Specific Instructions

Table of Contents

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 are not 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. Do not enter separately stated amounts on the numbered lines on Form 1065, page 1, on Form 1125-A, or on Schedule D.

File all five pages of Form 1065. However, if the answer to question 6 of Schedule B is “Yes,” Schedules L, M-1, and M-2 on page 5 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.

Note.

A foreign partnership required to file a return generally must report all of its foreign and U.S. source income. For rules regarding whether a foreign partnership must file Form 1065, see Who Must File, earlier.

Name and Address

Print or type 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 does not 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 on the street address line “C/O” 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 its possessions or 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. Do not 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.

Note.

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.

Items A and C

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 the 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 the instructions.

Item D. Employer Identification Number (EIN)

Show the correct EIN in item D. If the partnership does not have an EIN, it must apply for one:

A limited liability company must determine which type of federal tax entity it will be (that is, partnership, corporation, or disregarded entity) before applying for an EIN (see Form 8832, Entity Classification Election, for details). If the partnership has not 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.

Note.

The online application process is not yet available for partnerships with addresses in foreign countries. If you are located outside the United States, please call 1-267-941-1099.

Do not request a new EIN for a partnership that terminated because of a sale or exchange of at least 50% of the total interests in partnership capital and profits.

Item F. Total Assets

You are not required to complete item F if the answer to question 6 of Schedule B is “Yes.

If you are 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 -0-.

Item G

A technical termination (box G(6)) occurs when there has been a sale or exchange of 50% or more of the interests in partnership capital and profits within a 12-month period.

If this Form 1065 is being filed for the tax period ending on the date a technical termination has occurred, check box G(2) and box G(6). See Termination of the Partnership, earlier.

If this Form 1065 is being filed for the tax period beginning immediately after a technical termination has occurred, check box G(1) and box G(6). A new EIN is not needed in a technical termination. The new partnership that is formed will continue to use the EIN of the terminated partnership.

For information on amended returns, see Amended Return, earlier.

Item J. Schedule C and Schedule M-3

A partnership must complete Schedule M-3, Net Income (Loss) Reconciliation for Certain Partnerships, instead of Schedule M-1, if any of the following apply.

  1. The amount of total assets at the end of the tax year is $10 million or more.

  2. The amount of adjusted total assets for the tax year is $10 million or more. Adjusted total assets is defined in the Instructions for Schedule M-3.

  3. The amount of total receipts (as defined later, in the instructions for Schedule B, question 6), for the tax year, is $35 million or more.

  4. An entity that is a reportable entity partner with respect to the partnership owns or is deemed to own, directly or indirectly, an interest of 50% or more in the partnership's capital, profit, or loss, on any day during the tax year of the partnership. Reportable entity partner is defined in the Instructions for Schedule M-3.

A partnership filing Form 1065 that is not 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, Additional Information for Schedule M-3 Filers. See the Instructions for Schedule C and Schedule M-3 for more information.

Income

Report only trade or business activity income on lines 1a through 8. Do not report rental activity income or portfolio income on these lines. See Passive Activity Limitations, earlier, for definitions of rental 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.   Do not 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 line 18b of Schedule K 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 regulated investment company, on line 18a of Schedule K and in box 18 of Schedule K-1 using code A.

  See Deductions, after the instructions for lines 1a through 8 and before the instructions for lines 9 through 21, for information on how to report expenses related to tax-exempt income.

Election to defer income from cancelled debt.   If the partnership elected to defer cancellations of debt (COD) income under section 108(i), the exclusions for COD under sections 108(a)(1)(A), (B), (C), and (D) do not apply to the income from the COD for the tax year of the election and any later year. If the partnership issued a debt instrument with original issue discount (OID) that is subject to section 108(i)(2) because of an election under section 108(i) to defer COD income, the deduction for all or a portion of the OID that accrues prior to the first tax year the COD is includible in income is deferred until the COD is includible in income. The amount of OID deferred is limited to the amount of COD income subject to the section 108(i) election. See section 108(i) and Rev. Proc. 2009-37, 2009-36 I.R.B. 309 for more information. See also Regulations section 1.108(i)-2.

