Section references are to the Internal Revenue Code unless otherwise noted.
For the latest information about developments related to Form 1065 and its instructions, such as legislation enacted after they were published, go to IRS.gov/Form1065.
Electronically filed returns.
Beginning January 1, 2024, partnerships are required to file Form 1065 and related forms and schedules electronically if they file 10 or more returns of any type during the tax year, including information, income tax, employment tax, and excise tax returns. Certain exceptions apply. See Electronic Filing , later.
Qualified derivatives dealers (QDDs).
Under the new qualified intermediary agreement (QIA), if the partnership is, or has a branch that is, a QDD, it must file Form 1065. See Qualified derivatives dealers (QDDs) , later, for more information.
Energy efficient commercial building deduction.
Line 20 has been changed from Other deductions to Energy efficient commercial building deduction. See Line 20 , later.
Elective payment election.
Line 29 has been changed from Amount owed to Elective payment election amount from Form 3800. See Line 29 , later.
Schedule B.
Schedule B has multiple updates. First, question 10 was expanded and now includes 10d. See Questions 10a, 10b, 10c, and 10d , later, for more information. Second, question 29 was activated to request information on excise tax on repurchase of corporate stock. See Question 29 , later. Third, a new Question 30 was added to request information on digital assets. Fourth, the previous question 30 has been renumbered to 31.
Schedule K-1 (Form 1065), item J.
The checkbox under Schedule K-1 (Form 1065), item J, was expanded to a box for sale and a box for exchange. The instructions differentiate when each should be checked; see Item J , for more information.
Schedule K-1 (Form 1065), items K2 and K3.
Item K was expanded to include an additional checkbox and each item given a separate number. The instructions were separated to identify information pertaining to each item and new instructions are provided for the new item K3 checkbox to indicate whether the listed liabilities are subject to guarantees or other payment obligations. For more information, see Item K1 , Item K2 , and Item K3 , later.
Schedule K, line 11.
Line 11, Other income (loss) (code I), previously included a number of bulleted items. These items have been assigned individual codes for Schedule K, line 11, and box 11 of Schedule K-1. See Line 11. Other Income (Loss) , later, for the expanded list of codes.
Schedule K, line 13.
There are two major changes to line 13. First, line 13a, Contributions, has been split into Line 13a. Cash Contributions and Line 13b. Noncash Contributions . The subsequent lines have been renumbered accordingly. Second, the 2022 line 13d, Other deductions (code W), included a number of bulleted items. These items have been assigned individual codes for Schedule K, line 13, and box 13 of Schedule K-1. See Line 13e. Other Deductions , later, for the expanded list of codes.
Schedule K, line 15.
Line 15f, Other credits (code P), previously included a number of bulleted items. These items have been assigned individual codes for Schedule K, line 15, and box 15 of Schedule K-1. See Line 15f. Other Credits , later, for the expanded list of codes and new energy credits.
Schedule K, line 20.
Line 20c, Other information (code AH), previously included a number of bulleted items. These items have been assigned individual codes for Schedule K, line 20, and box 20 of Schedule K-1. See Line 20c. Other Items and Amounts , later, for the expanded list of codes.
Schedule K, line 20c, code P.
Instructions have been updated for section 453A information required to be provided to partners.
Schedule K, line 20c, code X.
Line 20c, code X, was previously Reserved and has been activated to report payment obligations including guarantees and deficit restoration obligations (DROs). See line 20c, code X, later.
Changes from the Inflation Reduction Act of 2022 (IRA 2022) and the CHIPS Act of 2022 (CHIPS 2022).
The following are changes from the IRA 2022 (P.L. 117-169) and the CHIPS 2022 (P.L. 117-167).
Schedule M-1. Reconciliation of Income (Loss) per Books With Analysis of Net Income (Loss) per Return.
The title of the Schedule M-1 was changed to Reconciliation of Income (Loss) per Books With Analysis of Net Income (Loss) per Return. There weren't any changes to the Schedule M-1 line items. The change clarified that Schedule M-1, line 9, isn't the taxable income of the partnership. Instead, Schedule M-1, line 9, agrees with the Analysis of Net Income (Loss) per Return, line 1. The Analysis of Net Income (Loss) per Return, line 1, is a summary of various items reported on the Schedule K and is used for reconciliation purposes.
Domestic partnerships treated as aggregates for purposes of sections 951, 951A, and 956(a).
Final regulations announced in T.D. 9960 treat domestic partnerships as aggregates of their partners for purposes of sections 951, 951A, and 956(a), and any provision that specifically applies by reference to any of those sections, for tax years of foreign corporations beginning on or after January 25, 2022, and for tax years of U.S. persons in which or with which such tax years of foreign corporations end. Domestic partnerships may apply the final regulations to tax years of foreign corporations beginning after December 31, 2017, and to tax years of the domestic partnership in which or with which such tax years of the foreign corporations end, provided certain consistency requirements are met.
IRA partner disclosure.
For IRA partners, the partnership reports the employer identification number (EIN) of the IRA's custodian in item E on the partner's Schedule K-1 (Form 1065). If the partnership reports unrelated business taxable income (UBTI) to an IRA partner on line 20, code V, the partnership must report the IRA's EIN on line 20, code AR. See Items E and F and IRA disclosure (code AR) , later.
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If you have questions about a tax issue; need help preparing your tax return; or want to download free publications, forms, or instructions, go to IRS.gov to find resources that can help you right away.
Online tax information in other languages.
You can find information on IRS.gov/MyLanguage if English isn’t your native language.
Free Over-the-Phone Interpreter (OPI) Service.
The IRS is committed to serving our multilingual customers by offering OPI services. The OPI Service is a federally funded program and is available at Taxpayer Assistance Centers (TACs), other IRS offices, and every VITA/TCE return site. The OPI Service is accessible in more than 350 languages.
Accessibility Helpline available for taxpayers with disabilities.
Taxpayers who need information about accessibility services can call 833-690-0598. The Accessibility Helpline can answer questions related to current and future accessibility products and services available in alternative media formats (for example, braille, large print, audio, etc.). The Accessibility Helpline doesn't have access to your IRS account. For help with tax law, refunds, or account-related issues, go to IRS.gov/LetUsHelp.
TAS is an independent organization within the IRS that helps taxpayers and protects taxpayer rights. Their job is to ensure that every taxpayer is treated fairly and that you know and understand your rights under the Taxpayer Bill of Rights.
The Taxpayer Bill of Rights describes 10 basic rights that all taxpayers have when dealing with the IRS. Go to TaxpayerAdvocate.IRS.gov to help you understand what these rights mean to you and how they apply. These are your rights. Know them. Use them.
TAS can help you resolve problems that you can’t resolve with the IRS. And their service is free. If you qualify for their assistance, you will be assigned to one advocate who will work with you throughout the process and will do everything possible to resolve your issue. TAS can help you if:
TAS has offices in every state, the District of Columbia, and Puerto Rico. Your local advocate's number is in your local directory and at TaxpayerAdvocate.IRS.gov/Contact-Us. You can also call them at 877-777-4778.
TAS works to resolve large-scale problems that affect many taxpayers. If you know of one of these broad issues, report it to them at IRS.gov/SAMS.
TAS can provide a variety of information for tax professionals, including tax law updates and guidance, TAS programs, and ways to let TAS know about systemic problems you’ve seen in your practice.
Internet.
You can access the IRS website at IRS.gov 24 hours a day, 7 days a week to:
Tax forms and publications.
The partnership can download or print all of the forms and publications it may need on IRS.gov/FormsPubs. Otherwise, the partnership can go to IRS.gov/OrderForms to place an order and have forms mailed to the partnership. The IRS will process your order for forms and publications as soon as possible.
Form 1065 is an information return used to report the income, gains, losses, deductions, credits, and other information from the operation of a partnership. Generally, a partnership doesn't pay tax on its income but passes through any profits or losses to its partners. Partners must include partnership items on their tax or information returns.
The Bipartisan Budget Act of 2015 (BBA) created a new centralized partnership audit regime effective for partnership tax years beginning after 2017. The new audit regime replaces the consolidated audit proceedings under the Tax Equity and Fiscal Responsibility Act (TEFRA). The new audit regime applies to all partnerships unless the partnership is an eligible partnership and elects out by making a valid election using Schedule B-2 (Form 1065).
Adjustment year.
An adjustment year is a tax year in which:
Reviewed year.
A reviewed year is a partnership’s tax year to which a partnership adjustment relates.
A partnership is the relationship between two or more persons who join to carry on a trade or business, with each person contributing money, property, labor, or skill and each expecting to share in the profits and losses of the business whether or not a formal partnership agreement is made.
The term “partnership” includes a limited partnership, syndicate, group, pool, joint venture, or other unincorporated organization, through or by which any business, financial operation, or venture is carried on, that isn't, within the meaning of regulations under section 7701, a corporation, trust, estate, or sole proprietorship.
A joint undertaking merely to share expenses isn't a partnership. Mere co-ownership of property that is maintained and leased or rented isn't a partnership. However, if the co-owners provide services to the tenants, a partnership exists.
Business owned and operated by spouses.
Generally, if you and your spouse jointly own and operate an unincorporated business and share in the profits and losses, you're partners in a partnership and you must file Form 1065.
If you and your spouse materially participate as the only members of a jointly owned and operated business, and you file a joint return for the tax year, you can make an election to be treated as a QJV instead of a partnership. By making the election, you won't be required to file Form 1065 for any year the election is in effect and will instead report the income and deductions directly on your joint return.
A QJV conducts a trade or business where the only members of the joint venture are a married couple who file a joint return, both spouses materially participate in the trade or business (because mere joint ownership of property isn’t enough), both spouses elect not to be treated as a partnership, and the business is co-owned by both spouses and isn't held in the name of a state law entity such as a partnership or limited liability company (LLC).
To make this election, you must divide all items of income, gain, loss, deduction, and credit between you and your spouse in accordance with your respective interests in the venture. Each of you must file a separate Schedule C (Form 1040), Profit or Loss From Business; or Schedule F (Form 1040), Profit or Loss From Farming. On each line of your separate Schedule C or F (Form 1040), you must enter your share of the applicable income, deduction, or loss. Each of you must also file a separate Schedule SE (Form 1040), Self-Employment Tax, to pay self-employment tax, as applicable.
If you and your spouse make the election for your rental real estate business, you each must report your share of income and deductions on Schedule E (Form 1040), Supplemental Income and Loss. Rental real estate income isn’t generally included in net earnings from self-employment subject to self-employment tax and is generally subject to the passive loss limitation rules. Electing QJV status doesn't alter the application of the self-employment tax or the passive loss limitation rules.
To make the QJV election for 2023, jointly file the 2023 Form 1040 or 1040-SR with the required schedules. This generally doesn't increase the total tax on the return, but it does give each spouse credit for social security earnings on which retirement benefits are based, provided neither spouse exceeds the social security wage base limitation.
Once made, the election can't be revoked without IRS consent. If you and your spouse filed a Form 1065 for the year prior to the election, you don't need to amend that return or file a final Form 1065 for the year the election takes effect.
For more information on QJVs, go to IRS.gov/QJV.
A foreign partnership is a partnership that isn't created or organized in the United States or under the law of the United States or of any state. In certain instances, a partnership created or organized in the United States can be treated as a foreign partnership. See, for example, Regulations section 1.958-1(d)(1).
In addition, if a domestic section 721(c) partnership is formed after January 17, 2017, and the gain deferral method is applied, then a U.S. transferor must treat the section 721(c) partnership as a foreign partnership and file a Form 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships, with respect to the partnership. See Form 8865 and its instructions. See also Regulations section 1.721(c)-6(b)(4).
A general partner is a partner who is personally liable for partnership debts.
A general partnership is composed only of general partners.
A limited partner is a partner in a partnership formed under a state limited partnership law, whose personal liability for partnership debts is limited to the amount of money or other property that the partner contributed or is required to contribute to the partnership. Some members of other entities, such as domestic or foreign business trusts or LLCs that are classified as partnerships, may be treated as limited partners for certain purposes.
However, whether a partner qualifies as a limited partner for purposes of self-employment tax depends on whether the partner meets the definition of a limited partner under section 1402(a)(13). See Self-Employment , later.
A limited partnership is formed under a state limited partnership law and composed of at least one general partner and one or more limited partners.
An LLP is formed under a state limited liability partnership law. Generally, a partner in an LLP isn't personally liable for the debts of the LLP or any other partner, nor is a partner liable for the acts or omissions of any other partner solely by reason of being a partner.
An LLC is an entity formed under state law by filing articles of organization as an LLC. Unlike a partnership, none of the members of an LLC are personally liable for its debts. An LLC may be classified for federal income tax purposes as a partnership, a corporation, or an entity disregarded as an entity separate from its owner by applying the rules in Regulations section 301.7701-3. See Form 8832, Entity Classification Election, for more details.
A domestic LLC with at least two members that doesn't file Form 8832 is classified as a partnership for federal income tax purposes.
Nonrecourse loans are those liabilities of the partnership for which no partner or related person bears the economic risk of loss.
A partnership (domestic or foreign) is a section 721(c) partnership if there is a contribution of section 721(c) property to the partnership and, after the contribution (and all transactions related to the contribution), (a) a related foreign person with respect to the U.S. transferor is a direct or indirect partner in the partnership; and (b) the U.S. transferor and related persons own 80% or more of the interests in partnership capital, profits, deductions, or losses. See Regulations section 1.721(c)-1(b)(14).
A U.S. transferor is a U.S. person other than a domestic partnership. See Regulations section 1.721(c)-1(b)(18).
Section 721(c) property is property (other than excluded property) with built-in gain that is contributed to a partnership by a U.S. transferor, including pursuant to a contribution described in Regulations section 1.721(c)-2(d) (partnership look-through rule). See Regulations section 1.721(c)-1(b)(15).
A gain deferral contribution is a contribution of section 721(c) property to a section 721(c) partnership with respect to which the recognition of gain is deferred under the gain deferral method. See Regulations section 1.721(c)-1(b)(7).
The gain deferral method is the method described in Regulations section 1.721(c)-3(b) applied to avoid the immediate recognition of gain on a contribution of section 721(c) property to a section 721(c) partnership under Regulations section 1.721(c)-2(b).
Except as provided below, every domestic partnership must file Form 1065, unless it neither receives income nor incurs any expenditures treated as deductions or credits for federal income tax purposes.
To be certified as a qualified opportunity fund (QOF), the partnership must file Form 1065 and attach Form 8996, Qualified Opportunity Fund, even if the partnership had no income or expenses to report. See Schedule B, question 25, and the Instructions for Form 8996.
Entities formed as LLCs that are classified as partnerships for federal income tax purposes have the same filing requirements as domestic partnerships.
A religious or apostolic organization exempt from income tax under section 501(d) must file Form 1065 to report its taxable income, which must be allocated to its members as a dividend, whether distributed or not. Such an organization must figure its taxable income on an attached statement to Form 1065 in the same manner as a corporation. The organization may use Form 1120, U.S. Corporation Income Tax Return, for this purpose. Enter the organization's taxable income, if any, on Form 1065, Schedule K, line 6a, and each member's distributive share in box 6a of Schedule K-1 (Form 1065). Net operating losses aren't deductible by the members but may be carried back or forward by the organization under the rules of section 172. The religious or apostolic organization must also make its annual information return available for public inspection. For this purpose, annual information return includes an exact copy of Form 1065 and all accompanying schedules and attached statements, except Schedules K-1. For more details, see Regulations section 301.6104(d)-1.
A qualifying syndicate, pool, joint venture, or similar organization may elect under section 761(a) not to be treated as a partnership for federal income tax purposes and won't be required to file Form 1065 except for the year of election. For details, see section 761(a) and Regulations section 1.761-2.
Real estate mortgage investment conduits (REMICs) must file Form 1066, U.S. Real Estate Mortgage Investment Conduit (REMIC) Income Tax Return.
Certain publicly traded partnerships (PTPs) treated as corporations under section 7704 must file Form 1120.
Notwithstanding the foregoing, a partnership that is, or has a branch that is, a QDD must file Form 1065. See Qualified derivatives dealers (QDDs) , later.
Generally, a foreign partnership that has gross income that is (or is treated as) effectively connected with the conduct of a trade or business within the United States (effectively connected income) or has gross income derived from sources in the United States (U.S. source income) must file Form 1065, even if its principal place of business is outside the United States or all its members are foreign persons. A foreign partnership required to file a return must generally report all of its foreign and U.S. partnership items.
A foreign partnership with U.S. source income isn't required to file Form 1065 if it qualifies for either of the following two exceptions.
Notwithstanding the foregoing, a partnership that is, or has a branch that is, a QDD must file Form 1065. See Qualified derivatives dealers (QDDs) , later.
Exception for foreign partnerships with U.S. partners.
A return isn't required if:
Exception for foreign partnerships with no U.S. partners and no effectively connected income.
A foreign partnership with U.S. source income isn't required to file a return if it meets the following requirements.
