the year, and to facilitate a smooth transition onto your tax return. This is done using various source document information, including receipts, invoices, or bank statements and transaction logs. However, you are responsible for maintaining copies of all receipts in case of an audit by federal, state, or local tax authorities. Businesses ultimately need to maintain evidence for any deduction taken on their tax return.We help clients stay organized and maintain proper support for their business records during the year. This is crucial for tax and regulatory compliance. You can learn more about the services we offer and book a consultation on our website: lilacfinancial.org.

Choosing not to file jointly

It's complicated

WRITTEN BY: TONY  |  June 12, 2026

By filing jointly, both spouses can be held legally and financially responsible for anything on the return.Situations where you may not want to file jointly
There are some pretty self-explanatory reasons to not file a joint return with your spouse:
- If you are not on good terms
- If your spouse is unwilling to sign a joint return 🥺What if you are happily married?
Congratulations! It gets more interesting in this case. You may still want to file separately in the following scenarios:
- If you have concerns about being held liable for your spouse's activities on the return for any reason
- If you have high medical expenses
- If you have student loan repayments that calculate monthly payments based only on individual income
- If you have personal casualty and disaster losses
- If one spouse is a business owner and combined income with spouse's earnings is high
- If alternative minimum tax applies and one spouse has higher earnings
- If one spouse is ready to file a tax return long before the other and wants to file now!Generally, filing separately can help with claiming below-the-line deductions subject to an AGI-based floor or income threshold.Is filing jointly usually more advantageous?
Typically, yes! Married filing separately has some specific scenarios where it may benefit your return, but it also causes you to lose eligibility for several tax credits and deductions (such as family and education credits and deductions). If one spouse itemizes deductions, both have to itemize deductions, and this can be severely disadvantageous if one spouse does not have significant itemized deductions. The tax brackets for married filing separately are also less advantageous than even Single filers (once you reach higher income tax brackets). And, more social security income may be taxable when filing separately, even at lower income levels. Roth IRA contribution income limits and traditional IRA deductions are also significantly lower when filing separately.If you live in a community property state (e.g. Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, or Wisconsin), filing separately can also be logistically very challenging due to community income and deduction rules.Next steps
Choosing a filing status has significant impacts on your tax return and can be quite complicated. We help clients choose the filing status that will lead to the best results on their return. You can learn more about the tax services we offer for individuals and businesses on our website, lilacfinancial.org.

Granting access to your accountant for business accounts

To save you time (and fees), it is essential to grant read-only access to your records.

WRITTEN BY: TONY  |  June 8, 2026

Accountant access is a common separate user access level in many business accounts and portals.We offer full-cycle accounting, bookkeeping and tax services for our clients. To ensure smooth facilitation of your records, it is imperative to provide accountant level access (or read-only access) to your business accounts. This minimizes the amount of back-and-forth required between you and us during the year, especially during busy periods. Fees are lower for clients who use accounts and portals that allow us to independently pull reports and data. It saves time and reduces the administrative burden needed to manage requests.Financial institutions
Most financial institutions offer integration with QuickBooks and accountant level access in their online portals by now. You should be able to call your financial institution and get instructions on how to set these up for your accounts.If your financial institution still uses a very old website and does not offer these services, we will have to manually request bank statements each month to perform reconciliations and record transactions, which significantly increases the administrative time spent on bookkeeping during the year.Some financial institutions or other business accounts require 2 factor authentication (2FA) from the business owner that can also create an administrative burden. For these accounts, we will determine a strategy that is most time efficient and ensures we can access your accounts as regularly as needed.Government portals
Government portals and accounts typically require a power of attorney form to be on-file in order for your accountant to represent you and access your information. Depending on which apply, we will typically request power of attorney forms from you during the onboarding process. We will also guide you through granting access and the ability to represent you when communicating with governmental authorities.Next steps
We help clients stay organized and maintain proper support for their business records during the year. This is crucial for tax and regulatory compliance. You can learn more about the services we offer and book a consultation on our website, lilacfinancial.org.