Section 108(i) election and reporting by tiered partnerships.   A partnership that receives a Schedule K-1 from another partnership containing information relating to a section 108(i) election must report on the Schedules K-1 to its partners certain information relative to the section 108(i) election. See Rev. Proc. 2009-37, 2009-36 I.R.B. 309 for details. See also Regulations section 1.108(i)-2.

Line 1a. Gross Receipts or Sales

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.

Special rules apply to certain income, as discussed below. For example, do not include gross receipts from farming on line 1a. Instead, show the net profit (loss) from farming on line 5. Also, do not include on line 1a rental activity income or portfolio income.

In general, advance payments are reported in the year of receipt. To report income from long-term contracts, see section 460. For special rules for reporting certain advance payments for goods and long-term contracts, see Regulations section 1.451-5. For permissible methods for reporting advance payments for services and certain goods by an accrual method partnership, see Rev. Proc. 2004-34, 2004-22 I.R.B. 991, as modified by Rev. Proc. 2011-14, and as clarified and modified by Rev. Proc. 2011-18, and modified by Rev. Proc. 2013-29, 2013-33 I.R.B. 141.

Installment sales.   Generally, the installment method cannot be used for dealer dispositions of property. A “dealer disposition” is any disposition of:
  1. Personal property by a person who regularly sells or otherwise disposes of personal property of the same type on the installment plan or

  2. Real property held for sale to customers in the ordinary course of the taxpayer's trade or business.

   Exception. These restrictions on using the installment method do not 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 allocable 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.
  • Dealer dispositions of property before March 1, 1986.

  • Dispositions of property used or produced in the trade or business of farming.

  • Certain dispositions of timeshares and residential lots reported under the installment method.

  Attach a statement showing the following information for the current year and the 3 preceding years.
  • Gross sales.

  • Cost of goods sold.

  • Gross profits.

  • Percentage of gross profits to gross sales.

  • Amount collected.

  • Gross profit on the amount collected.

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.

Line 2. Cost of Goods Sold

If the partnership has a cost of goods sold deduction, complete and attach Form 1125-A, if applicable. Enter on Form 1065, page 1,line 2 the amount from Form 1125-A, line 8. See Form 1125-A and its instructions.

Line 4. Ordinary Income (Loss) From Other Partnerships, Estates, and Trusts

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.

Do not 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 line 20a of Form 8825 if the amount is from a rental real estate activity.

Ordinary income (loss) from another partnership that is a publicly traded partnership is not reported on this line. Instead, report the amount separately on line 11 of Schedule K and in box 11 of Schedule K-1 using code F.

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 is a loss from another partnership, the amount of the loss that may be claimed is subject to the at-risk and basis limitations as appropriate.

If the tax year of your partnership does not 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.

Line 5. Net Farm Profit (Loss)

Enter the partnership's net farm profit (loss) from Schedule F (Form 1040), Profit or Loss From Farming. Attach Schedule F (Form 1040) to Form 1065. Do not 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), do not 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.

Note.

Because the election to deduct the expenses of raising any plant with a preproductive period of more than 2 years is made by the partner and not the partnership, farm partnerships that are not required to use an accrual method should not 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 Regulations section 1.263A-4(d) for more information.

Line 6. Net Gain (Loss) From Form 4797

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 line 19 of Form 8825 or line 3c of Schedule K and 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, Sales of Business Property, 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 should not 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 the instructions for Dispositions of property with section 179 deductions (code L), later, for details.

Line 7. Other Income (Loss)

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.

  1. Interest income derived in the ordinary course of the partnership's trade or business, such as interest charged on receivable balances.

  2. Recoveries of bad debts deducted in prior years under the specific charge-off method.

  3. Taxable income from insurance proceeds.

  4. The amount included in income from line 2 of Form 6478, Biofuel Producer Credit.

  5. The amount included in income from line 8 of Form 8864, Biodiesel and Renewable Diesel Fuels Credit.

  6. The recapture amount under section 280F if the business use of listed property drops to 50% or less. To figure the recapture amount, complete Part IV of Form 4797.

  7. Any recapture amount under section 179A for clean-fuel vehicle refueling property that ceases to qualify. See Regulations section 1.179A-1 for details.

  8. All section 481 income adjustments resulting from changes in accounting methods. Show the computation of the section 481 adjustments on an attached statement.