A foreign partnership filing Form 1065 solely to make an election (such as an election to amortize organization expenses) need only provide its name, address, and EIN on page 1 of Form 1065 and attach a statement citing “Regulations section 1.6031(a)-1(b)(5)” and identifying the election being made. A foreign partnership filing Form 1065 solely to make an election must obtain an EIN if it doesn't already have one.
Qualified derivatives dealers (QDDs)
A partnership that is, or has a branch that is, a QDD (QDD partnership) must file Form 1065 even if it wouldn't be required to file otherwise. A QDD partnership must attach a statement (QDD statement) to its Form 1065 with certain required information as provided in section 7.01(C) of the QIA in Rev. Proc. 2022-43, 2022-52 I.R.B. 570. If the only reason the partnership is filing Form 1065 is because it's a QDD partnership, then the only information it must provide on Form 1065 in addition to the QDD statement is its tax year, name, address, and EIN; and it must check item G on page 1 of Form 1065. While a partnership is generally required to use an EIN, if the only reason the partnership is filing Form 1065 is because it's a QDD partnership and it doesn't have an EIN, it may use its QI-EIN instead.
A partnership terminates 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.
The partnership’s tax year ends on the date of termination which is the date the partnership winds up its affairs. Special rules apply in the case of a merger, consolidation, or division of a partnership. See Regulations sections 1.708-1(c) and (d) for details. Also see IRS.gov/newsroom/questions-and-answers-about-technical-terminations-internal-revenue-code-irc-sec-708.
Beginning January 1, 2024, partnerships are required to file Form 1065 and related forms and schedules electronically if they file 10 or more returns of any type during the tax year, including information, income tax, employment tax, and excise tax returns. See Regulations section 301.6011-3, updated by T.D. 9972.
Partnerships with more than 100 partners are required to file Form 1065, Schedules K-1, and other related forms and schedules electronically.
The IRS may waive the electronic filing rules if the partnership demonstrates that a hardship would result if it were required to file its return electronically. A partnership interested in requesting a waiver of the mandatory electronic filing requirement must file a written request, and request one in the manner prescribed by the Ogden Submission Processing Center.
All written requests for waivers should be mailed to:
Internal Revenue Service
Ogden Submission Processing Center
Attn: Form 1065 e-file Waiver Request, Stop 1057
Mail Stop 1057
Ogden, UT 84201
Use the following address if using an overnight delivery service.
Internal Revenue Service
Ogden Submission Processing Center
Attn: Form 1065 e-file Waiver Request
1973 N. Rulon White Blvd.
Ogden, UT 84404
Waiver requests can also be faxed to 877-477-0575.
Contact the e-Help Desk at 866-255-0654 for questions regarding the waiver procedures or process. For more information, go to Guidance on Waivers for Partnerships Unable to Meet e-file Requirements.
If using the technology required to file electronically conflicts with the religious beliefs of the partners, the partnership is exempt from the requirement and may file using paper forms. Enter “Religious Exemption” at the top of page 1 of Form 1065 filed in paper form. Also, most filers claiming the religious exemption who file information returns subject to the general electronic filing requirements prescribed by Regulations section 301.6011-2 (for example, Forms 1099 and Forms W-2) have the option to notify the IRS that they qualify for a religious exemption in advance of filing returns and other documents. Filers are encouraged to notify the IRS in advance that they're claiming a religious exemption by filing Form 8508, Application for a Waiver from Electronic Filing of Information Returns, in accordance with the form's instructions. For additional information, see Notice 2024-18.
The requirement to file electronically doesn't apply to certain returns, including:
See Rev. Proc. 2012-17, available at IRS.gov/pub/irs-irbs/irb12-10.pdf, for the requirements for furnishing substitute Schedule K-1 in electronic format.
For more details on electronic filing using the Modernized e-file system, see:
Generally, a domestic partnership must file Form 1065 by the 15th day of the 3rd month following the date its tax year ended as shown at the top of Form 1065. For calendar year partnerships, the due date is March 15.
If the due date falls on a Saturday, Sunday, or legal holiday in the District of Columbia or the state in which you file your return, a return filed by the next day that isn't a Saturday, Sunday, or legal holiday will be treated as timely. Calendar year partnerships may therefore timely file their return for the 2023 partnership year by March 15, 2024.
Partnerships can use certain PDSs designated by the IRS to meet the “timely mailing as timely filing/paying” rule for tax returns. Go to IRS.gov/PDS for the current list of designated services. The PDS can tell you how to get written proof of the mail date.
For the IRS mailing address to use if you're using a PDS, go to IRS.gov/PDSStreetAddresses.
A PDS can’t deliver items to P.O. boxes. You must use the U.S. Postal Service to mail any item to an IRS P.O. box address.
File Form 7004, Application for Automatic Extension of Time To File Certain Business Income Tax, Information, and Other Returns, to request an extension of time to file. File Form 7004 by the regular due date of the partnership return. Form 7004 can be electronically filed. See the Instructions for Form 7004.
The 2023 Form 1065 is an information return for calendar year 2023 and fiscal years that begin in 2023 and end in 2024. For a fiscal year or a short tax year, fill in the tax year space at the top of Form 1065 and each Schedule K-1 and Schedules K-2 and K-3, if applicable.
The 2023 Form 1065 may also be used if:
However, the partnership must show its 2024 tax year on the 2023 Form 1065 and incorporate any tax law changes that are effective for tax years beginning after 2023.
File Form 1065 at the applicable IRS address listed below. If Schedule M-3 is filed, Form 1065 must be filed at the Ogden Internal Revenue Service Center as shown below.
| If the partnership's principal business, office, or agency is located in: | And the total assets at the end of the tax year (Form 1065, page 1, item F) are: | Use the following address: |
|---|---|---|
| Connecticut, Delaware, District of Columbia, Georgia, Illinois, Indiana, Kentucky, Maine, Maryland, Massachusetts, Michigan, New Hampshire, New Jersey, New York, North Carolina, Ohio, Pennsylvania, Rhode Island, South Carolina, Tennessee, Vermont, Virginia, West Virginia, Wisconsin | Less than $10 million and Schedule M-3 isn't filed | Department of the Treasury Internal Revenue Service Center Kansas City, MO 64999-0011 |
| Connecticut, Delaware, District of Columbia, Georgia, Illinois, Indiana, Kentucky, Maine, Maryland, Massachusetts, Michigan, New Hampshire, New Jersey, New York, North Carolina, Ohio, Pennsylvania, Rhode Island, South Carolina, Tennessee, Vermont, Virginia, West Virginia, Wisconsin | $10 million or more or less than $10 million and Schedule M-3 is filed | Department of the Treasury Internal Revenue Service Center Ogden, UT 84201-0011 |
| Alabama, Alaska, Arizona, Arkansas, California, Colorado, Florida, Hawaii, Idaho, Iowa, Kansas, Louisiana, Minnesota, Mississippi, Missouri, Montana, Nebraska, Nevada, New Mexico, North Dakota, Oklahoma, Oregon, South Dakota, Texas, Utah, Washington, Wyoming | Any amount | Department of the Treasury Internal Revenue Service Center Ogden, UT 84201-0011 |
| A foreign country or U.S. territory | Any amount | Internal Revenue Service P.O. Box 409101 Ogden, UT 84409 |
Form 1065 isn't considered to be a return unless it's signed by a partner or LLC member. When a return is made for a partnership by a receiver, trustee, or assignee, the fiduciary must sign the return, instead of the partner or LLC member. Returns and forms signed by a receiver or trustee in bankruptcy on behalf of a partnership must be accompanied by a copy of the order or instructions of the court authorizing signing of the return or form.
When filing an AAR, Form 1065 must be signed by the partnership representative (PR) (or the designated individual (DI) if the PR is an entity) for the reviewed year.
If a partner, member, or employee of the partnership completes Form 1065, the paid preparer's space should remain blank. Only paid preparers with a valid preparer tax identification number (PTIN) should complete this section.
Generally, anyone who is paid to prepare the partnership return must do the following.
A paid preparer may sign original or amended returns by rubber stamp, mechanical device, or computer software program.
If the partnership wants to allow the paid preparer to discuss its 2023 Form 1065 with the IRS, check the “Yes” box in the signature area of the return. The authorization applies only to the individual whose signature appears in the “Paid Preparer Use Only” section of its return. It doesn't apply to the firm, if any, shown in the section.
If the “Yes” box is checked, the partnership is authorizing the IRS to call the paid preparer to answer any questions that may arise during the processing of its return. The partnership is also authorizing the paid preparer to:
The partnership isn't authorizing the paid preparer to bind the partnership to anything or otherwise represent the partnership before the IRS. If the partnership wants to expand the paid preparer's authorization, see Pub. 947, Practice Before the IRS and Power of Attorney.
The authorization can't be revoked. However, the authorization will automatically end no later than the due date (excluding extensions) for filing the 2024 return.
A penalty is assessed against the partnership if it's required to file a partnership return and it (a) fails to file the return by the due date, including extensions; or (b) files a return that fails to show all the information required, unless such failure is due to reasonable cause. The penalty is $235 for each month or part of a month (for a maximum of 12 months) the failure continues, multiplied by the total number of persons who were partners in the partnership during any part of the partnership's tax year for which the return is due. If the partnership receives a notice about a penalty after it files the return, the partnership may send the IRS an explanation and the IRS will determine if the explanation meets reasonable-cause criteria. Don’t attach an explanation when filing the return.
For each failure to furnish Schedule K-1 (and K-3, if applicable) to a partner when due and each failure to include on Schedule K-1 (and K-3, if applicable) all the information required to be shown (or the inclusion of incorrect information), a $310 penalty may be imposed for each Schedule K-1 (and K-3, if applicable) for which a failure occurs. For all such failures during a calendar year, the maximum penalty for entities with gross receipts over $5,000,000 is $3,783,000; and $1,261,000 for entities with gross receipts at or below $5,000,000. If the requirement to report correct information is intentionally disregarded, each $310 penalty is increased to $630 or, if greater, 10% of the aggregate amount of items required to be reported. There's no limit to the amount of the penalty in the case of intentional disregard.
This penalty may apply if certain excise, income, social security, and Medicare taxes that must be collected or withheld aren't collected or withheld, or these taxes aren't paid. These taxes are generally reported on:
The trust fund recovery penalty may be imposed on all persons who are determined by the IRS to have been responsible for collecting, accounting for, or paying over these taxes, and who acted willfully in not doing so. The penalty is equal to the unpaid trust fund tax. See the Instructions for Form 720; Pub. 15 (Circular E), Employer's Tax Guide; Pub. 51 (Circular A), Agricultural Employer's Tax Guide; or Pub. 15-T, Federal Income Tax Withholding Methods, for more details, including the definition of a responsible person .
An accounting method is a set of rules used to determine when and how income and expenditures are reported. The method of accounting used must be reconcilable with the partnership's books and records. In all cases, the method used must clearly reflect income. Generally, the following rules apply. For more information, see Pub. 538, Accounting Periods and Methods.
Permissible overall methods of accounting include:
Generally, a partnership may use the cash method of accounting unless it’s required to maintain inventories, has a C corporation as a partner, or is a tax shelter (as defined in section 448(d)(3)). However, for tax years beginning after 2017, any partnership qualifying as a small business taxpayer (defined below) may use the cash method.
Tax shelter election.
A taxpayer that is a tax shelter, as defined in section 448(d)(3), isn't permitted to use the cash method pursuant to section 448(a)(3), and is also not permitted to use the small business taxpayer exemptions contained in sections 163(j)(3) (limitation on business interest), 263A(i) (uniform capitalization), 460(e)(1)(B) (percentage of completion method), and 471(c) (general inventory method). Under section 448(d)(3), a taxpayer that is a syndicate is considered a tax shelter. For purposes of section 448(d)(3), a syndicate is a partnership or other entity (other than a C corporation) if more than 35% of the losses of such entity during the tax year are allocated to limited partners or limited entrepreneurs.
The final regulations under section 448 permit a taxpayer to make an annual election to use its allocations made in the immediately preceding tax year, instead of using the current tax year's allocation, to determine whether the taxpayer is a syndicate under section 448(d)(3) for the current tax year. The election is made on the timely filed original return (including extensions) for the tax year for which it's made. The election is valid only for the tax year for which it's made, and once made, can't be revoked. See Regulations section 1.448-2(b)(2)(iii)(B)(2) for guidance on the time and manner of making the annual election and effective dates.
Small business taxpayer.
For tax years beginning after 2017, a small business taxpayer (defined below) can adopt or change its accounting method to account for inventories (a) in the same manner as materials and supplies that are nonincidental; or (b) to conform to the taxpayer's treatment of inventories in an applicable financial statement (as defined in section 451(b)(3)), or, if the taxpayer doesn't have an applicable financial statement, the method of accounting used in the taxpayer's books and records prepared in accordance with the taxpayer's accounting procedures. See section 471(c)(1), and Change in accounting method , later.
For tax years beginning after 2017, a small business taxpayer (defined below) can adopt or change its accounting method to not capitalize costs to property produced or acquired for resale under section 263A. See section 263A(i), and Change in accounting method and Limitations on Deductions , later.
Small business taxpayer defined. For 2023, a small business taxpayer is a taxpayer that (a) has average annual gross receipts of $29 million or less for the prior 3 tax years, and (b) isn't a tax shelter (as defined in section 448(d)(3)).
Accrual method.
Generally, under the accrual method, an amount is includible in income when:
See Regulations sections 1.451-1(a) and 1.451-3(c) for details.
Generally, an accrual basis taxpayer can deduct accrued expenses in the tax year in which:
For property and service liabilities, for example, economic performance occurs as the property or service is provided. There are special economic performance rules for certain items, including recurring expenses. See section 461(h) and the related regulations for the rules for determining when economic performance takes place.
Nonaccrual-experience method.
Accrual method partnerships aren't required to accrue certain amounts to be received from the performance of services that, on the basis of their experience, won't be collected if:
This provision doesn't apply to any amount if interest is required to be paid on the amount or if there's any penalty for failure to timely pay the amount. For information, see section 448(d)(5) and Regulations section 1.448-2. For reporting requirements, see the instructions for line 1a, later.
Percentage of completion method.
Long-term contracts (except for certain real property construction contracts) must generally be accounted for using the percentage of completion method described in section 460. See section 460 and the underlying regulations for rules on long-term contracts.
Mark-to-market accounting method.
Dealers in securities must use the mark-to-market accounting method described in section 475. Under this method, any security that is inventory to the dealer must be included in inventory at its fair market value (FMV). Any security that isn't inventory and that is held at the close of the tax year is treated as sold at its FMV on the last business day of the tax year, and any gain or loss must be taken into account in determining gross income. The gain or loss taken into account is generally treated as ordinary gain or loss. For details, including exceptions, see section 475, the related regulations, and Rev. Rul. 97-39, 1997-39 I.R.B. 4.
Dealers in commodities and traders in securities and commodities can elect to use the mark-to-market accounting method. To make the election, the partnership must file a statement describing the election, the first tax year the election is to be effective, and, in the case of an election for traders in securities or commodities, the trade or business for which the election is made. Except for new taxpayers, the statement must be filed by the due date (not including extensions) of the return for the tax year immediately preceding the election year and attached to that return or, if applicable, to a request for an extension of time to file that return. For more details, see Rev. Proc. 99-17, 1999-7 I.R.B. 52, as superseded in part by Rev. Proc. 99-49; and sections 475(e) and (f).
Change in accounting method.
Generally, the partnership must get IRS consent to change its method of accounting used to report income or expense (for income or expense as a whole or for any material item). To do so, the partnership must generally file Form 3115, Application for Change in Accounting Method, during the tax year for which the change is requested. See the Instructions for Form 3115 and Pub. 538 for more information and exceptions.
The partnership may have to make an adjustment to prevent amounts of income or expenses from being omitted or duplicated. This is called a section 481(a) adjustment. The section 481(a) adjustment period is generally 1 year for a net negative adjustment and 4 years for a net positive adjustment. However, in some instances, a partnership can elect to modify the section 481(a) adjustment period. The partnership must complete the appropriate lines of Form 3115 to make the election. See the Instructions for Form 3115.
Include any net positive section 481(a) adjustment on page 1 of Form 1065, line 7. If the net section 481(a) adjustment is negative, report it on page 1, line 21.
There are some instances when the partnership can obtain automatic consent from the IRS to change to certain accounting methods. See the Instructions for Form 3115.
A partnership is generally required to have one of the following tax years.
In determining the tax year of a partnership under (1), (2), or (3) above, the tax years of certain tax-exempt and foreign partners are disregarded. See Regulations section 1.706-1(b) for more details.
To change its tax year or to adopt or retain a tax year other than its required tax year, the partnership must file Form 1128, Application To Adopt, Change, or Retain a Tax Year, unless the partnership is making an election under section 444.
The tax year of a common trust fund must be the calendar year.
The partnership may enter decimal points and cents when completing its return. However, it should round off cents to whole dollars on its return, forms, and schedules to make completing its return easier. The partnership must either round off all amounts on the return to whole dollars, or use cents for all amounts. To round, drop amounts under 50 cents and increase amounts from 50 to 99 cents to the next dollar. For example, $8.40 rounds to $8 and $8.50 rounds to $9.