  9. Part or all of the proceeds received from certain employer-owned life insurance contracts issued after August 17, 2006. Partnerships that own one or more employer-owned life insurance contracts issued after that date must file Form 8925, Report of Employer-Owned Life Insurance Contracts. See section 101(j) for details.

Do not 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.

Do not report portfolio or rental activity income (loss) on this line.

Deductions

Report only trade or business activity deductions on lines 9 through 20.

Do not report the following expenses on lines 9 through 20.

  • Rental activity expenses. Report these expenses on Form 8825 or line 3b of Schedule K.

  • Deductions allocable to portfolio income. Report these deductions on line 13d of Schedule K and in box 13 of Schedule K-1 using code I, K, or L.

  • Nondeductible expenses (for example, expenses connected with the production of tax-exempt income). Report nondeductible expenses on line 18c of Schedule K and in box 18 of Schedule K-1 using code C.

  • Qualified expenditures to which an election under section 59(e) may apply. The instructions for line 13c of Schedule K and for Schedule K-1, box 13, code J, explain how to report these amounts.

  • Items the partnership must state separately that require separate computations by the partners. Examples include expenses incurred for the production of income instead of in a trade or business, charitable contributions, foreign taxes paid or accrued, intangible drilling and development costs, soil and water conservation expenditures, amortizable basis of reforestation expenditures, and exploration expenditures. The distributive shares of these expenses are reported separately to each partner on Schedule K-1.

Limitations on Deductions

Section 263A uniform capitalization rules.   The uniform capitalization rules of section 263A generally require partnerships to capitalize or include in inventory costs, certain costs incurred in connection with the following.
  • The production of real property and tangible personal property held in inventory or held for sale in the ordinary course of business.

  • Real property or personal property (tangible and intangible) acquired for resale.

  • The production of real property and tangible personal property by a partnership for use in its trade or business or in an activity engaged in for profit.

  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 are not deductible until the property to which the costs relate is sold, used, or otherwise disposed of by the partnership.

Exceptions.

Section 263A does not apply to the following.

  • Inventoriable items accounted for in the same manner as materials and supplies that are not incidental. See Form 1125-A and its instructions for details.

  • Personal property acquired for resale if the partnership's average annual gross receipts for the 3 prior tax years were $10 million or less.

  • Timber.

  • Most property produced under a long-term contract.

  • Certain property produced in a farming business. See the note at the end of the instructions for line 5, earlier.

  • Geological and geophysical costs amortized under section 167(h).

The partnership must report the following costs separately to the partners for purposes of determinations under section 59(e).

  • Research and experimental costs under section 174.

  • Intangible drilling costs for oil, gas, and geothermal property.

  • Mining exploration and development costs.

Indirect costs.

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.

  • Administration expenses.

  • Taxes.

  • Depreciation.

  • Insurance.

  • Compensation paid to officers attributable to services.

  • Rework labor.

  • Contributions to pension, stock bonus, and certain profit-sharing, annuity, or deferred compensation plans.

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 start-up and organizational costs.   Generally, a partnership can elect to deduct up to $5,000 of business start-up and organizational costs paid or incurred after October 22, 2004. Any remaining costs must be amortized. The $5,000 deduction is reduced (but not below zero) by the amount the total costs exceed $50,000. If the total costs are $55,000 or more, the deduction is reduced to zero. Any costs not deducted must be amortized as explained below. See sections 195(b) and 709(b).

Time for making an election.

The partnership generally elects to deduct start-up 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 start-up 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 write “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 start-up 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 start-up or organizational costs is irrevocable and applies to all start-up and organizational costs that are related to the trade or business.

Amortization.

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 20. For amortization that began during the tax year, complete and attach Form 4562.

Syndication costs.   Costs for issuing and marketing interests in the partnership, such as commissions, professional fees, and printing costs, must be capitalized. They cannot 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. (Do not 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.)
  1. Work opportunity credit.

  2. Credit for increasing research activities.

  3. Disabled access credit.

  4. Empowerment zone employment credit.

  5. Indian employment credit.

  6. Credit for employer social security and Medicare taxes paid on certain employee tips.

  7. Orphan drug credit.

  8. Credit for small employer pension plan startup costs.

  9. Credit for employer-provided childcare facilities and services.

  10. Low sulfur diesel fuel production credit.

  11. Mine rescue team training credit.

  12. Credit for employer differential wage payments.

  13. Credit for small employer health insurance premiums.

  If the partnership has any of these credits, figure each current year credit before figuring the deductions for expenses on which the credit is based.

Line 9. Salaries and Wages

Enter the salaries and wages paid or incurred for the tax year, reduced by the amount of the following credit(s), if applicable:

  • Work Opportunity Credit (Form 5884).

  • Empowerment Zone Employment Credit (Form 8844)

  • Indian Employment Credit (Form 8845).

  • Mine Rescue Team Training Credit (Form 8923).

  • Credit for Employer Differential Wage Payments (Form 8932).

Do not 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.

Do not 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.

Line 10. Guaranteed Payments to Partners

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 are not 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.

Do not 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 are not deductible on line 10. They are capital expenditures. However, they should be separately reported on Schedule K, line 4, and on Schedule K-1, box 4.

Do not include distributive shares of partnership profits.

Report the guaranteed payments to the appropriate partners on Schedule K-1, box 4.

Line 11. Repairs and Maintenance

Enter the costs of incidental repairs and maintenance that do not add to the value of the property or appreciably prolong its life, but only to the extent that such costs relate to a trade or business activity and are not claimed elsewhere on the return.

The cost of new buildings, machinery, or permanent improvements that increase the value of the property are not deductible. They are chargeable to capital accounts and may be depreciated or amortized.

Line 12. Bad Debts

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 cannot take a bad debt deduction unless the amount was previously included in income.

Line 13. Rent

Enter rent paid on business property used in a trade or business activity. Do not 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 Part V of Form 4562, Depreciation and Amortization. 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  
After 12/31/12 and before 1/1/14 $19,000
After 12/31/07 but before 1/1/13 $18,500
After 12/31/06 but before 1/1/08 $15,500
After 12/31/04 but before 1/1/07 $15,200
After 12/31/03 but before 1/1/05 $17,500
Trucks and Vans  
After 12/31/09 but before 1/1/14 $19,000
After 12/31/08 but before 1/1/10 $18,500
After 12/31/07 but before 1/1/09 $19,000
The inclusion amount for lease terms beginning in 2014 will be published in the Internal Revenue Bulletin in early 2014.

See Pub. 463 for instructions on figuring the inclusion amount.

Line 14. Taxes and Licenses

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.

Do not deduct the following taxes on line 14.

  • Taxes not imposed on the partnership.

  • Federal income taxes or taxes reported elsewhere on the return.

  • Section 901 foreign taxes. Report these taxes separately on Schedule K, line 16l and on Schedule K-1, box 16, using codes L and M.

  • Taxes allocable to a rental activity. Report taxes allocable to rental real estate activity on Form 8825. Report taxes allocable to a rental activity other than a rental real estate activity on line 3b of Schedule K.

  • Taxes allocable to portfolio income. Report these taxes on line 13d of Schedule K and in box 13 of Schedule K-1 using code K.

  • Taxes paid or incurred for the production or collection of income, or for the management, conservation, or maintenance of property held to produce income. Report these taxes separately on line 13d of Schedule K and in box 13 of Schedule K-1 using code W.

See section 263A(a) for rules on capitalization of allocable costs (including taxes) for any property.

  • Taxes, including state or local sales taxes, that are paid or incurred in connection with an acquisition or disposition of property (these taxes must be treated as a part of the cost of the acquired property or, in the case of a disposition, as a reduction in the amount realized on the disposition).

  • Taxes assessed against local benefits that increase the value of the property assessed (such as for paving, etc.).

See section 164(d) for information on apportionment of taxes on real property between seller and purchaser.

Line 15. Interest

Include only interest incurred in the trade or business activities of the partnership that is not claimed elsewhere on the return.

Do not include interest expense on the following.

  • Debt used to purchase rental property or debt used in a rental activity. Interest allocable to a rental real estate activity is reported on Form 8825 and is used in arriving at net income (loss) from rental real estate activities on line 2 of Schedule K and in box 2 of Schedule K-1. Interest allocable to a rental activity other than a rental real estate activity is included on line 3b of Schedule K and is used in arriving at net income (loss) from a rental activity (other than a rental real estate activity). This net amount is reported on line 3c of Schedule K and in box 3 of Schedule K-1.