If two or more amounts are added to figure the amount to enter on a line, include cents when adding the amounts and round off only the total.
The partnership must keep its records as long as they may be needed for the administration of any provision of the Code. The partnership must usually keep records that support an item of income, deduction, or credit on the partnership return for 3 years from the date the return is due or is filed, whichever is later. These records must usually be kept for 3 years from the date each partner's return is due or is filed, whichever is later. It must also keep records that verify the partnership's basis in property for as long as they are needed to figure the basis of the original or replacement property.
The partnership should also keep copies of all returns it has filed. They help in preparing future returns and in making computations when filing an amended return.
A partnership that is subject to the BBA centralized partnership audit regime must file an AAR to request an administrative adjustment in the amount or other treatment of one or more partnership-related items.
BBA partnerships filing an AAR shouldn't file amended tax returns or amended Schedules K-1 and/or K-3. For an exception where a BBA partnership is itself a partner in a BBA partnership and is filing an amended return, see Partner amended return filed as part of modification of the IU during a BBA examination , later.
Electronically filed AARs.
If the AAR will be filed electronically, complete Form 1065 with the corrected amounts and check box G(5). In addition, complete Form 8082, Notice of Inconsistent Treatment or Administrative Adjustment Request (AAR). See the Instructions for Form 8082 for detailed instructions. For AARs filed on paper, see Paper-filed amended returns and AARs , later.
A partnership that hasn't made a valid election out of the BBA centralized partnership audit regime, which is filing an AAR and that doesn't elect to have its partners take adjustments into account, and that has adjustments that result in an imputed underpayment (IU), should report the IU and any interest and penalties on Form 1065, page 1, line 26. See the Instructions for Form 8082 for information on how to figure a BBA IU and what to do when an adjustment requested by an AAR doesn't result in an IU. See section 6233 for information about interest and penalties on the IU. Include the following information on your payment.
Mail payment to:
Ogden Service Center
Ogden, UT 84201-0011 Payments can be made by check or electronically. If making an electronic payment, choose the payment description “BBA AAR Imputed Underpayment” from the list of payment types.
If the partnership has an IU, the partnership may elect to have its partners take the adjustments into account instead of paying the IU. See the Instructions for Form 8082 for information on how to make the election.
The procedures to follow when filing an amended partnership return depend on whether the amended return is filed electronically or on paper. The rules for determining when a return must be filed electronically (see Electronic Filing , earlier) also apply to amended returns.
Electronically filed amended returns.
If the amended return will be filed electronically, complete Form 1065 and check box G(5) to indicate that you're filing an amended return. Attach a statement that identifies the line number of each amended item, the corrected amount or other treatment of the item, and an explanation of the reason(s) for each change. If the income, deductions, credits, or other information provided to any partner on Schedule K-1 or Schedule K-3, as applicable, is incorrect, file an amended Schedule K-1 or K-3 for that partner with the amended Form 1065. Also give a copy of the amended Schedule K-1 or K-3 to that partner. Check the “Amended K-1” or “Amended K-3” box at the top of the Schedule K-1 or K-3 to indicate that it's an amended Schedule K-1 or K-3.
Partner amended return filed as part of modification of the IU during a BBA examination.
Section 6225(c)(2) allows a BBA partnership under examination to request specific types of modifications of any IU proposed by the IRS. One type of modification that may be requested is when one or more partners, including partnership-partners, file amended returns for the tax years of the partners which include the end of the reviewed year of the BBA partnership under examination and for any tax year with respect to which tax attributes are affected. Go to IRS.gov/bbaaar.
A modification amended return filing must meet a number of requirements. Therefore, a partnership-partner filing a modification amended return must refer to Form 8982, Affidavit for Partner Modification Amended Return Under IRC 6225(c)(2)(A) or Partner Alternative Procedure Under IRC 6225(c)(2)(B). The instructions for Form 8982, Section A, explain the modification of amended returns, requirements for payment and submission, and the requirement to provide Form 8982, Section A, to the PR of the BBA partnership. See Filing Instructions for Partner Modification Amended Returns and Paying the Amount You Owe in the instructions for Form 8982.
Partnership-partners who are filing amended returns electronically as part of the modification will report the applicable payment of tax and interest and any penalties on Form 1065, page 1, line 26. A payment made with an amended Form 1065 should detail the amount of the payment to be applied separately to tax, interest, and penalties. The partnership should consider all guidance issued by the IRS when figuring the amount due. In general, the partnership should figure its amount due in accordance with Regulations sections 301.6225-2(d)(2)(vi)(A) and 301.6226-3(e)(4)(iii).
Paper-filed amended returns and AARs.
If the amended return or AAR won't be filed electronically, complete Form 1065-X, Amended Return or Administrative Adjustment Request (AAR), to file the amended return or AAR. See Form 1065-X and its separate instructions for information on completing and filing the form.
When a partnership's federal return is amended or changed for any reason, it may affect the partnership's state tax return. For more information, contact the state tax agency for the state in which the partnership return was filed.
Go to IRS.gov/Payments for more information about your options.
Other Forms, Returns, and Statements That May Be Required
| Form, Return, or Statement | Use this to— |
|---|---|
| W-2 and W-3 —Wage and Tax Statement; and Transmittal of Wage and Tax Statements | Report wages, tips, other compensation, and withheld income, social security, and Medicare taxes for employees. |
| 720 —Quarterly Federal Excise Tax Return | Report and pay environmental excise taxes, communications and air transportation taxes, fuel taxes, manufacturers taxes, ship passenger tax, and certain other excise taxes. Also see Trust Fund Recovery Penalty , earlier. |
| 940 —Employer's Annual Federal Unemployment (FUTA) Tax Return | Report and pay FUTA tax. |
| 941 —Employer's QUARTERLY Federal Tax Return | Report quarterly income tax withheld on wages and employer and employee social security and Medicare taxes. Also see Trust Fund Recovery Penalty , earlier. |
| 943 —Employer's Annual Federal Tax Return for Agricultural Employees | Report income tax withheld and employer and employee social security and Medicare taxes on farmworkers. Also see Trust Fund Recovery Penalty , earlier. |
| 944 —Employer's ANNUAL Federal Tax Return | File annual Form 944 instead of filing quarterly Forms 941 if the IRS notified you in writing. |
| 945 —Annual Return of Withheld Federal Income Tax | Report income tax withheld from nonpayroll payments, including pensions, annuities, individual retirement accounts (IRAs), gambling winnings, and backup withholding. Also see Trust Fund Recovery Penalty , earlier. |
| 1042 and 1042-S —Annual Withholding Tax Return for U.S. Source Income of Foreign Persons; and Foreign Person's U.S. Source Income Subject to Withholding | Report tax withheld on payments or distributions made to nonresident alien individuals, foreign partnerships, or foreign corporations to the extent these payments or distributions constitute gross income from sources within the United States that isn't effectively connected with a U.S. trade or business. A domestic partnership must also withhold tax on a foreign partner's distributive share of such income, including amounts that aren't actually distributed. Withholding on amounts not previously distributed to a foreign partner must generally be made and paid over by the earlier of: |
When submitting Form 1065, organize the pages of the return in the following order.
Complete every applicable entry space on Form 1065 and Schedule K-1. Don't enter “See attached” instead of completing the entry spaces. Penalties may be assessed if the partnership files an incomplete return. If you need more space on the forms or schedules, attach separate sheets and place them at the end of the return using the same size and format as on the printed forms. Show the totals on the printed forms. Also be sure to put the partnership's name and EIN on each supporting statement.
Use Form 8832, Entity Classification Election, to make a change in classification. Except for certain business entities always classified as a corporation, a business entity with at least two members may choose to be classified either as a partnership or an association taxable as a corporation. A domestic eligible entity with at least two members that doesn't file Form 8832 is classified under the default rules as a partnership. However, a foreign eligible entity with at least two members is classified under the default rules as a partnership only if the entity doesn't provide limited liability to at least one member. File Form 8832 only if the entity doesn't want to be classified under these default rules or if it wants to change its classification.
Attach a copy of Form 8832 to the partnership's Form 1065 for the tax year of the election.
Generally, the partnership decides how to figure income from its operations. For example, it chooses the accounting method and depreciation methods it will use. The partnership also makes elections under the following sections.
The partnership can get an automatic 12-month extension to make the section 754 election, provided corrective action is taken within 12 months of the original deadline for making the election. For details, see Regulations section 301.9100-2.
See section 754 and the related regulations for more information.
If there's a distribution of property consisting of an interest in another partnership, see section 734(b).
The partnership is required to attach a statement for any section 743(b) basis adjustments. See below for details.
To revoke a section 754 election, the partnership must file the revocation request using Form 15254, Request for Section 754 Revocation. See the instructions for Form 15254 for more information.
This election must be made on an entity-by-entity basis, and applies only to the particular CFCs and QEFs for which an election is made. In general, for purposes of section 1411, if an election is in effect for a CFC or QEF, the amounts included in income under section 951 and section 1293 derived from the CFC or QEF are included in net investment income, and distributions described in section 959(d) or section 1293(c) are excluded from net investment income. An election that is made under Regulations section 1.1411-10(g) can't be revoked. For more information regarding this election, see Regulations section 1.1411-10(g).
The election must be made in a statement that is filed with the partnership’s original or amended return for the tax year in which the election is made. An election can be made on an amended return only if the tax year for which the election is made, and all tax years affected by the election, aren't closed by the period of limitations on assessments under section 6501. The statement must include:
If the basis of partnership property has been adjusted for a transferee partner under section 743(b), the partnership must adjust the transferee's distributive share of the items of partnership income, deduction, gain, or loss in accordance with Regulations sections 1.743-1(j)(3) and (4). These adjustments (other than adjustments to depletable oil and gas property allocable to the partner under section 613A(c)(7)(D)) must be reported on Schedule K and the transferee partner's Schedule K-1. Report the adjustments on an attached statement to Schedule K, line 20c, code U. See the instructions for Schedule K, line 20. Identify the partnership item being adjusted and the amount of the adjustment. If the adjustments are to partnership items from more than one trade or business, report the adjustments separately for each activity.
A partnership can elect out of the centralized partnership audit regime for a tax year if the partnership is an eligible partnership that year. See Question 31 under Schedule B , later.
Elections under the following sections are made by each partner separately on the partner's tax return.
If a partner engages in a transaction with the partnership, other than in the capacity as a partner, the partner is treated as not being a member of the partnership for that transaction. Special rules apply to sales or exchanges of property between partnerships and certain persons, as explained in Pub. 541.
Generally, no gain (loss) is recognized to the partnership or any of the partners when property is contributed to the partnership in exchange for an interest in the partnership. This rule doesn't apply to any gain realized on a transfer of property to a partnership that would be treated as an investment company (within the meaning of section 351(e)) if the partnership were incorporated. If, as a result of a transfer of property to a partnership, there's a direct or indirect transfer of money or other property to the transferring partner, the partner may have to recognize gain on the exchange.
The basis to the partnership of property contributed by a partner is the adjusted basis in the hands of the partner at the time it was contributed, plus any gain recognized (under section 721(b)) by the partner at that time. See section 723 for more information.
See Regulations sections 1.721(c)-1(b)(7) and 1.721(c)-3(b) for more information on a gain deferral contribution of section 721(c) property to a section 721(c) partnership. Also see Section 721(c) Partnership, Section 721(c) Property, and Gain Deferral Method under Definitions, earlier.
Generally, if the partnership disposes of property contributed to the partnership by a partner, income, gain, loss, and deductions from that property must be allocated among the partners to take into account the difference between the property's basis and its FMV at the time of the contribution. However, if the adjusted basis of the contributed property exceeds its FMV at the time of the contribution, the built-in loss can only be taken into account by the contributing partner. For all other partners, the basis of the property in the hands of the partnership is treated as equal to its FMV at the time of the contribution (see section 704(c)(1)(C)).
For property contributed to the partnership, the contributing partner must recognize gain or loss on a distribution of the property to another partner within 7 years of being contributed. The gain or loss is equal to the amount that the contributing partner should have recognized if the property had been sold for its FMV when distributed, because of the difference between the property's basis and its FMV at the time of contribution.
See section 704(c) for details and other rules on dispositions of contributed property. See section 724 for the character of any gain or loss recognized on the disposition of unrealized receivables, inventory items, or capital loss property contributed to the partnership by a partner.
See Regulations sections 1.721(c)-4 and 1.721(c)-5 for more information on certain dispositions of contributed 721(c) property to which the gain deferral method applies. Also see Section 721(c) Partnership, Section 721(c) Property, and Gain Deferral Method under Definitions, earlier.
A partner who contributes appreciated property to the partnership must include in income any precontribution gain to the extent the FMV of other property (other than money) distributed to the partner by the partnership exceeds the adjusted basis of the partner’s partnership interest just before the distribution. Precontribution gain is the net gain, if any, that would have been recognized under section 704(c)(1)(B) if the partnership had distributed to another partner all the property that had been contributed to the partnership by the distributee partner within 7 years of the distribution and that was held by the partnership just before the distribution.
Appropriate basis adjustments are to be made to the adjusted basis of the distributee partner's interest in the partnership and the partnership's basis in the contributed property to reflect the gain recognized by the partner.
For more details and exceptions, see Pub. 541.
Generally, if a partner sells or exchanges a partnership interest where unrealized receivables or inventory items are involved, the transferor partner must notify the partnership, in writing, within 30 days of the exchange. The partnership must then file Form 8308, Report of a Sale or Exchange of Certain Partnership Interests.
If a partnership distributes unrealized receivables or substantially appreciated inventory items in exchange for all or part of a partner's interest in other partnership property (including money), treat the transaction as a sale or exchange between the partner and the partnership. Treat the partnership gain (loss) as ordinary business income (loss). The income (loss) is specially allocated only to partners other than the distributee partner.
If a partnership gives other property (including money) for all or part of that partner's interest in the partnership's unrealized receivables or substantially appreciated inventory items, treat the transaction as a sale or exchange of the property.
See Rev. Rul. 84-102, 1984-2 C.B. 119, for information on the tax consequences that result when a new partner joins a partnership that has liabilities and unrealized receivables. Also see Pub. 541 for more information on unrealized receivables and inventory items.
In general, section 465 limits the amount of deductible losses partners can claim from certain activities. The at-risk limitations don't apply to the partnership, but instead apply to each partner's share of net losses attributable to each activity. Because the treatment of each partner's share of partnership losses depends on the nature of the activity that generated it, the partnership must report the items of income, loss, and deduction separately for each activity. The at-risk limitation applies to individuals, estates, trusts, and certain closely held C corporations. See Pub. 925, Passive Activity and At-Risk Rules, for additional information.
Activities covered by the at-risk rules.
If the partnership is involved in one of the following activities as a trade or business or for the production of income, the partner may be subject to the at-risk rules.
Aggregation of activities.
Activities described in (6) above that constitute a trade or business are treated as one activity if:
Similar rules apply to activities described in items 1 through 5 above. For more information, see Pub. 925.
If you aggregate your activities under these rules for section 465 purposes, check the appropriate box in item K below the name and address block on page 1 of Form 1065.
At-risk activity reporting requirements.
If the partnership items of income, loss, or deduction reported on Schedule K-1 are from more than one activity covered by the at-risk rules, the partnership should report on an attachment to Schedule K-1 information relating to each activity as is required by Item K. Partner's Share of Liabilities , later. See the Instructions for Form 6198 and Pub. 925 for additional information needed to help the partner compute the profit or loss from each at-risk activity and the amount at risk that may be required to be separately reported.
In general, section 469 limits the amount of losses, deductions, and credits that partners can claim from passive activities. The passive activity limitations don't apply to the partnership. Instead, they apply to each partner's share of any income or loss and credit attributable to a passive activity. Because the treatment of each partner's share of partnership income or loss and credit depends on the nature of the activity that generated it, the partnership must report income or loss and credits separately for each activity.
The following instructions and the instructions for Schedules K and K-1, later, explain the applicable passive activity limitation rules and specify the type of information the partnership must provide to its partners for each activity. If the partnership had more than one activity, it must report information for each activity on an attached statement to Schedules K and K-1.
Generally, passive activities include (a) activities that involve the conduct of a trade or business if the partner doesn't materially participate in the activity, and (b) all rental activities (defined later) regardless of the partner's participation. For exceptions, see Activities That Are Not Passive Activities , later. The level of each partner's participation in an activity must be determined by the partner.
The passive activity rules provide that losses and credits from passive activities can generally be applied only against income and tax from passive activities. Thus, passive losses and credits can't be applied against income from salaries, wages, professional fees, or a business in which the partner materially participates; against portfolio income (defined later); or against the tax related to any of these types of income.
Special provisions apply to certain activities. First, the passive activity limitations must be applied separately for a net loss from passive activities held through a PTP. Second, special rules require that net income from certain activities that would otherwise be treated as passive income must be recharacterized as nonpassive income for purposes of the passive activity limitations.
To allow each partner to correctly apply the passive activity limitations, the partnership must report income or loss and credits separately by activity for each of the following.
The following aren't passive activities.
For a partner that is a closely held C corporation (defined in section 465(a)(1)(B)), the above conditions are treated as met if more than 50% of the corporation's gross receipts are from real property trades or businesses in which the corporation materially participated.
For purposes of this rule, each interest in rental real estate is a separate activity, unless the partner elects to treat all interests in rental real estate as one activity.
If the partner is married filing jointly, either the partner or the partner’s spouse must separately meet both of the above conditions, without taking into account services performed by the other spouse.
A real property trade or business is any real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage trade or business. Services the partner performed as an employee aren't treated as performed in a real property trade or business unless the partner owned more than 5% of the stock (or more than 5% of the capital or profits interest) in the employer.
A trade or business activity is an activity (other than a rental activity or an activity treated as incidental to an activity of holding property for investment) that:
If the partner doesn't materially participate in the activity, a trade or business activity conducted through a partnership is generally a passive activity of the partner.
Each partner must determine if the partner materially participated in an activity. As a result, while the partnership's ordinary business income (loss) is reported on page 1 of Form 1065, the specific income and deductions from each separate trade or business activity must be reported on attached statements to Form 1065. Similarly, while each partner's distributive share of the partnership's ordinary business income (loss) is reported in box 1 of Schedule K-1, each partner's distributive share of the income and deductions from each trade or business activity must be reported on attached statements to each Schedule K-1. See Passive Activity Reporting Requirements , later, for more information.
Generally, except as noted below, if the gross income from an activity consists of amounts paid principally for the use of real or personal tangible property held by the partnership, the activity is a rental activity.
There are several exceptions to this general rule. Under these exceptions, an activity involving the use of real or personal tangible property isn't a rental activity if any of the following apply.
In addition, a guaranteed payment described in section 707(c) is never income from a rental activity.
Average period of customer use.
Figure the average period of customer use for a class of property by dividing the total number of days in all rental periods by the number of rentals during the tax year. If the activity involves renting more than one class of property, multiply the average period of customer use of each class by the ratio of the gross rental income from that class to the activity's total gross rental income. The activity's average period of customer use equals the sum of these class-by-class average periods weighted by gross income. See Regulations section 1.469-1(e)(3)(iii).
Significant personal services.
Personal services include only services performed by individuals. To determine if personal services are significant personal services, consider all the relevant facts and circumstances. Relevant facts and circumstances include:
The following services aren't considered in determining whether personal services are significant.
Extraordinary personal services.
Services provided in connection with making rental property available for customer use are extraordinary personal services only if the services are performed by individuals and the customers' use of the rental property is incidental to their receipt of the services.
For example, a patient's use of a hospital room is generally incidental to the care received from the hospital's medical staff. Similarly, a student's use of a dormitory room in a boarding school is incidental to the personal services provided by the school's teaching staff.
Rental activity incidental to a nonrental activity.
An activity isn't a rental activity if the rental of the property is incidental to a nonrental activity, such as the activity of holding property for investment, a trade or business activity, or the activity of dealing in property.
Rental of property is incidental to an activity of holding property for investment if both of the following apply.
Rental of property is incidental to a trade or business activity if all of the following apply.
The sale or exchange of property that is also rented during the tax year (in which the gain or loss is recognized) is treated as incidental to the activity of dealing in property if, at the time of the sale or exchange, the property was held primarily for sale to customers in the ordinary course of the partnership's trade or business.
See Temporary Regulations section 1.469-1T(e)(3) and Regulations section 1.469-1(e)(3) for more information on the definition of rental activities for purposes of the passive activity limitations.
Reporting of rental activities.
In reporting the partnership's income or losses and credits from rental activities, the partnership must separately report rental real estate activities and rental activities other than rental real estate activities.
Partners who actively participate in a rental real estate activity may be able to deduct part or all of their rental real estate losses (and the deduction equivalent of rental real estate credits) against income (or tax) from nonpassive activities. The combined amount of rental real estate losses and the deduction equivalent of rental real estate credits from all sources (including rental real estate activities not held through the partnership) that may be claimed is limited to $25,000. This $25,000 amount is generally reduced for high-income partners.
Report rental real estate activity income (loss) on Form 8825 and Schedule K, line 2, and in box 2 of Schedule K-1, rather than on page 1 of Form 1065. Report credits related to rental real estate activities on Schedule K, lines 15c and 15d (box 15, codes E and F, of Schedule K-1), and low-income housing credits on Schedule K, lines 15a and 15b (box 15, codes C and D, of Schedule K-1).
See Line 3. Other Net Rental Income (Loss) , later, for reporting other net rental income (loss) other than rental real estate.
Generally, portfolio income includes all gross income, other than income derived in the ordinary course of a trade or business, that is attributable to interest; dividends; royalties; income from a real estate investment trust (REIT), a regulated investment company (RIC), a REMIC, a common trust fund, a CFC, a QEF, or a cooperative; income from the disposition of property that produces income of a type defined as portfolio income; and income from the disposition of property held for investment. See Self-Charged Interest , later, for an exception.
Solely for purposes of the preceding paragraph, gross income derived in the ordinary course of a trade or business includes (and portfolio income, therefore, doesn't include) the following types of income.
See Temporary Regulations section 1.469-2T(c)(3) for more information on portfolio income.
Report portfolio income and related deductions on Schedule K rather than on page 1 of Form 1065.
Certain self-charged interest income and deductions may be treated as passive activity gross income and passive activity deductions if the loan proceeds are used in a passive activity. Generally, self-charged interest income and deductions result from loans between the partnership and its partners and also includes loans between the partnership and another partnership if each owner in the borrowing entity has the same proportional ownership interest in the lending entity.
The self-charged interest rules don't apply to a partner's interest in a partnership if the partnership makes an election under Regulations section 1.469-7(g) to avoid the application of these rules. To make the election, the partnership must attach to its original or amended partnership return a statement that includes the name, address, and EIN of the partnership and a declaration that the election is being made under Regulations section 1.469-7(g). The election will apply to the tax year in which it was made and all subsequent tax years. Once made, the election may only be revoked with the consent of the IRS.
For more details on the self-charged interest rules, see Regulations section 1.469-7.
Generally, one or more trade or business or rental activities may be treated as a single activity if the activities make up an appropriate economic unit for measurement of gain or loss under the passive activity rules. Whether activities make up an appropriate economic unit depends on all the relevant facts and circumstances. The factors given the greatest weight in determining whether activities make up an appropriate economic unit are:
Example.
The partnership has a significant ownership interest in a bakery and a movie theater in Baltimore and a bakery and a movie theater in Philadelphia. Depending on the relevant facts and circumstances, there may be more than one reasonable method for grouping the partnership's activities. For instance, the following groupings may or may not be permissible.
Once the partnership chooses a grouping under these rules, it must continue using that grouping in later tax years unless a material change in the facts and circumstances makes it clearly inappropriate.
The IRS may regroup the partnership's activities if the partnership's grouping fails to reflect one or more appropriate economic units and one of the primary purposes of the grouping is to avoid the passive activity limitations.
Limitation on grouping certain activities.
The following activities may not be grouped together.
Activities conducted through other partnerships.
Once a partnership determines its activities under these rules, the partnership as a partner can use these rules to group those activities with:
A partner can't treat as separate activities those activities grouped together by a partnership.
If you group your activities under these rules for section 469 purposes, check the appropriate box in item K below the name and address block on page 1 of Form 1065.
Under Temporary Regulations section 1.469-2T(f) and Regulations section 1.469-2(f), net passive income from certain passive activities must be treated as nonpassive income. Net passive income is the excess of an activity's passive activity gross income over its passive activity deductions (current year deductions and prior year unallowed losses).
Any net passive income recharacterized as nonpassive income is treated as investment income for purposes of figuring investment interest expense limitations if it's from (a) an activity of renting substantially nondepreciable property from an equity-financed lending activity, or (b) an activity related to an interest in a pass-through entity that licenses intangible property.
The amount of income from the activities in the first three paragraphs, below, that any partner will be required to recharacterize as nonpassive income may be limited under Temporary Regulations section 1.469-2T(f)(8). Because the partnership won't have information regarding all of a partner's activities, it must identify all partnership activities meeting the definitions under Certain nondepreciable rental property activities and Passive equity-financed lending activities below as activities that may be subject to recharacterization.
Income from the following six sources is subject to recharacterization.
Significant participation passive activities.
A significant participation passive activity is any trade or business activity in which the partner participated for more than 100 hours during the tax year but didn't materially participate. Because each partner must determine the partner's level of participation, the partnership won't be able to identify significant participation passive activities.
Certain nondepreciable rental property activities.
Net passive income from a rental activity is nonpassive income if less than 30% of the unadjusted basis of the property used or held for use by customers in the activity is subject to depreciation under section 167.
Passive equity-financed lending activities.
If the partnership has net income from a passive equity-financed lending activity, the smaller of the net passive income or the equity-financed interest income from the activity is nonpassive income.
Rental of property incidental to a development activity.
Net rental activity income is the excess of passive activity gross income from renting or disposing of property over passive activity deductions (current year deductions and prior year unallowed losses) that are reasonably allocable to the rented property. Net rental activity income is nonpassive income for a partner if all of the following apply.
Because the partnership can't determine a partner's level of participation, the partnership must identify net income from property described earlier under Rental Activities (without regard to the partner's level of participation) as income that may be subject to recharacterization.
Rental of property to a nonpassive activity.
If a taxpayer rents property to a trade or business activity in which the taxpayer materially participates, the taxpayer's net rental activity income from the property is nonpassive income.
Acquisition of an interest in a pass-through entity that licenses intangible property.
Generally, net royalty income from intangible property is nonpassive income if the taxpayer acquired an interest in the pass-through entity after the pass-through entity created the intangible property or performed substantial services or incurred substantial costs in developing or marketing the intangible property. Net royalty income is the excess of passive activity gross income from licensing or transferring any right in intangible property over passive activity deductions (current year deductions and prior year unallowed losses) that are reasonably allocable to the intangible property.
See Temporary Regulations section 1.469-2T(f)(7)(iii) for exceptions to this rule.
To allow partners to correctly apply the passive activity loss and credit limitation rules, the partnership must do the following.
The information described in this section should be given directly to the partner and shouldn't be reported by the partnership to the IRS.
To allow partners to correctly figure the net investment income tax (NIIT) where a partner disposes of an interest in the partnership during the tax year, the partnership may be required to provide the partner with certain information. The NIIT is a tax imposed on an individual’s, trust’s, or estate’s net investment income. Net investment income includes the net gains or losses from the sale of an interest in the partnership. A partner who is actively involved in one or more of the partnership’s or lower-tier pass-through entities’ trades or businesses (other than trading in financial instruments or commodities) can reduce the amount of the gain or loss from the sale of the partnership or lower-tier pass-through entity interest included in its net investment income. However, to figure its net investment income, the active partner needs certain information from the partnership.
Generally, the partnership must provide certain information to the partner if the partnership knows, or has reason to know, the following.
Information to be provided to partner.
Generally, the partnership must provide the partner with its distributive share of the net gain and loss from the deemed sale for FMV of the partnership’s property, other than property that relates to the trades or businesses in which the partner materially participates, as determined under the passive activity loss rules applicable to the transfer of an interest in a pass-through entity. For more information, see the instructions for Form 8960, line 5c.
If a partner, who qualifies for the optional simplified reporting method, prefers to determine net gain or loss under the general calculation, the partnership may, but isn't obligated to, provide the information to the partner at that partner’s request.
These instructions follow the line numbers on the first page of Form 1065. The accompanying schedules are discussed separately. Specific instructions for most of the lines are provided. Lines that aren't discussed are self-explanatory.
Fill in all applicable lines and schedules.
Enter any items specially allocated to the partners in the appropriate box of the applicable partner's Schedule K-1. Enter the total amount on the appropriate line of Schedule K. Don't enter separately stated amounts on the numbered lines on Form 1065; Form 1125-A, page 1; orSchedule D (Form 1065).
File all six pages of Form 1065. However, if the answer to Schedule B, question 4, is “Yes,” Schedules L, M-1, and M-2 on page 6 are optional. Also attach a Schedule K-1 to Form 1065 for each partner.
File only one Form 1065 for each partnership. Mark “Duplicate Copy” on any copy you give to a partner.
If a syndicate, pool, joint venture, or similar group files Form 1065, it must attach a copy of the agreement and all amendments to the return, unless a copy has previously been filed.
A foreign partnership required to file a return must generally report all of its foreign and U.S. partnership items. For rules regarding whether a foreign partnership must file Form 1065, see Who Must File , earlier.
Enter the legal name of the partnership, address, and EIN on the appropriate lines. If the partnership has changed its name, check box G(3). Include the suite, room, or other unit number after the street address. If the post office doesn't deliver mail to the street address and the partnership has a P.O. box, show the box number instead.
If the partnership receives its mail in care of a third party (such as an accountant or an attorney), enter “C/O” on the street address line, followed by the third party’s name and street address or P.O. box.
If the partnership's address is outside the United States or U.S. territories, enter the information on the line for “City or town, state or province, country, and ZIP or foreign postal code” in the following order: city, province or state, and the foreign country. Follow the foreign country's practice in placing the postal code in the address. Don't abbreviate the country name.
If the partnership has changed its address since it last filed a return (including a change to an “in care of” address), check box G(4) for “Address change.”
If the partnership changes its mailing address or the responsible party after filing its return, it can notify the IRS by filing Form 8822-B, Change of Address or Responsible Party—Business.
If a partnership has an adjustment from a BBA audit which doesn't result in an IU, the partnership shouldn't take the adjustment into account until the adjustment year (see Definitions , earlier). With its Form 1065 for the adjustment year, the partnership should provide a statement describing the adjustments, including the line numbers to which the adjustments relate, and incorporate those adjustments into its adjustment year return. If there's a reallocation adjustment being reported on the adjustment year return, ensure the statement identifies the partner receiving the reallocation adjustment. If there's an adjustment to a separately stated item or to a credit, the partnership must adjust that item or that credit in the adjustment year. See Examples 1 and 2 in Regulations 301.6225-3.
Enter the applicable activity name and the code number from the list, Codes for Principal Business Activity and Principal Product or Service , near the end of these instructions.
For example, if, as its principal business activity, the partnership (a) purchases raw materials, (b) subcontracts out for labor to make a finished product from the raw materials, and (c) retains title to the goods, the partnership is considered to be a manufacturer and must enter “Manufacturer” in item A and enter in item C one of the codes (311110 through 339900) listed under “Manufacturing” on the list, Codes for Principal Business Activity and Principal Product or Service , near the end of these instructions. For nonstore retailers, select the Principal Business Activity (PBA) code by the primary product that your establishment sells. For example, establishments primarily selling prescription and non-prescription drugs, select PBA code 456110 Pharmacies & Drug Retailers.
Show the correct EIN in item D. If the partnership doesn't have an EIN, it must apply for one in one of the following ways.
An LLC must determine which type of federal tax entity it will be (partnership, corporation, or disregarded entity (DE)) before applying for an EIN (see Form 8832 for details). If the partnership hasn't received its EIN by the time the return is due, enter “Applied for” and the application date in the space for the EIN. For more details, see the Instructions for Form SS-4.
The online application process isn't yet available for partnerships with addresses in foreign countries. If you're located outside the United States, please call 267-941-1099.
You aren't required to complete item F if the answer to Schedule B, question 4, is “Yes.”
If you're required to complete this item, enter the partnership's total assets at the end of the tax year, as determined by the accounting method regularly used in keeping the partnership's books and records. If there were no assets at the end of the tax year, enter zero.
A partnership must file Schedule M-3, Net Income (Loss) Reconciliation for Certain Partnerships, instead of Schedule M-1, if any of the following apply.
A partnership filing Form 1065 that isn't required to file Schedule M-3 may voluntarily file Schedule M-3 instead of Schedule M-1.
Any partnership that files Schedule M-3 must also complete and file Schedule C (Form 1065), Additional Information for Schedule M-3 Filers. See Eased requirements next.
Partnerships that (a) are required to file Schedule M-3 and have less than $50 million in total assets at tax-year-end, or (b) aren't required to file Schedule M-3 and voluntarily file Schedule M-3, must either (i) complete Schedule M-3 entirely, or (ii) complete Schedule M-3 through Part I and complete Schedule M-1 instead of completing Parts II and III of Schedule M-3.
In addition, partnerships that meet the requirements of (a) and (b) above aren't required to file Schedule C (Form 1065) or Form 8916-A.
See the instructions for Schedule C and Schedule M-3 for more information.
Report only trade or business activity income on lines 1a through 8. Don't report rental activity income or portfolio income on these lines. See Passive Activity Limitations , earlier, for definitions of rental activity income and portfolio income. Rental activity income and portfolio income are reported on Schedules K and K-1. Rental real estate activities are also reported on Form 8825.
Tax-exempt income.
Don’t include any tax-exempt income on lines 1a through 8. A partnership that receives any tax-exempt income other than interest, or holds any property or engages in any activity that produces tax-exempt income, reports this income on Schedule K, line 18b, and in box 18 of Schedule K-1 using code B.