  • Debt used to buy property held for investment. Interest that is clearly and directly allocable to interest, dividend, royalty, or annuity income not derived in the ordinary course of a trade or business is reported on line 13b of Schedule K and in box 13 of Schedule K-1 using code H. See the instructions for line 13b of Schedule K; box 13, code H of Schedule K-1; and Form 4952, Investment Interest Expense Deduction, for more information on investment property.

  • Debt proceeds allocated to distributions made to partners during the tax year. Instead, report such interest on line 13d of Schedule K and in box 13 of Schedule K-1 using code W. To determine the amount to allocate to distributions to partners, see Notice 89-35, 1989-1 C.B. 675.

  • Debt required to be allocated to the production of designated property. Designated property includes real property, personal property that has a class life of 20 years or more, and other tangible property requiring more than 2 years (1 year in the case of property with a cost of more than $1 million) to produce or construct. Interest allocable to designated property produced by a partnership for its own use or for sale must be capitalized. In addition, a partnership must also capitalize to the basis of the designated property any interest on debt allocable to an asset used to produce designated property. A partner may have to capitalize interest that the partner incurs during the tax year for the partnership's production expenditures. Similarly, interest incurred by a partnership may have to be capitalized by a partner for the partner's own production expenditures. The information required by the partner to properly capitalize interest for this purpose must be provided by the partnership on an attached statement for box 20 of Schedule K-1, using code R. See section 263A(f) and Regulations sections 1.263A-8 through 1.263A-15.

Special rules apply to:

  • Allocating interest expense among activities so that the limitations on passive activity losses, investment interest, and personal interest can be properly figured. Generally, interest expense is allocated in the same manner as debt is allocated. Debt is allocated by tracing disbursements of the debt proceeds to specific expenditures. Temporary Regulations section 1.163-8T gives rules for tracing debt proceeds to expenditures.

  • Interest paid by a partnership to a partner for the use of capital, which should be entered on line 10 as guaranteed payments.

  • Prepaid interest, which generally can only be deducted over the term of the debt. See section 461(g) and Regulations section 1.163-7, 1.446-2, and 1.1273-2(g) for details.

  • Interest which is allocable to unborrowed policy cash values of life insurance, endowment, or annuity contracts issued after June 8, 1997, when the partnership is a policyholder or beneficiary. See section 264(f). Attach a statement showing the computation of the deduction.

Line 16. Depreciation

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.

Do not include any section 179 expense deduction on this line. This amount is not deducted by the partnership. Instead, it is 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.

Line 17. Depletion

If the partnership claims a deduction for timber depletion, complete and attach Form T (Timber), Forest Activities Schedule.

Do not 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.

Line 18. Retirement Plans, etc.

Do not 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 on Schedule K-1, box 13, 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 individual retirement arrangement (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 Internal Revenue Code and whether or not a deduction is claimed for the current year, generally must file the applicable form listed below.

  • Form 5500, Annual Return/Report of Employee Benefit Plan.

  • Form 5500-SF, Short Form Annual Return/Report of Small Employee Benefit Plan (generally filed instead of Form 5500 if there are under 100 participants at the beginning of the plan year).

    Note.

    Form 5500 and Form 5500-SF must be filed electronically under the computerized ERISA Filing Acceptance System (EFAST2). For more information, see the EFAST2 website at www.efast.dol.gov.

  • Form 5500-EZ, Annual Return of One-Participant (Owners and Their Spouses) Retirement Plan. File this form for a plan that only covers one or more partners (or partners and their spouses).

Line 19. Employee Benefit Programs

Enter the partnership's contributions to employee benefit programs not claimed elsewhere on the return (for example, insurance, health, and welfare programs) that are not part of a pension, profit-sharing, etc., plan included on line 18.

Do not 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 are not dependents. Instead, include these amounts on line 10 as guaranteed payments on Schedule K, line 4, and Schedule K-1, box 4, of each partner on whose behalf the amounts were paid. Also report these amounts on Schedule K, line 13d, and Schedule K-1, box 13, using code M, of each partner on whose behalf the amounts were paid.