Report tax-exempt interest income, including exempt-interest dividends received as a shareholder in a mutual fund or other RIC, on Schedule K, line 18a, and in box 18 of Schedule K-1 using code A.
See Deductions , later, for information on how to report expenses related to tax-exempt income.
Enter on line 1a gross receipts or sales from all trade or business operations, except for amounts that must be reported on lines 4 through 7. If a cost offset method under section 451(b) or (c) is used, the resulting gross income is reported on line 1a.
Special rules apply to certain income, as discussed below. For example, don't include gross receipts from farming on line 1a. Instead, show the net profit (loss) from farming on line 5. Also, don't include on line 1a rental activity income or portfolio income.
In general, advance payments are reported in the year of receipt. For exceptions to this general rule for partnerships that use the accrual method of accounting, see the following.
Installment sales.
Generally, the installment method can't be used for dealer dispositions of property. A dealer disposition is any disposition of:
These restrictions on using the installment method don't apply to dispositions of property used or produced in a farming business or sales of timeshares and residential lots. However, if the partnership elects to report dealer dispositions of timeshares and residential lots on the installment method, each partner's tax liability must be increased by the partner's distributive share of the interest payable under section 453(l)(3).
Include on line 1a the gross profit on collections from installment sales for any of the following.
Attach a statement showing the following information for the current year and the 3 preceding years.
Nonaccrual-experience method.
Partnerships that qualify to use the nonaccrual-experience method (described earlier) should attach a statement showing total gross receipts, the amount not accrued as a result of the application of section 448(d)(5), and the net amount accrued. Include the net amount on line 1a.
If the partnership has a cost of goods sold deduction, complete and attach Form 1125-A. Enter on Form 1065, page 1,line 2, the amount from Form 1125-A, line 8. See Form 1125-A and its instructions.
Enter the ordinary income (loss) shown on Schedule K-1 (Form 1065) or Schedule K-1 (Form 1041), or other ordinary income (loss) from a foreign partnership, estate, or trust. Show the partnership's, estate's, or trust's name, address, and EIN on a separate statement attached to this return. If the amount entered is from more than one source, identify the amount from each source.
Don't include portfolio income or rental activity income (loss) from other partnerships, estates, or trusts on this line. Instead, report these amounts on Schedules K and K-1, or on Form 8825, line 20a, if the amount is from a rental real estate activity.
Ordinary income (loss) from another partnership that is a PTP isn't reported on this line. Instead, report the amount separately on Schedule K, line 11, and in box 11 of Schedule K-1 using code ZZ.
Treat shares of other items separately reported on Schedule K-1 issued by the other entity as if the items were realized or incurred by this partnership.
If there's a loss from another partnership, the amount of the loss that may be claimed is subject to the basis limitations as appropriate.
If the tax year of your partnership doesn't coincide with the tax year of the other partnership, estate, or trust, include the ordinary income (loss) from the other entity in the tax year in which the other entity's tax year ends.
Enter the partnership's net farm profit (loss) from Schedule F (Form 1040). Attach Schedule F (Form 1040) to Form 1065. Don't include on this line any farm profit (loss) from other partnerships. Report those amounts on line 4. In figuring the partnership's net farm profit (loss), don't include any section 179 expense deduction; this amount must be separately stated.
Also report the partnership's fishing income on this line.
For a special rule concerning the method of accounting for a farming partnership with a corporate partner and for other tax information on farms, see Pub. 225, Farmer's Tax Guide.
Because the partner, and not the partnership, makes the election to deduct the expenses of raising any plant with a preproductive period of more than 2 years, farm partnerships that aren't required to use an accrual method shouldn't capitalize such expenses. Instead, state them separately on an attached statement to Schedule K, line 13d, and in box 13 of Schedule K-1 using code P. See section 263A(d) for more information.
Include only ordinary gains or losses from the sale, exchange, or involuntary conversion of assets used in a trade or business activity. Ordinary gains or losses from the sale, exchange, or involuntary conversion of rental activity assets are reported separately on Form 8825, line 19, or Schedule K, line 3c, and in box 3 of Schedule K-1, generally as a part of the net income (loss) from the rental activity.
A partnership that is a partner in another partnership must include on Form 4797 its share of ordinary gains (losses) from sales, exchanges, or involuntary conversions (other than casualties or thefts) of the other partnership's trade or business assets.
Partnerships shouldn't use Form 4797 to report the sale or other disposition of property if a section 179 expense deduction was previously passed through to any of its partners for that property. Instead, report it in box 20 of Schedule K-1 using code L. See Dispositions of property with section 179 deductions (code L) , later, for details.
Enter any other trade or business income (loss) not included on lines 1a through 6. List the type and amount of income on an attached statement. Examples of other income include the following.
A credit is available only if the leave was taken sometime after March 31, 2020, and before October 1, 2021, and only after the qualified leave wages were paid, which might under certain circumstances not occur until a quarter after September 30, 2021, including quarters during 2022. Accordingly, all lines related to qualified sick and family leave wages remain on the employment tax returns for 2023.
Don't include items requiring separate computations that must be reported on Schedules K and K-1. See the instructions for Schedules K and K-1, later.
Don't report portfolio or rental activity income (loss) on this line.
Report only trade or business activity deductions on lines 9 through 21.
Don't report the following expenses on lines 9 through 21.
Section 263A uniform capitalization rules.
The uniform capitalization rules of section 263A generally require partnerships to capitalize certain costs incurred in connection with the following.
Tangible personal property produced by a partnership includes a film, sound recording, videotape, book, or similar property.
The costs required to be capitalized under section 263A aren't deductible until the property to which the costs relate is sold, used, or otherwise disposed of by the partnership.
For tax years beginning after 2017, a small business taxpayer, defined earlier, can adopt or change its method of accounting to not capitalize costs under section 263A. See section 263A(i) and Accounting Methods , earlier.
Section 263A doesn't apply to the following.
The partnership must report the following costs separately to the partners for purposes of determinations under section 59(e).
Partnerships subject to the uniform capitalization rules are required to capitalize not only direct costs but an allocable part of most indirect costs (including taxes) that benefit the assets produced or acquired for resale, or are incurred because of the performance of production or resale activities.
For inventory, indirect costs that must be capitalized include the following.
Regulations section 1.263A-1(e)(3) specifies other indirect costs that relate to production or resale activities that must be capitalized and those that may be currently deductible.
Interest expense paid or incurred during the production period of designated property must be capitalized and is governed by special rules. For more details, see Regulations sections 1.263A-8 through 1.263A-15.
For more details on the uniform capitalization rules, see Regulations sections 1.263A-1 through 1.263A-3.
Transactions between related taxpayers.
Generally, an accrual basis partnership can deduct business expenses and interest owed to a related party (including any partner) only in the tax year of the partnership that includes the day on which the payment is includible in the income of the related party. See section 267 for details.
Business interest.
Business interest expense (BIE) is limited for tax years beginning after 2017. See section 163(j) for limitations on deductions for business interest, and section 163(j)(4) for rules specific to partnerships.
Business startup and organizational costs.
Generally, a partnership can elect to deduct a limited amount of startup or organizational costs paid or incurred. Any costs not deducted must be amortized as explained below. See sections 195(b) and 709(b).
The partnership generally elects to deduct startup or organizational costs by claiming the deduction on its return filed by the due date (including extensions) for the tax year in which the active trade or business begins. However, for startup or organizational costs paid or incurred before September 9, 2008, the partnership may be required to attach a statement to its return to elect to deduct such costs. See Temporary Regulations sections 1.195-1T and 1.709-1T (as in effect on July 7, 2008) for details. Also, see Regulations sections 1.195-1 and 1.709-1.
If the partnership timely filed its return for the year without making an election, it can still make an election by filing an amended return within 6 months of the due date of the return (excluding extensions). Clearly indicate the election on the amended return and enter “Filed pursuant to section 301.9100-2” at the top of the amended return. File the amended return at the same address the partnership filed its original return. The election applies when figuring income for the current tax year and all subsequent years.
The partnership can choose to forgo the above elections by clearly electing to capitalize its startup or organizational costs on its return filed by the due date (including extensions) for the tax year in which the active trade or business begins.
The election to either amortize or capitalize startup or organizational costs is irrevocable and applies to all startup and organizational costs that are related to the trade or business.
Any costs not deducted under the above rules must be amortized ratably over a 180-month period, beginning with the month the partnership begins business. See the Instructions for Form 4562 for details.
Report the deductible amount of these costs and any amortization on line 21. For amortization that began during the tax year, complete and attach Form 4562, Depreciation and Amortization.
Syndication costs.
Costs for issuing and marketing interests in the partnership, such as commissions, professional fees, and printing costs, must be capitalized. They can't be depreciated or amortized. See the instructions for line 10, later, for the treatment of syndication fees paid to a partner.
Reducing certain expenses for which credits are allowable.
The partnership may need to reduce the otherwise allowable deductions for expenses used to figure certain credits. The following are examples of such credits. (Don't reduce the amount of the allowable deduction for any portion of the credit that was passed through to the partnership from another pass-through entity.)
Wages taken into account in determining the credit for qualified sick and family leave on Form 941 can't be taken into account in determining the employer credit for paid family and medical leave on Form 8994. See the Instructions for Form 8994.
If the partnership has any of the credits listed above, figure each current year credit before figuring the deductions for expenses on which the credit is based.
Enter the salaries and wages paid or incurred for the tax year, reduced by the amount of the following credit(s).
Don't reduce the amount of the allowable deduction for any portion of the credit that was passed through to the partnership from another pass-through entity. See the instructions for the credit form for more information.
Don't include salaries and wages reported elsewhere on the return, such as amounts included in cost of goods sold, elective contributions to a section 401(k) cash or deferred arrangement, or amounts contributed under a salary reduction SEP agreement or a SIMPLE IRA plan.
Deduct payments or credits to a partner for services or for the use of capital if the payments or credits are determined without regard to partnership income and are allocable to a trade or business activity. Also include on line 10 amounts paid during the tax year for insurance that constitutes medical care for a partner, a partner's spouse, a partner's dependents, or a partner's children under age 27 who aren't dependents.
For information on how to treat the partnership's contribution to a partner's health savings account (HSA), see Notice 2005-8, 2005-4 I.R.B. 368.
Don't include any payments and credits that should be capitalized. For example, although payments or credits to a partner for services rendered in syndicating a partnership may be guaranteed payments, they aren't deductible on line 10. They are capital expenditures. However, they should be reported as guaranteed payments on the applicable line of Schedule K, line 4b, and in box 4b of Schedule K-1.
Don't include distributive shares of partnership profits.
Report the guaranteed payments to the appropriate partners using the applicable box 4 of Schedule K-1.
Enter the cost of repairs and maintenance not claimed elsewhere on the return, such as labor and supplies, that aren't payments for improvements to the partnership’s property. Amounts are paid for improvements if they’re for betterments to the property or for restorations of the property (such as the replacements of major components or substantial structural parts), or if they adapt the property to a new or different use. Improvements must be capitalized. See Regulations section 1.263(a)-3.
The partnership can deduct repair and maintenance expenses only to the extent they relate to a trade or business activity. See Regulations section 1.162-4. The partnership may elect to capitalize certain repair and maintenance costs consistent with its books and records. See Regulations section 1.263(a)-3(n) for information on how to make the election.
Enter the total debts that became worthless in whole or in part during the year, but only to the extent such debts relate to a trade or business activity. Report deductible nonbusiness bad debts as a short-term capital loss on Form 8949.
Cash method partnerships can't take a bad debt deduction unless the amount was previously included in income.
Enter rent paid on business property used in a trade or business activity. Don't deduct rent for a dwelling unit occupied by any partner for personal use.
If the partnership rented or leased a vehicle, enter the total annual rent or lease expense paid or incurred in the trade or business activities of the partnership. Also complete Form 4562, Part V. If the partnership leased a vehicle for a term of 30 days or more, the deduction for vehicle lease expense may have to be reduced by an amount called the inclusion amount. The partnership may have an inclusion amount if:
| The lease term began: | And the vehicle's FMV on the first day of the lease exceeded: | |
|---|---|---|
| Automobiles other than trucks and vans | ||
| During calendar year 2023 | $60,000 | |
| During calendar year 2022 | $56,000 | |
| During calendar year 2021 | $51,000 | |
| After 12/31/2017 but before 1/1/2021 | $50,000 | |
| After 12/31/12 and before 1/1/18 | $19,000 | |
| After 12/31/09 but before 1/1/13 | $18,500 | |
| Trucks and vans | ||
| During calendar year 2023 | $60,000 | |
| During calendar year 2022 | $56,000 | |
| During calendar year 2021 | $51,000 | |
| After 12/31/2017 but before 1/1/2021 | $50,000 | |
| After 12/31/13 and before 1/1/18 | $19,500 | |
| After 12/31/09 and before 1/1/14 | $19,000 | |
| The inclusion amount for lease terms beginning in 2024 will be published in the Internal Revenue Bulletin in early 2024. | ||
See Pub. 463, Travel, Gift, and Car Expenses, for instructions on figuring the inclusion amount.
Enter taxes and licenses paid or incurred in the trade or business activities of the partnership if not reflected elsewhere on the return. Federal import duties and federal excise and stamp taxes are deductible only if paid or incurred in carrying on the trade or business of the partnership. Foreign taxes are included on line 14 only if they are taxes not creditable but deductible under sections 901 and 903. See Schedule K-2, Part II, Section 2, line 45, column (g).
Don't deduct the following taxes on line 14.
See section 263A(a) for rules on capitalization of allocable costs (including taxes) for any property.
See section 164(d) for information on apportionment of taxes on real property between seller and purchaser.
Don't reduce your deduction for social security and Medicare taxes by the nonrefundable and refundable portions of the FFCRA and ARP credits for qualified sick and family leave wages claimed on the partnership's employment tax returns. Instead, report the credits as income on line 7.
Include only interest incurred in the trade or business activities of the partnership that isn't claimed elsewhere on the return.
Don't include interest expense on the following.
Special rules apply to the following.
Limitation on deduction.
Business interest expense deduction is generally limited to the sum of business interest income, 30% of the adjusted taxable income (ATI), and floor plan financing interest. This limitation generally applies at the partnership level. See section 163(j)(4) for additional information about the application of the business interest expense limitation to partnerships. See Form 8990, Limitation on Business Interest Expense Under Section 163(j), and its instructions for more information. BIE includes any interest expense properly allocable to a trade or business. A small business taxpayer that isn't a tax shelter (as defined in section 448(d)(3)) and that meets the gross receipts test isn't required to limit BIE under section 163(j). A taxpayer meets the gross receipts test if the taxpayer has average annual gross receipts of $29 million or less for the 3 prior tax years under the gross receipts test of section 448(c). Gross receipts include the aggregate gross receipts from all persons treated as a single employer such as a controlled group of corporations, commonly controlled partnerships or proprietorships, and affiliated service groups. If the partnership fails to meet the gross receipts test, Form 8990 is generally required. Also see Schedule B, questions 23 and 24.
On line 16a, enter only the depreciation claimed on assets used in a trade or business activity. Enter on line 16b the depreciation included elsewhere on the return (for example, on page 1, line 2) that is attributable to assets used in trade or business activities. See the Instructions for Form 4562, or Pub. 946, How To Depreciate Property, to figure the amount of depreciation to enter on this line.
Complete and attach Form 4562 only if the partnership placed property in service during the tax year or claims depreciation on any car or other listed property.
Don't include any section 179 expense deduction on this line. This amount isn't deducted by the partnership. Instead, it's passed through to the partners in box 12 of Schedule K-1. Generally, the basis of a partnership's section 179 property must be reduced to reflect the amount of section 179 expense elected by the partnership. This reduction must be made in the basis of partnership property even if the limitations of section 179(b) and Regulations section 1.179-2 prevent a partner from deducting all or a portion of the amount of the section 179 expense allocated by the partnership.
If the partnership claims a deduction for timber depletion, complete and attach Form T (Timber), Forest Activities Schedule.
Don't deduct depletion for oil and gas properties. Each partner figures depletion on oil and gas properties. See the instructions for Schedule K-1, box 20, Depletion information oil and gas (code T), for the information on oil and gas depletion that must be supplied to the partners by the partnership.
Don't deduct payments for partners to retirement or deferred compensation plans including IRAs, qualified plans, and simplified employee pension (SEP) and SIMPLE IRA plans on this line. These amounts are reported in box 13 of Schedule K-1, using code R, and are deducted by the partners on their own returns.
Enter the deductible contributions not claimed elsewhere on the return made by the partnership for its common-law employees under a qualified pension, profit-sharing, annuity, or SEP or SIMPLE IRA plan, and under any other deferred compensation plan.
If the partnership contributes to an IRA for employees, include the contribution in salaries and wages on page 1, line 9, or Form 1125-A, line 3, and not on line 18.
Employers who maintain a pension, profit-sharing, or other funded deferred compensation plan (other than a SEP or SIMPLE IRA), whether or not the plan is qualified under the Code and whether or not a deduction is claimed for the current year, must generally file the applicable form listed below.
Enter the partnership's contributions to employee benefit programs not claimed elsewhere on the return (for example, insurance, health, and welfare programs) that aren't part of a pension, profit-sharing, etc., plan included on line 18.
Don't include amounts paid during the tax year for insurance that constitutes medical care for a partner, a partner's spouse, a partner's dependents, or a partner's children under age 27 who aren't dependents. Instead, include these amounts on line 10 as guaranteed payments on the applicable line of Schedule K, line 4, and the applicable line of box 4 of Schedule K-1, of each partner on whose behalf the amounts were paid. Also report these amounts on Schedule K, line 13e, and in box 13 of Schedule K-1, using code M, of each partner on whose behalf the amounts were paid.
Deduction for certain energy efficient commercial building property. See the Instructions for Form 7205 and section 179D for more information. Complete and attach Form 7205 if claiming this deduction.
Enter the total allowable trade or business deductions that aren't deductible elsewhere on page 1 of Form 1065. Attach a statement listing by type and amount each deduction included on this line. Examples of other deductions include the following.
Don't deduct the following on line 21.
Travel, meals, and entertainment.
Subject to limitations and restrictions discussed below, a partnership can deduct ordinary and necessary travel and non-entertainment-related meal expenses paid or incurred in its trade or business. Generally, entertainment expenses, membership dues, and facilities used in connection with these activities can't be deducted. Also, special rules apply to deductions for gifts, luxury water travel, and convention expenses. See section 274 and Pub. 463 for details.
The partnership can't deduct travel expenses of any individual accompanying a partner or partnership employee, including a spouse or dependent of the partner or employee, unless:
Generally, the partnership can deduct only 50% of the amount otherwise allowable for non-entertainment meal expenses paid or incurred in its trade or business. Entertainment-related meals are generally disallowed. In addition (subject to exceptions under section 274(k)(2)):
See section 274(n)(3) for a special rule that applies to expenses for meals consumed by individuals subject to the hours of service limits of the Department of Transportation.
The partnership may deduct amounts paid or incurred for membership dues in civic or public service organizations, professional organizations (such as bar and medical associations), business leagues, trade associations, chambers of commerce, boards of trade, and real estate boards. However, no deduction is allowed if a principal purpose of the organization is to entertain, or provide entertainment facilities for, members or their guests. In addition, the partnership may not deduct membership dues in any club organized for business, pleasure, recreation, or other social purpose. This includes country clubs, golf and athletic clubs, airline and hotel clubs, and clubs operated to provide meals under conditions favorable to business discussion.
The partnership can't deduct an expense paid or incurred for a facility (such as a yacht or hunting lodge) used for an activity usually considered entertainment, amusement, or recreation.
Generally, the partnership may be able to deduct otherwise nondeductible entertainment, amusement, or recreation expenses if the amounts are treated as compensation to the recipient and reported on Form W-2 for an employee or on Form 1099-NEC for an independent contractor.
Reforestation expenditures.
If the partnership made an election to deduct a portion of its reforestation expenditures on Schedule K, line 13e, it must amortize over an 84-month period the portion of these expenditures in excess of the amount deducted on Schedule K (see section 194). Deduct on line 21 only the amortization of these excess reforestation expenditures. See Reforestation expense deduction (code S) , later.
Line 24. Interest due under the look-back method for completed long-term contracts.
For partnerships that aren't closely held, attach Form 8697 and a check or money order for the full amount, made payable to "United States Treasury." Enter the partnership's EIN, daytime phone number, and "Form 8697 Interest'' on the check or money order.
Line 25. Interest due under the look-back method for property depreciated under the income forecast method.
For partnerships that aren’t closely held, attach Form 8866 and a check or money order for the full amount, made payable to “United States Treasury.” Enter the partnership’s EIN, daytime phone number, and “Form 8866 Interest” on the check or money order.
Line 26. BBA AAR imputed underpayment.
Use this line if the partnership is filing an AAR electronically and chooses to pay the IU. For instructions on how to figure the IU, see the Instructions for Form 8082. Enter the name of the partnership, TIN, tax year, “Form 1065,” and “BBA AAR Imputed Underpayment” on the payment. Checks must be made payable to “United States Treasury” and mailed to Ogden Service Center, Ogden, UT 84201-0011. Payments can be made by check or electronically. If making an electronic payment, choose the payment description “BBA AAR Imputed Underpayment” from the list of payment types.
Line 27. Other taxes.
In a few instances, payments other than those listed above may have to be made with Form 1065. Enter the amount on this line and attach a statement identifying the purpose of the payment.
Line 29. Elective payment election amount from Form 3800.
Report the gross elective payment election amount from Form 3800, Part III, line 6, column (h).
Line 30. Payment.
Enter any prepayments related to lines 24–27 above.
Check box 1f for any other type of entity and state the type.
To determine the maximum percentage owned in the partnership's profit, loss, or capital for the purposes of questions 2a, 2b, and 3b, determine separately the partner's percentage of interest in profit, loss, and capital at the end of the partnership's tax year. This determination must be based on the partnership agreement and it must be made using the constructive ownership rules described below. The maximum percentage is the highest of these three percentages (determined at the end of the tax year).
See Item J. Partner's Profit, Loss, and Capital , later, for more information on ownership percentages.
Constructive ownership of the partnership.
For purposes of question 2, except for foreign governments within the meaning of section 892, in determining an ownership interest in the profit, loss, or capital of the partnership, the constructive ownership rules of section 267(c) (excluding section 267(c)(3)) apply to ownership of interests in the partnership as well as corporate stock. An interest in the partnership that is owned directly or indirectly by or for another entity (corporation, partnership, estate, trust, or tax-exempt organization) is considered to be owned proportionately by the owners (shareholders, partners, or beneficiaries) of the owning entity.
Also, under section 267(c), an individual is considered to own an interest owned directly or indirectly by or for the individual’s family. The family of an individual includes only that individual's spouse, brothers, sisters, ancestors, and lineal descendants. An interest will be attributed from an individual under the family attribution rules only if the person to whom the interest is attributed owns a direct interest in the partnership or an indirect interest under section 267(c)(1) or (5). For purposes of these instructions, an individual won't be considered to own, under section 267(c)(2), an interest in the partnership owned, directly or indirectly, by a family member of the individual unless the individual also owns an interest in the partnership either directly or indirectly through a corporation, partnership, or trust.
For purposes of question 2, “foreign government” has the same meaning as it does under section 892. In determining a foreign government's ownership interest in the profit, loss, or capital of the partnership, the constructive ownership rules of Regulations section 1.892-5T(c)(1)(i) apply to ownership of interests in the partnership as well as corporate stock. An interest in the partnership that is owned directly or indirectly by an integral part or controlled entity of a foreign sovereign (within the meaning of Regulations section 1.892-2T(a)) is considered to be owned proportionately by such foreign sovereign.
Constructive ownership examples for questions 2 and 3 are included below. For the purposes of questions 2 and 3, add an owner's direct percentage ownership and indirect percentage ownership in an entity to determine if the owner owns, directly or indirectly, 50% or more of the entity.
Corporation A owns, directly, an interest of 50% in the profit, loss, or capital of Partnership B. Corporation A also owns, directly, an interest of 15% in the profit, loss, or capital of Partnership C. Partnership B owns, directly, an interest of 70% in the profit, loss, or capital of Partnership C. Therefore, Corporation A owns, directly or indirectly, an interest of 50% in the profit, loss, or capital of Partnership C (15% directly and 35% indirectly through Partnership B). On Partnership C's Form 1065, it must answer “Yes” to question 2a of Schedule B. See Example 1 in the instructions for Schedule B-1 (Form 1065) for guidance on providing the rest of the information required of entities answering “Yes” to this question.
A owns, directly, 50% of the profit, loss, or capital of Partnership X. B, the daughter of A, doesn't own, directly, any interest in X and doesn't own, indirectly, any interest in X through any entity (corporation, partnership, trust, or estate). Because family attribution rules apply only when an individual (in this example, B) owns a direct interest in the partnership or an indirect interest through another entity, A's interest in Partnership X isn't attributable to B. On Partnership X's Form 1065, it must answer “Yes” to question 2b of Schedule B. See Example 2 in the instructions for Schedule B-1 (Form 1065) for guidance on providing the rest of the information required of entities answering “Yes” to this question.
Constructive ownership of other entities by the partnership.
For purposes of determining the partnership's constructive ownership of other entities, the constructive ownership rules of section 267(c) (excluding section 267(c)(3)) apply to ownership of interests in partnerships and trusts as well as corporate stock. Generally, if an entity (a corporation, partnership, or trust) is owned, directly or indirectly, by or for another entity (corporation, partnership, estate, or trust), the owned entity is considered to be owned proportionally by or for the owners (shareholders, partners, or beneficiaries) of the owning entity.
List each corporation in which the partnership, at the end of the tax year, owns, directly, 20% or more, or owns, directly or indirectly, 50% or more of the total voting power of all classes of stock entitled to vote. Indicate the name, EIN, country of incorporation, and percentage interest owned, directly or indirectly, in the total voting power. List the parent corporation of an affiliated group filing a consolidated tax return rather than the subsidiary members except for subsidiary members in which an interest is owned, directly or indirectly, independent of the interest owned, directly or indirectly, in the parent corporation. If a corporation is owned through a DE, list the information for the corporation rather than the DE.
List each partnership in which the partnership, at the end of the tax year, owns, directly, an interest of 20% or more, or owns, directly or indirectly, an interest of 50% or more in the profit, loss, or capital of the partnership. List each trust in which the partnership, at the end of the tax year, owns, directly, an interest of 20% or more, or owns, directly or indirectly, an interest of 50% or more in the trust beneficial interest. For each partnership or trust listed, indicate the name, EIN, type of entity (partnership or trust), and country of origin. If the listed entity is a partnership, enter in column (v) the maximum of percentage interests owned, directly or indirectly, in the profit, loss, or capital of the partnership at the end of the partnership's tax year. If the entity is a trust, enter in column (v) the percentage of the partnership's beneficial interest in the trust owned, directly or indirectly, at the end of the tax year. List a partnership or trust owned through a DE rather than the DE.
Answer “Yes” if the partnership meets all four of the requirements shown on the form. Total receipts is defined as the sum of gross receipts or sales (page 1, line 1a); all other income (page 1, lines 4 through 7); income reported on Schedule K, lines 3a, 5, 6a, and 7; income or net gain reported on Schedule K, lines 8, 9a, 10, and 11; and income or net gain reported on Form 8825, lines 2, 19, and 20a. “Total assets” is defined as the amount that would be reported in item F on page 1 of Form 1065.
Answer “Yes” if interests in the partnership are traded on an established securities market or are readily tradable on a secondary market (or its substantial equivalent).
Generally, the partnership will have income if debt is canceled or forgiven. Amounts related to forgiven Paycheck Protection Program (PPP) loans are disregarded for purposes of this question. The determination of the existence and amount of cancellation of debt income is determined at the partnership level. Partnership cancellation of indebtedness income is separately stated on Schedule K and Schedule K-1. The extent to which such income is taxable is usually determined by each individual partner under rules found in section 108. For more information, see Pub. 334, Tax Guide for Small Business.
Answer “Yes” if the partnership filed, or is required to file, a return under section 6111 to provide information on any reportable transaction by a material advisor. Use Form 8918, Material Advisor Disclosure Statement, to provide the information. For details, see the Instructions for Form 8918.
Answer “Yes” if either (1) or (2) below applies to the partnership. Otherwise, check the “No” box.
If the “Yes” box is checked for this question, do the following.
The partnership may be required to file Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts, if any of the following apply.
For more information, see the Instructions for Form 3520.
An owner of a foreign trust must ensure that the trust files an annual information return on Form 3520-A, Annual Information Return of Foreign Trust With a U.S. Owner.
You must check “Yes” or “No” for each question.
Question 10a.
Answer “Yes” if the partnership is making, or has made (and hasn't revoked), a section 754 election. For information about the election, see item 4 under Elections Made by the Partnership , earlier.
Question 10b.
Answer “Yes” if either of the following has occurred.
For partnerships other than PTPs, enter the total aggregate positive amount (in the appropriate space provided) resulting from all section 743(b) adjustments. Aggregate positive amount from all section 743(b) adjustments means the increase in the partners' share of basis in partnership property from all section 743(b) adjustments allocated to all the partners. Enter the total aggregate negative amount (in the appropriate space provided) resulting from all section 743(b) adjustments. Aggregate negative amount from all section 743(b) adjustments means decrease in the partners' share of basis in partnership property from all section 743(b) adjustments allocated to all the partners.
The basis adjustment affects only the transferee's basis in partnership property. The partnership must attach a statement to the return for the tax year in which the transfer occurred. The statement must include:
For details, see section 743 and Regulations section 1.743-1. For details on allocating the basis adjustment to partnership properties, see section 755 and Regulations section 1.755-1.
Question 10c.
Answer “Yes” if the partnership made an optional basis adjustment under section 734(b) for the tax year. If the partnership has made a section 754 election (and it hasn't been revoked), the partnership must make a basis adjustment under section 734(b). Enter the total aggregate positive amount and the total aggregate negative amount in the appropriate space provided. Aggregate positive amount from all section 734(b) adjustments means the increase in the basis of partnership property from all section 734(b) adjustments. Enter the total aggregate negative amount (in the appropriate space provided) resulting from all section 734(b) adjustments. Aggregate negative amount from all section 734(b) adjustments means the decrease in basis of partnership property from all section 734(b) adjustments.
For a section 734(b) basis adjustment, attach a statement that includes:
Question 10d.
Answer “Yes” if the partnership had to make a basis reduction under section 743(b) because of a substantial built-in loss (as defined in section 743(d)) or under section 734(b) because of a substantial basis reduction (as defined in section 734(d)).
Enter the total aggregate amount of such section 743(b) adjustments and/or section 734(b) adjustments for all partners and/or partnership property made in the tax year in the space provided as a positive number.
Section 743(d)(1) provides that, for purposes of section 743, a partnership has a substantial built-in loss resulting from a transfer of a partnership interest if the partnership's adjusted basis in the partnership's property exceeds by more than $250,000 the FMV of the property or the transferee partner would be allocated a loss of more than $250,000 if the partnership assets were sold for cash equal to their FMV immediately after such transfer. Under section 734(d), there's a substantial basis reduction resulting from a distribution if the sum of the following amounts exceeds $250,000.
For section 734(b) basis adjustment, for partnerships other than PTPs, attach a statement that includes:
Check the box if the partnership engaged in a like-kind exchange during the current or immediately preceding tax year and received replacement property that it distributed during the current tax year. For purposes of this question, the partnership is considered to have distributed replacement property if the partnership contributed such property to any entity other than a DE. The distribution of its ownership interest in a DE is considered a distribution of the underlying property.
If a partnership distributed property to its partners to be jointly owned, whether such distribution is direct or through the formation of an intermediate entity, the question must be answered “Yes.” For purposes of question 12, an “undivided interest in partnership property” means property that was owned by the partnership either directly or through a DE and which was distributed to partners as fractional ownership interests. A tenancy-in-common interest is a type of undivided ownership interest in property which provides each owner the right to transfer property to a third party without destroying the tenancy in common. Partners may agree to partition property held as tenants in common or may seek a court order to partition the property (usually dividing the property into fractional interests in accordance with each partner's ownership interest in the partnership).
Example.
Partnership P is a partnership that files Form 1065. Partnership P holds title to land held for investment. Partnership P converts its title to the land to fractional interests in the name of the partners and distributes such interests to its partners. Partnership P must answer “Yes” to question 12.
Enter the number of Forms 8858, Information Return of U.S. Persons With Respect To Foreign Disregarded Entities (FDEs) and Foreign Branches (FBs), that are attached to the return. Form 8858 and its schedules are used by certain U.S. persons (including domestic partnerships) that own an FDE or FB directly (or, in certain cases, indirectly or constructively) to satisfy the reporting requirements of sections 6011, 6012, 6031, and 6038, and the related regulations. See Form 8858 (and its separate instructions) for information on completing the form and the information that the partnership may need to provide to certain partners for them to complete their Forms 8858 relating to that FDE or FB.
Answer “Yes” if the partnership had any foreign partners (for purposes of section 1446(a)) at any time during the tax year. Otherwise, answer “No.”
If the partnership had gross income effectively connected with a trade or business in the United States and foreign partners, it may be required to withhold tax under section 1446(a) on income allocable to foreign partners (without regard to distributions) and file Forms 8804, 8805, and 8813. See Regulations sections 1.1446-1 through -7 for more information.
If the partnership made any payment in 2023 that would require the partnership to file any Form(s) 1099, check the “Yes” box for question 16a and answer question 16b. Otherwise, check the “No” box for question 16a and skip question 16b. See Am I Required to File a Form 1099 or Other Information Return for more information.
For tax years beginning after 2015, domestic partnerships that are formed or availed of to hold specified foreign financial assets (“specified domestic entities”) must file Form 8938, Statement of Specified Foreign Financial Assets, with its Form 1065 for the tax year. Form 8938 must be filed each year the value of the partnership’s specified foreign financial assets meets or exceeds the reporting threshold. For more information on domestic partnerships that are specified domestic entities and the types of foreign financial assets that must be reported, see the Instructions for Form 8938.