Line 20. Other Deductions

Enter the total allowable trade or business deductions that are not 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.

  • Amortization. See the Instructions for Form 4562 for more information. Complete and attach Form 4562 if the partnership is claiming amortization of costs that began during the tax year.

  • Insurance premiums.

  • Legal and professional fees.

  • Supplies used and consumed in the business.

  • Utilities.

  • Certain business start-up and organizational costs. See Limitations on Deductions, earlier, for more details.

  • Deduction for certain energy efficient commercial building property. See section 179D, Notice 2006-52, 2006-26 I.R.B. 1175, as amplified and clarified by Notice 2008-40, 2008-14 I.R.B. 725, and modified by Notice 2012-26.

  • Any negative net section 481(a) adjustment.

Also see Special Rules, later.

Do not deduct the following on line 20.

  • Items that must be reported separately on Schedules K and K-1.

  • Fines or penalties paid to a government for violating any law. Report these expenses on Schedule K, line 18c.

  • Expenses allocable to tax-exempt income. Report these expenses on Schedule K, line 18c.

  • Net operating losses. Only individuals and corporations may claim a net operating loss deduction.

  • Amounts paid or incurred to participate or intervene in any political campaign on behalf of a candidate for public office, or to influence the general public regarding legislative matters, elections, or referendums. Report these expenses on Schedule K, line 18c.

  • Expenses paid or incurred to influence federal or state legislation, or to influence the actions or positions of certain federal executive branch officials. However, certain in-house lobbying expenditures that do not exceed $2,000 are deductible. See section 162(e) for more details.

Special Rules

Commercial revitalization deduction.   If the partnership constructed, purchased, or substantially rehabilitated a qualified building in a renewal community, it may have qualified for either (a) a deduction of 50% of qualified capital expenditures in the year the building was placed in service or (b) amortization of 100% of the qualified capital expenditures over a 120-month period beginning with the month the building was placed in service. If the partnership elected to amortize these expenditures, complete and attach Form 4562. To qualify, the building must be nonresidential (as defined in section 168(e)(2)) and placed in service by the partnership. The partnership must be the original user of the building unless it is substantially rehabilitated. The qualified expenditures cannot exceed the lesser of $10 million or the amount allocated to the building by the commercial revitalization agency of the state in which the building is located. Any remaining expenditures are depreciated over the regular depreciation recovery period. See section 1400I for details.

Note.

The commercial revitalization deduction is not available for buildings placed in service after 2009.

Rental real estate.

Do not report this deduction on line 20 if the building is placed in service as rental real estate. A commercial revitalization deduction for rental real estate is not deducted by the partnership but is passed through to the partners in box 13 of Schedule K-1 using code Q.

Travel, meals, and entertainment.   Subject to limitations and restrictions discussed below, a partnership can deduct ordinary and necessary travel, meals, and entertainment expenses paid or incurred in its trade or business. Also, special rules apply to deductions for gifts, skybox rentals, luxury water travel, convention expenses, and entertainment tickets. See section 274 and Pub. 463 for details.

Travel.

The partnership cannot deduct travel expenses of any individual accompanying a partner or partnership employee, including a spouse or dependent of the partner or employee, unless:

  • That individual is an employee of the partnership and

  • His or her travel is for a bona fide business purpose and would otherwise be deductible by that individual.

Meals and entertainment.

Generally, the partnership can deduct only 50% of the amount otherwise allowable for meals and entertainment expenses paid or incurred in its trade or business. In addition (subject to exceptions under section 274(k)(2)):

  • Meals must not be lavish or extravagant;

  • A bona fide business discussion must occur during, immediately before, or immediately after the meal; and

  • A partner or employee of the partnership must be present at the meal.

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.

Membership dues.

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.

Entertainment facilities.

The partnership cannot 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.

Amounts treated as compensation.

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-MISC for an independent contractor.

Reforestation expenditures.   If the partnership made an election to deduct a portion of its reforestation expenditures on line 13d of Schedule K, 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 20 only the amortization of these excess reforestation expenditures. See Reforestation expense deduction (code S), later.

Schedule B. Other Information

Question 1

Check box 1f for any other type of entity and state the type.