A domestic partnership required to file Form 8938 with its Form 1065 for the tax year should check “Yes” to this question.
Section 267A disallows a deduction for certain interest or royalty paid or accrued pursuant to a hybrid arrangement, to the extent that, under the foreign tax law, there isn't a corresponding income inclusion (including long-term deferral). In the entry line for question 22, report the total amount of interest and royalty paid or accrued by the partnership for which the partnership knows, or has reason to know, that one or more partners' distributive share of deductions is disallowed under section 267A. For additional information, see FAQs at IRS.gov/businesses/partnerships/FAQs-for-Form-1065-Schedule-B-Other-Information-Question-22.
The limitation on BIE applies to every taxpayer with a trade or business, unless the taxpayer meets certain specified exceptions. A partnership may elect out of the limitation for certain businesses otherwise subject to the business interest expense limitation.
Certain real property trades or businesses and farming businesses qualify to make an election not to limit BIE. This is an irrevocable election. If you make this election, you're required to use the alternative depreciation system to depreciate certain property. Also, you aren’t entitled to the special depreciation allowance for that property. For a partnership with more than one qualifying business, the election is made with respect to each business. Check “Yes” if the partnership has an election in effect to exclude a real property trade or business or a farming business from section 163(j). For more information, see section 163(j) and the Instructions for Form 8990.
Generally, a taxpayer with a trade or business must file Form 8990 to claim a deduction for business interest. BIE is interest that is properly allocable to a non-excepted trade or business or that is floor plan financing interest. In addition, Form 8990 must be filed by any taxpayer that owns an interest in a partnership with current year, or prior year carryover, excess business interest expense (EBIE) allocated from the partnership. A pass-through entity allocating excess taxable income or excess business interest income to its owners (that is, a pass-through entity that isn't a small business taxpayer) must file Form 8990, regardless of whether it has any interest expense.
Exclusions from filing.
A taxpayer isn't required to file Form 8990 if the taxpayer is a small business taxpayer and doesn't have EBIE from a partnership. A taxpayer is also not required to file Form 8990 if the taxpayer only has BIE from the following excepted trades or businesses.
Small business taxpayer.
A small business taxpayer isn't subject to the business interest expense limitation and isn't required to file Form 8990. A small business taxpayer is a taxpayer that (a) isn't a tax shelter (as defined in section 448(d)(3)); and (b) meets the gross receipts test of section 448(c), discussed next.
A taxpayer meets the gross receipts test if the taxpayer has average annual gross receipts of $29 million or less for the 3 prior tax years. A taxpayer's average annual gross receipts for the 3 prior tax years is determined by adding the gross receipts for the 3 prior tax years and dividing the total by 3. Gross receipts include the aggregate gross receipts from all persons treated as a single employer, such as a controlled group of corporations, commonly controlled partnerships, or proprietorships, and affiliated service groups. See section 448(c) and the Instructions for Form 8990 for additional information.
To be certified as a QOF, the partnership must file Form 1065 and attach Form 8996, even if the partnership had no income or expenses to report. If the partnership is attaching Form 8996, check the "Yes" box for question 25. On the line following the dollar sign, enter the amount from Form 8996, Part III, line 15.
Provide the number of foreign partners subject to section 864(c)(8) as a result of transferring all or a portion of an interest in the partnership if the partnership is engaged in a U.S. trade or business. Section 864(c)(8) provides that gain or loss of a foreign transferor from the transfer of a partnership interest is treated as effectively connected with the conduct of a trade or business within the United States to the extent that the transferor would have had effectively connected gain or loss if the partnership sold all of its assets at FMV on the date of transfer. For purposes of section 864(c)(8), a transfer of a partnership interest means a sale, exchange, or other disposition, and includes a distribution from a partnership to a partner to the extent that gain or loss is recognized on the distribution, as well as a transfer treated as a sale or exchange under section 707(a)(2)(B). Section 864(c)(8) applies to foreign partners that directly or indirectly transfer an interest in a partnership that is engaged in a U.S. trade or business. The partnership should include in its response any transfer for which it has received notification or otherwise knows about. If the partnership is a PTP as defined in section 469(k)(2) and has properly answered “Yes” to question 5 on Form 1065, Schedule B, then it's not required to answer the question.
If a partnership had any foreign partners subject to section 864(c)(8), the partnership must complete Schedule K-3 (Form 1065), Part XIII, for each foreign partner subject to section 864(c)(8) on a transfer or distribution. The partnership may also be required to withhold under section 1446(f)(4) on future distributions that it makes to the transferee partner if that partner failed to withhold on the transfer under section 1446(f)(1). See Pub. 515, Withholding of Tax on Nonresident Aliens and Foreign Entities, for more information.
Answer "Yes" if at any time during the tax year there were transfers between the partnership and its partners subject to the disclosure requirements of Regulations section 1.707-8. For certain transfers that are presumed to be sales, the partnership or the partners must comply with the disclosure requirements in Regulations section 1.707-8. Generally, disclosure is required when:
The disclosure must be made on the transferor partner's return using Form 8275, Disclosure Statement, or on an attached statement providing the same information. When more than one partner transfers property to a partnership under a plan, the disclosure may be made by the partnership rather than by each partner.
Section 7874 applies in certain cases in which a foreign corporation directly or indirectly acquires substantially all of the properties constituting a trade or business of a domestic partnership. Check “Yes” if, since December 22, 2017, a foreign corporation directly or indirectly acquired substantially all of the properties constituting a trade or business of your partnership (and you're a domestic partnership), and the ownership with respect to the acquisition was greater than 50% (by vote or value). If “Yes” is checked, list the ownership percentage by both vote and value.
The information must be reported even if you conclude that section 7874 doesn't apply.
Section 7874 generally applies when the following three requirements are met.
When section 7874 applies, the tax treatment of the acquisition depends on the ownership percentage. If the ownership is at least 80%, the foreign acquiring corporation is treated as a domestic corporation for all purposes of the Code. See section 7874(b). If the ownership is at least 60% but less than 80%, the foreign acquiring corporation is considered a foreign corporation but the domestic partnership and certain other persons are subject to special rules that reduce the tax benefits of the acquisition. See section 7874(a)(1).
The Tax Cuts and Jobs Act of 2017 provides additional special rules for certain cases in which section 7874 applies. See sections 59A(d)(4) and 965(l).
Ownership percentage.
The ownership percentage is the percentage described in section 7874(a)(2)(B)(ii). See the regulations under section 7874 for rules regarding the computation of the ownership percentage.
In general, the ownership percentage measures the percentage of stock of the foreign acquiring corporation that is held by partners of the domestic partnership by reason of holding a capital or profits interest in the domestic partnership, with certain adjustments (for example, disregarding certain stock of the foreign acquiring corporation attributable to passive assets or assets of other domestic entities that were recently acquired by the foreign acquiring corporation). The ownership percentage is measured separately by vote and value.
Multiple reportable acquisitions.
If there are multiple acquisitions that must be reported, list on the lines for question 28 the ownership percentage by vote and value for the most recent acquisition. Attach a statement reporting the ownership percentage by vote and value for the other acquisitions.
Under section 4501, the partnership may be required to file Form 7208 and pay the stock repurchase excise tax if, during the partnership's tax year, (a) the partnership is a specified affiliate of an applicable foreign corporation, or (b) the partnership is an expatriated entity with respect to a covered surrogate foreign corporation. Don't complete a Form 7208 until the date specified in upcoming regulations under section 4501. For additional information, see section 4501 and Announcement 2023-18.
Digital assets are any digital representations of value that are recorded on a cryptographically secured distributed ledger or any similar technology. For example, digital assets include non-fungible tokens (NFTs) and virtual currencies, such as cryptocurrencies and stablecoins. If a particular asset has the characteristics of a digital asset, it will be treated as a digital asset for federal income tax purposes.
Check the “Yes” box if at any time during 2023, the partnership (a) received (as a reward, award, or payment for property or services); or (b) sold, exchanged, or otherwise disposed of a digital asset (or any financial interest in any digital asset).
For example, check “Yes” if at any time during 2023 the partnership:
The partnership has a financial interest in a digital asset if it’s the owner of record of a digital asset, or has an ownership stake in an account that holds one or more digital assets, including the rights and obligations to acquire a financial interest, or it owns a wallet that holds digital assets.
The following actions or transactions in 2023, alone, generally don’t require the partnership to check “Yes.”
Don’t leave the question unanswered. You must answer “Yes” or “No” by checking the appropriate box. For more information, go to IRS.gov/VirtualCurrencyFAQs.
Answer "Yes" if an eligible partnership chooses to elect out of the centralized partnership audit regime for the tax year and enter the total from Schedule B-2, Part III, line 3. If making the election, attach a completed Schedule B-2 to Form 1065. An election out of the centralized partnership audit regime can only be made on a timely filed return (including extensions). A partnership is an eligible partnership for the tax year if it has 100 or fewer eligible partners in that year. Eligible partners are individuals, C corporations, S corporations, foreign entities that would be C corporations if they were domestic entities, and estates of deceased partners. The determination as to whether the partnership has 100 or fewer partners is made by adding the number of Schedules K-1 required to be issued by the partnership for the tax year to the number of Schedules K-1 required to be issued by any partner that is an S corporation to its shareholders for the tax year of the S corporation ending with or within the partnership tax year. A partnership isn't eligible to elect out of the centralized partnership audit regime if it's required to issue a Schedule K-1 to any of the following partners.
Section 6223 provides that unless the partnership has made a valid election out of the centralized partnership audit regime, each partnership must designate, in the manner prescribed by the Secretary, a partner or other person with a substantial presence in the United States as the PR who shall have the sole authority to act on behalf of the partnership. On Form 1065, provide the name, address, and phone number of the PR. If an entity is designated as the PR, the partnership must also appoint an individual to act on the entity's behalf (a DI). To be a DI, the appointed person must also have a substantial presence in the United States.
How to designate.
A designation of a PR must be made for each respective year on the partnership’s Form 1065. The partnership can revoke a designation of a PR or DI, and the PR or DI can resign, by submitting Form 8979, Partnership Representative Revocation, Designation, and Resignation Form.
See the Instructions for Form 8979 for information concerning how and when Form 8979 can be submitted to the IRS.
PR authority.
Under section 6223, the partnership and all its partners (and any other person whose tax liability is determined in whole or in part by taking into account directly or indirectly adjustments determined under the centralized partnership audit regime) are bound by the actions of the PR in dealings with the IRS. A designation for a partnership tax year remains in effect until the designation is terminated by (a) a valid resignation of the PR or DI, (b) a valid revocation of the PR (with designation of successor PR), or (c) a determination by the IRS that the designation isn't in effect.
Substantial presence.
In order for either a PR or a DI to have substantial presence, they must make themselves available to meet in person with the IRS in the United States at a reasonable time and place as determined by the IRS, and must have a street address in the United States, a U.S. TIN, and a telephone number with a U.S. area code.
Although the partnership isn't subject to income tax, the partners are liable for tax on their shares of the partnership income, whether or not distributed, and must include their shares on their tax returns.
Schedule K.
Schedule K is a summary schedule of all the partners' shares of the partnership's income, credits, deductions, etc. All partnerships must complete Schedule K. Rental activity income (loss) and portfolio income aren't reported on page 1 of Form 1065. These amounts aren't combined with the trade or business activity income (loss) reported on page 1. Schedule K is used to report the totals of these and other amounts reported on page 1.
Schedule K-1.
Schedule K-1 shows each partner's separate share. Attach a copy of each Schedule K-1 to the Form 1065 filed with the IRS. Keep a copy with a copy of the partnership return as a part of the partnership's records and furnish a copy to each partner. If the partner is a DE, furnish the Schedule K-1 to the DE partner. If a partnership interest is held by a nominee on behalf of another person, the partnership may be required to furnish Schedule K-1 to the nominee. See Temporary Regulations sections 1.6031(b)-1T and 1.6031(c)-1T for more information.
Give each partner a copy of either the Partner's Instructions for Schedule K-1 (Form 1065) or specific instructions for each item reported on the partner's Schedule K-1.
The partnership doesn't need IRS approval to use a substitute Schedule K-1 if it's an exact copy of the IRS schedule. The boxes must use the same numbers and titles and must be in the same order and format as on the comparable IRS Schedule K-1. The substitute schedule must include the OMB number. The partnership must provide each partner with the Partner's Instructions for Schedule K-1 (Form 1065) or other prepared specific instructions for each item reported on the partner's Schedule K-1.
The partnership must request IRS approval to use other substitute Schedules K-1. To request approval, write to:
Internal Revenue Service
Attention: Substitute Forms Program
SE:W:CAR:MP:P:TP:TP
5000 Ellin Road, Mail Stop C6-110
Lanham, MD 20706
substituteforms@irs.gov
Each partner's information must be on a separate sheet of paper. Therefore, separate all continuously printed substitutes before you file them with the IRS.
The partnership may be subject to a penalty if it files Schedules K-1 that don't conform to the specifications discussed in Pub. 1167, General Rules and Specifications for Substitute Forms and Schedules.
Allocate shares of income, gain, loss, deduction, or credit among the partners according to the partnership agreement for sharing income or loss generally. Partners may agree to allocate specific items in a ratio different from the ratio for sharing income or loss. For instance, if the net income exclusive of specially allocated items is divided evenly among three partners but some special items are allocated 50% to one, 30% to another, and 20% to the third partner, report the specially allocated items on the appropriate line of the applicable partner's Schedule K-1 and the total on the appropriate line of Schedule K, instead of on the numbered lines on page 1 of Form 1065, Form 1125-A, or Schedule D.
If a partner's interest changed during the year (such as the entrance of a new partner, the exit of a partner, an increase to a partner's interest through an additional capital contribution, or a decrease in a partner's interest through a distribution), see section 706(d) and Regulations section 1.706-4 before determining each partner's distributive share of any item of income, gain, loss, and deduction, and other items. Partnership items are allocated to a partner only for the part of the year in which that person is a member of the partnership. Generally, for each change in a partner’s interest, the partnership will either allocate its items using a proration method or a closing-of-the-books method. Special rules apply to certain partnerships, certain variations, and certain items. See Regulations section 1.706-4 for additional rules and procedures for making elections. In addition, special rules in section 706(d)(2) apply to certain items of partnerships that report their income on the cash basis, and special rules in section 706(d)(3) apply to tiered partnerships.
Special rules on the allocation of income, gain, loss, and deductions generally apply if a partner contributes property to the partnership and the FMV of that property at the time of contribution differs from the contributing partner's adjusted tax basis. Under these rules, the partnership must use a reasonable method of making allocations of income, gain, loss, and deductions from the property so that the contributing partner receives the tax burdens and benefits of any built-in gain or loss (that is, precontribution appreciation or diminution of value of the contributed property). See Regulations section 1.704-3 for details on how to make these allocations, including a description of specific allocation methods that are generally reasonable.
See Dispositions of Contributed Property , earlier, for special rules on the allocation of income, gain, loss, and deductions on the disposition of property contributed to the partnership by a partner.
If the partnership agreement doesn't provide for the partner's share of income, gain, loss, deduction, or credit, or if the allocation under the agreement doesn't have substantial economic effect, the partner's share is determined according to the partner's interest in the partnership. See Regulations section 1.704-1 for more information.
Generally, the partnership is required to prepare and give a Schedule K-1 to each person who was a partner in the partnership at any time during the year. Schedule K-1 must be provided to each partner on or before the day on which the partnership return is required to be filed.
However, a foreign partnership that has one or more U.S. partners must file Form 1065. But if it meets each of the following four requirements, it isn't required to file or provide Schedules K-1 for foreign partners (unless the foreign partner is a pass-through entity through which a U.S. person holds an interest in the foreign partnership).
Generally, any person who holds an interest in a partnership as a nominee for another person must furnish to the partnership the name, address, etc., of the other person.
If a married couple each had an interest in the partnership, prepare a separate Schedule K-1 for each of them.
In order to enable accurate scanning and processing of Schedule(s) K-1, please use a 10-point Helvetica Light Standard font for all entries on Schedules K-1 if the entries are typed or made using a computer.
If the return is for a fiscal year or a short tax year, fill in the tax year space at the top of each Schedule K-1. On each Schedule K-1, enter the information about the partnership and the partner in Parts I and II (items A through N). In Part III, enter the partner's distributive share of each item of income, deduction, and credit and any other information the partner needs to file the partner's tax return, including information needed to prepare state and local tax returns.
Codes.
In box 11 and boxes 13 through 15, and 17 through 20, identify each item by entering a code in the column to the left of the entry space for the dollar amount. These codes are identified in these instructions and on the List of Codes in the Partner’s Instructions for Schedule K-1 (Form 1065).
Attached statements.
When attaching statements to Schedule K-1 to report additional information to the partner, indicate there's a statement for the following.
More than one attached statement can be placed on the same sheet of paper. The information included in the statement should be identified in alphanumeric order by box number followed by the letter code (if any), description, and dollar amount for each item. For example: “Box 13, code J—Section 59(e)(2) expenditures—$1,000.” This can be followed with any additional information the partner needs to determine the proper tax treatment of the item.
Section 721(c) partnerships.
When the gain deferral method, as described in Regulations section 1.721(c)-3, is being applied, a partnership that is a section 721(c) partnership will attach to the Schedule K-1 provided to a U.S. transferor the information required under Regulations sections 1.721(c)-6(b)(2) and (3). A partnership that is a section 721(c) partnership will also attach to its Form 1065 a Schedule K-1 for each partner that is a related foreign person with respect to the U.S. transferor. For an indirect partner that is a related foreign person with respect to the U.S. transferor, the Schedule K-1 will only include relevant information with respect to section 721(c) property. See Regulations section 1.721(c)-1 for definitions.
On each Schedule K-1, enter the name, address, and identifying number of the partnership.
Item C.
If the partnership is filing its return electronically, enter "e-file." Otherwise, enter the name of the IRS Service Center where the partnership will file its return. See Where To File , earlier.
Complete a Schedule K-1 for each partner. On each Schedule K-1, enter the partner's name, address, identifying number, and distributive share items. See special rules below for partners that are DEs.
For an individual partner, enter the partner's SSN or individual taxpayer identification number (ITIN) rather than the TIN of the DE partner. For all other partners, enter the partner's EIN.
However, if a partner is an IRA, enter the identifying number of the custodian of the IRA. Don't enter the identification number of the person for whom the IRA is maintained. If the partnership reports UBTI to such IRA partner, include the IRA partner's unique EIN in box 20, code AR, along with the amount of such income.
For tax year 2023, PTPs aren't required to include the IRA partner’s unique EIN in box 20, code AR.
Don’t include dashes when entering the EIN in box 20.
Foreign partners without a U.S. identifying number should be notified by the partnership of the necessity of obtaining a U.S. identifying number. Certain aliens who aren't eligible to obtain SSNs can apply for an ITIN on Form W-7, Application for IRS Individual Taxpayer Identification Number.
If the partner in the partnership is an entity, such as single-member LLC, that is a DE for federal income tax purposes, enter the TIN of the beneficial owner of the DE partner in item E rather than the TIN of the DE partner. The beneficial owner is the taxpayer who owns the DE partner. In item F, enter the name and address of the beneficial owner of the DE partner. See the instructions for item H2 below.
If the partner is an LLC or a trust, the partnership should inquire as to whether the LLC is a DE for federal income tax purposes. If the LLC or trust is a DE, the partnership must verify that the partner's TIN is the TIN used by the partner's beneficial owner in filing its federal income tax return.
Truncating recipient’s TIN on Schedule K-1.
The partnership can truncate a partner's identifying number on the Schedule K-1 the partnership sends to the partner. Truncation isn't allowed on the Schedule K-1 the partnership files with the IRS. Also, the partnership can't truncate its own identification number on any form.
To truncate, where allowed, replace the first five digits of the nine-digit number with asterisks (*) or Xs (for example, an SSN xxx-xx-xxxx would appear as ***-**-xxxx or XXX-XX-xxxx). For more information, see Regulations section 301.6109-4.
Foreign address.
If the partner has a foreign address, enter the information in the following order: city or town, state or province, country, and ZIP or foreign postal code. Follow the country's practice for entering the postal code. Don't abbreviate the country name.
Complete item G on all Schedules K-1. If a partner holds interests as both a general and limited partner, check both boxes and attach a statement for each activity that shows the amounts allocable to the partner's interest as a limited partner.
Check the foreign partner box if the partner is a nonresident alien individual, foreign partnership, foreign corporation, foreign estate, foreign trust, or foreign government. Otherwise, check the domestic partner box.
If the partner is a DE, check the box and provide the name and TIN of the DE partner. The partnership should make reasonable attempts to obtain the DE’s TIN. If after making reasonable attempts to obtain the DE’s TIN such TIN is unavailable or unknown to the partnership, the partnership may report the DE’s TIN as unknown. If the DE doesn't have a TIN, enter “None” in the space for the DE’s TIN. For more information about DE reporting, go to IRS.gov/forms-pubs/clarifications-for-disregarded-entity-reporting-and-section-743b-reporting.
State whether the partner is an individual, a corporation, an estate, a trust, a partnership, a DE, an exempt organization, a foreign government, or a nominee (custodian). If the partner is an LLC and has elected to be treated as other than a DE under Regulations section 301.7701-3 for federal income tax purposes, the partnership must enter the LLC's classification for federal income tax purposes (that is, a corporation or partnership). If any legal owner of the partnership is a DE for federal income tax purposes, report the beneficial owner’s entity type in item I1. If the partner is a nominee, use one of the following codes after the word “nominee” to indicate the type of entity the nominee represents: I—Individual; C—Corporation; F—Estate or Trust; P—Partnership; DE—Disregarded Entity; E—Exempt Organization; IRA—Individual Retirement Arrangement; or FGOV—Foreign Government. If the partner is a nominee that acts on behalf of more than one person, use code M—Multiple.
On each line, enter the partner's percentage share of the partnership's profit, loss, and capital as of the beginning and end of the partnership's tax year, as determined under the partnership agreement. If a partner's interest commences after the beginning of the partnership's tax year, enter in the Beginning column the percentages that existed for the partner immediately after admission. If a partner's interest terminates before the end of the partnership's tax year, enter in the Ending column the percentages that existed immediately before termination.
On the line for Capital , enter the percentage share of the capital that the partner would receive if the partnership was liquidated by the distribution of undivided interests in partnership assets and liabilities. If the partner's capital account is negative or zero, express the percentage ownership of capital as zero.
The partner's percentage share of each category must be expressed as a percentage. The percentage must not be negative. The total percentage interest in each category must total 100% for all partners. To determine whether the total beginning and ending percentages are 100%, don't include the beginning percentage for a partner that wasn't a partner at the beginning of the partnership's tax year or the ending percentage for a partner that left the partnership before the end of the partnership's tax year. If the partnership agreement doesn't express the partner's share of profit, loss, and capital as fixed percentages, the partnership may use a reasonable method in arriving at each percentage for purposes of completing the items required by item J, as long as such method is consistent with the partnership agreement and is applied consistently from year to year. Maintain records to support the share of profits, share of losses, and share of capital reported for each partner.
If there is a decrease in the partner's share of profits, losses, or capital, indicate whether it was due to a sale or an exchange.
Check the Sale box in this item if there was a taxable sale of all or part of a partnership interest to a new or pre-existing partner during the year, regardless of whether the partner recognized gain or loss on the transaction(s). Sale, for the purposes of this checkbox, means a taxable transaction involving the transfer of a partnership interest. This will exclude transfers subject to gain recognition under section 721(b). This will also exclude transactions where a new partnership interest is issued to a partner in exchange for property contributed to the partnership, even if some gain is recognized by the contributing partner.
Check the Exchange box in this item if there was a nontaxable exchange of all or part of a partnership interest to a new or pre-existing partner during the year. Exchange, for purposes of this checkbox, means a nontaxable transaction involving the transfer of a partnership interest excluding a transfer on the death of a partner. Exchange also includes a transaction under section 721(a) regardless of whether gain recognition took place.
Enter each partner's share of nonrecourse liabilities, partnership-level qualified nonrecourse financing, and other recourse liabilities at the end of the year.
Nonrecourse liabilities are those liabilities of the partnership for which no partner (or related person) bears the economic risk of loss. The extent to which a partner bears the economic risk of loss is determined under the rules of Regulations section 1.752-2. Don't include partnership-level qualified nonrecourse financing (defined below) on the line for nonrecourse liabilities.
If the partner terminated their interest in the partnership during the year, enter the share that existed immediately before the total disposition. In all other cases, enter it as of the end of the year.
If the partnership is engaged in two or more different types of at-risk activities, or a combination of at-risk activities and any other activity, attach a statement showing the partner's share of nonrecourse liabilities, partnership-level qualified nonrecourse financing, and other recourse liabilities for each activity. See Pub. 925 to determine if the partnership is engaged in more than one at-risk activity.
The at-risk rules of section 465 generally apply to any activity carried on by the partnership as a trade or business or for the production of income. These rules generally limit the amount of loss and other deductions a partner can claim from any partnership activity to the amount for which that partner is considered at risk. However, for partners who acquired their partnership interests before 1987, the at-risk rules don't apply to losses from an activity of holding real property the partnership placed in service before 1987. The activity of holding mineral property doesn't qualify for this exception. Identify on an attached statement to Schedule K-1 the amount of any losses that aren't subject to the at-risk rules.
If a partnership is engaged in an activity subject to the limitations of section 465(c)(1) (such as films or videotapes, leasing section 1245 property, farming, or oil and gas property), give each partner their share of the total pre-1976 losses from that activity for which there existed a corresponding amount of nonrecourse liability at the end of each year in which the losses occurred. See Form 6198, At-Risk Limitations, and related instructions for more information.
Qualified nonrecourse financing secured by real property used in an activity of holding real property that is subject to the at-risk rules is treated as an amount at risk. Qualified nonrecourse financing generally includes financing for which no one is personally liable for repayment that is borrowed for use in an activity of holding real property and that is loaned or guaranteed by a federal, state, or local government or that is borrowed from a qualified person. Qualified persons include any person actively and regularly engaged in the business of lending money, such as a bank or savings and loan association. Qualified persons generally don't include related parties (unless the nonrecourse financing is commercially reasonable and on substantially the same terms as loans involving unrelated persons), the seller of the property, or a person who receives a fee for the partnership's investment in the real property. See section 465(b)(6) for more information on qualified nonrecourse financing.
The partner as well as the partnership must meet the qualified nonrecourse rules. Therefore, the partnership must enter on an attached statement any other information the partner needs to determine if the qualified nonrecourse rules are also met at the partner level.
If a partnership (upper-tier) owns a direct interest in other partnerships (lower-tier), then Regulations section 1.752-4(a) requires that the upper-tier partnership allocate to its partners its share of the lower-tier partnership's liabilities (except for any liability of the lower-tier partnership that is owed to the upper-tier partnership). Allocate those lower-tier partnership liabilities to each partner based on whether that liability is a recourse or nonrecourse liability to the partner under the regulations under section 752. The characterization of a liability may change as it moves from a lower-tier partnership to an upper-tier partnership. If Schedule K-1 (Form 1065) includes lower-tier partnership liabilities, check the box in item K2. If the total liabilities on all Schedules K-1 (Form 1065) don't equal the total liabilities on Schedule L, attach a reconciliation.
Check the box in item K3 if the partner or a related person has certain payment obligations, including guarantees or DROs, with respect to any liability in item K1. See the instructions for line 20c, code X, for additional information. For purposes of item K3, a payment obligation is defined as an obligation under Regulations section 1.752-2(b)(1) that is recognized under Regulations sections 1.752-2(b)(3)(i)(A) and (B) (such as a recognized guarantee or an obligation to restore a deficit capital account upon liquidation) and a related person is defined as a related person as defined in Regulations section 1.752-4(b).
You aren’t required to complete item L if the answer to question 4 of Schedule B is “Yes.” If you're required to complete this item, also see the instructions for Schedule M-2, later.
Tax-basis method.
Figure each partner's capital account for the partnership's tax year using the transactional approach, discussed below, for the tax-basis method.
If you're uncertain how to report a partnership event or transaction, you should account for the event or transaction in a manner generally consistent with figuring the partner's adjusted tax basis in its partnership interest (without regard to partnership liabilities), taking into account the rules and principles of sections 705, 722, 733, and 742 and by reporting the amount on the line for other increase (decrease). The partner's ending capital account as reported using the tax-basis method in item L might not equal the partner's adjusted tax basis in its partnership interest. Generally, this is because a partner's adjusted tax basis in its partnership interest includes the partner's share of partnership liabilities, as well as partner-specific adjustments. Each partner is responsible for maintaining a record of the adjusted tax basis in its partnership interest.
Enter the partner's ending capital account as determined for last year on the line for beginning capital account. If a partner joined the partnership through a contribution to the partnership this year, enter zero as the partner's beginning capital account.
On the line for capital contributed during the year, enter the amount of cash plus the adjusted tax basis of all property contributed by the partner to the partnership during the year. The amount you enter on this line should be reduced by any liabilities assumed by the partnership in connection with, or liabilities to which the property is subject immediately before, the contribution. This amount might be negative.
On the line for current year net income (loss), enter the partner's distributive share of partnership income and gain (including tax-exempt income) as figured for tax purposes for the year, minus the partner's distributive share of partnership loss and deductions (including nondeductible, noncapital expenditures) as figured for tax purposes for the year.
On the line for other increase (decrease), enter the sum of all other increases or decreases that affected the partner's capital account for tax purposes during the year and attach a statement explaining each adjustment. For example, if a new partner acquired its interest in the partnership from another partner in a purchase, exchange, gift, or inheritance, enter an amount for the transferee under other increase that is equal to the transferor partner's ending capital account with respect to the interest transferred immediately before the transfer figured using the tax-basis method. Other examples of increases include the following.
If a transferor partner disposed of its interest in the partnership by sale, exchange, or gift, or as the result of death, enter the transferor partner's ending capital account with respect to the interest transferred immediately before the transfer figured using the tax-basis method. Other examples of decreases include the following.
Section 743(b) basis adjustments aren't taken into account in calculating a partner's capital account under the tax-basis method.
On the line for withdrawals and distributions, enter the amount of cash plus the adjusted tax basis of all property distributed by the partnership to the partner during the year. The amount you enter on this line should be reduced by any liabilities assumed by the partner in connection with, or liabilities to which the property is subject immediately before, the distribution. This amount might be negative.
The sum of the amounts shown on the lines in item L above the line for ending capital account must equal the amount reported on the line for ending capital account. A partner's ending capital account determined under the tax-basis method may be negative if the sum of a partner's losses and distributions exceeds the sum of the partner's contributions and share of income.
Publicly traded partnerships (PTPs).
In the case of a sale or exchange of an interest in a PTP, you may determine a transferee partner's beginning capital account by adjusting the partner's beginning capital account to reflect the transferee partner's purchase price of the interest rather than entering the transferor partner's ending capital account. In making the adjustments, you may use information required to be reported to you under Regulations section 1.6031(c)-1T, and publicly available trading price information.
Check the appropriate box to indicate whether the partner contributed property with a built-in gain or loss during the tax year. If the “Yes” box is checked, attach a statement that contains the following information.
If a partner contributes more than 10 properties with either a built-in gain or built-in loss on any date during the tax year, the partnership isn't required to provide the required information separately for each property contributed for that date. Instead, the partnership can report the (a) number of properties contributed on that date, (b) total amount of built-in gain, and (c) total amount of built-in loss. Don't net the built-in gains and built-in losses; instead, show the total built-in gain and total built-in loss for all properties contributed on that date.
A property's built-in gain is the amount by which the FMV of the property exceeds its adjusted tax basis at the time the property is contributed to the partnership. A property's built-in loss is the amount by which the FMV of the property is less than its adjusted tax basis at the time the property is contributed to the partnership. Partnerships are required to keep track of this information; see Regulations section 1.704-3. This information is also needed for purposes of allocating partnership items to partners because income, gain, loss, and deductions related to property contributed to the partnership by a partner must be shared among the partners so as to take account of the variation between the basis of the property to the partnership and its FMV at the time of contribution. If the partnership distributes any property (other than built-in gain property) to a partner that has contributed built-in gain property to the partnership within the last 7 years, it will need this information for the attached statement required in the instructions for Schedule K, line 19b, for distributions subject to section 737 (code B). If the partnership distributes contributed property with a built-in gain or loss to any partner other than the partner that contributed the property and the date of the distribution is within 7 years of the date the property was contributed to the partnership, it will need this information for the attached statement required by the instructions for line 20c of Schedule K for the precontribution gain (loss) (code W).
For item N, the partnership should report the partner's share of net unrecognized section 704(c) gains or losses, both at the beginning and at the end of the partnership's tax year. Solely for purposes of completing item N, the section 704(c) gain or loss is the partner's share of the net (net means aggregate or sum) of all unrecognized section 704(c) gain or loss in partnership property, including section 704(c) gain or loss arising from revaluations of partnership property. See Notice 2019-66 for more information.
These instructions refer to the lines on Schedule K and the boxes on Schedule K-1.
An item is specially allocated if it's allocated to a partner in a ratio different from the ratio for sharing income or loss generally.
Report specially allocated ordinary gain (loss) on Schedule K, line 11, and in box 11 of Schedule K-1. Report other specially allocated items in the applicable boxes of the partner's Schedule K-1, with the total amount on the applicable line of Schedule K. See How Income Is Shared Among Partners , earlier.
A partnership has a long-term capital gain that is specially allocated to a partner and a net long-term capital gain reported on Schedule D (Form 1065), line 15, that must be reported on Schedule K, line 9a. Because specially allocated gains or losses aren't reported on Schedule D, the partnership must report both the net long-term capital gain from Schedule D and the specially allocated gain on Schedule K, line 9a. Box 9a of Schedule K-1 for the partner must include both the specially allocated gain and the partner's distributive share of the net long-term capital gain from Schedule D.