Maximum Percentage Owned for Purposes of Questions 3 and 4

To determine the maximum percentage owned in the partnership's profit, loss, or capital for the purposes of questions 3a, 3b, and 4b, 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).

For supplemental information and examples of reasonable methods for determining the maximum percentage owned, go to http://www.irs.gov/Businesses/Partnerships/2008-Changes-to-Form-1065---Frequently-Asked-Questions. Also see Item J. Partner's Profit, Loss, and Capital, later, for more information on ownership percentages.

Questions 3 and 4

Constructive ownership of the partnership.   For purposes of question 3, except with respect to 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 which 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 his or her 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 will not 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 3, 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 which 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 3 and 4 are included below. For the purposes of questions 3 and 4, 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.

Example for question 3a.

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 3a 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.

Example for question 3b.

A owns, directly, 50% of the profit, loss, or capital of Partnership X. B, the daughter of A, does not own, directly, any interest in X and does not 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 is not attributable to B. On Partnership X's Form 1065, it must answer “Yes” to question 3b 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.

Question 4a.

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 the 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 disregarded entity, list the information for the corporation rather than the disregarded entity.

Question 4b.

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 disregarded entity rather than the disregarded entity.

Question 5

Generally, the tax treatment of partnership items is determined at the partnership level in a consolidated audit proceeding under sections 6221 through 6234, rather than in separate proceedings with individual partners. Small partnerships are not subject to the rules for consolidated audit proceedings. “Small partnerships are defined as any partnership having 10 or fewer partners each of whom is an individual (other than a nonresident alien), a C corporation, or an estate of a deceased partner. The small partnership exception to the consolidated audit procedures does not apply if any partner during the tax year is a partnership, estate, trust, S corporation, nominee, or disregarded entity.

Small partnerships can elect to be subject to the rules for consolidated audit proceedings by attaching Form 8893, Election of Partnership Level Tax Treatment, to the partnership return for the first tax year for which the election is to be effective. This election must be signed by all persons who were partners of the partnership at any time during the partnership's tax year. Once made, the election may not be revoked without IRS consent (see Form 8894, Request to Revoke Partnership Level Tax Treatment Election). See section 6231(a)(1)(B) and Form 8893 for more information.

The partnership does not make this election when it answers “Yes” to question 5 or when it designates a Tax Matters Partner on Form 1065. The election must be made separately by filing Form 8893.

Question 6

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.

Question 7

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).

Question 8

Generally, the partnership will have income if debt is cancelled or forgiven. The determination of the existence and amount of cancellation of debt income is made 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 made by each individual partner under rules found in section 108. For more information, see Pub. 334, Tax Guide for Small Business.

Question 9

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.

Question 10. Foreign Accounts

Answer “Yes” if either 1 or 2 below applies to the partnership. Otherwise, check the “No” box.

  1. At any time during calendar year 2013, the partnership had an interest in or signature or other authority over a bank account, securities account, or other financial account in a foreign country (see FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR), formerly TD F 90–22.1); and

    • The combined value of the accounts was more than $10,000 at any time during the calendar year and

    • The accounts were not with a U.S. military banking facility operated by a U.S. financial institution.

  2. The partnership owns more than 50% of the stock in any corporation that would answer the question “Yes” based on item 1, above.

If the “Yes” box is checked for the question:

  • Enter the name of the foreign country or countries. Attach a separate sheet if more space is needed.

  • File FinCEN Form 114 electronically at the FinCEN website bsaefiling.fincen.treas.gov/main.html.

Question 11

The partnership may be required to file Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts, if:

  • It directly or indirectly transferred property or money to a foreign trust. For this purpose, any U.S. person who created a foreign trust is considered a transferor.

  • It is treated as the owner of any part of the assets of a foreign trust under the grantor trust rules.

  • It received a distribution from a foreign trust.

For more information, see the Instructions for Form 3520.

Note.

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.

Questions 12a, 12b, and 12c

Note.

You must check “Yes” or “No” for each question.

Question 12a.   Answer “Yes” if the partnership is making, or has made (and has not revoked) a section 754 election. If the partnership technically terminated under section 708(b)(1)(B), and the new partnership does not make a section 754 election for its first tax year, the section 754 election is considered “revoked” for purposes of completing question 12a. For information about the election, see item 4 under Elections Made by the Partnership, earlier.

Question 12b.   Answer “Yes” if the partnership made an optional basis adjustment under section 743(b) or 734(b) for the tax year. If the partnership has made a section 754 election (and it has not been revoked) and either of the following transactions occur, the partnership must make a basis adjustment under section 734(b) or 743(b).

Section 743(b) basis adjustment.

A section 743(b) basis adjustment is required if there is a transfer of an interest in the partnership by a sale or exchange, or in the death of a partner. See question 12c if the partnership has a substantial built-in loss immediately after such a transfer. 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:

  • The name of the transferee partner,

  • The EIN or SSN of the transferee partner,

  • The computation of the adjustment, and

  • The identity of the partnership properties to which the adjustment has been allocated.

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.

Section 734(b) basis adjustment.

A section 734(b) basis adjustment is required if there is a distribution of property to a partner, whether or not in liquidation of the partner's entire interest in the partnership. See question 12c if there is a substantial built-in loss with respect to the distribution. The basis adjustment affects each partner's basis in the partnership property. The partnership must attach a statement to the return for the tax year in which the distribution occurred. The statement must include:

  • The computation of the adjustment,

  • The class of property distributed (ordinary income property or capital gain property), and

  • The partnership properties to which the adjustment has been allocated.

For details, see section 734 and Regulations section 1.734-1. For details on allocating the basis adjustment to partnership properties, see section 755 and Regulations section 1.755-1.

Question 12c.   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)). Section 743(d)(1) provides that, for purposes of section 743, a partnership has a substantial built-in loss with respect to a transfer of a partnership interest if the partnership's adjusted basis in the partnership's property exceeds by more than $250,000 the fair market value of the property. Under section 734(d), there is a substantial basis reduction with respect to a distribution if the sum of the following amounts exceeds $250,000:
  • The amount of loss recognized by the distributee partner on a distribution in liquidation of the partner's interest in the partnership (see section 731(a)(2)), and

  • The excess of the basis of the distributed property to the distributee partner (determined under section 732) over the adjusted basis of the distributed property to the partnership immediately before the distribution (as adjusted by section 732(d)).

Section 743(b) basis adjustment.

For a section 743(b) basis adjustment, attach a statement that includes:

  • Name of the transferee partner,

  • EIN or SSN of the transferee partner,

  • Computation of the adjustment, and

  • Identity of the partnership properties to which the adjustment has been allocated.

Section 734(b) basis adjustment.

For a section 734(b) basis adjustment, attach a statement that includes:

  • The computation of the adjustment,

  • The class of property distributed (ordinary income property or capital gain property), and

  • The partnership properties to which the adjustment has been allocated.

Question 13

Check the box if the partnership engaged in a like-kind exchange during the current or immediately preceding tax year and received replacement property which 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 disregarded entity. The distribution of its ownership interest in a disregarded entity is considered a distribution of the underlying property.

Question 14

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 14, an “undivided interest in partnership property” means property that was owned by the partnership either directly or through a disregarded entity 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 which 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 14.

Question 15

Enter the number of Form(s) 8858, Information Return of U.S. Persons With Respect To Foreign Disregarded Entities, that are attached to the return. Form 8858 and its schedules are used by certain U.S. persons (including domestic partnerships) that own a foreign disregarded entity (FDE) directly, (or, in certain cases, indirectly or constructively) to satisfy the reporting requirements of sections 6011, 6012, 6031, 6038, and the related regulations. See Form 8858 (and its separate instructions) for information on completing the form.

Question 16. Foreign Partners

Answer “Yes” if the partnership had any foreign partners (for purposes of section 1446) 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 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.

Questions 18a and 18b

If the partnership made any payment in 2013 that would require the partnership to file any Form(s) 1099, check the “Yes” box for question 18a and answer question 18b. Otherwise, check the “No” box for question 18a and skip question 18b. See the General Instructions for Certain Information Returns for information on Form(s) 1099 the partnership may be required to file.

Designation of Tax Matters Partner (TMP)

If the partnership is subject to the rules for consolidated audit proceedings in sections 6221 through 6234, the partnership can designate a partner as the TMP for the tax year for which the return is filed by completing the Designation of Tax Matters Partner section on page 3 of Form 1065. The designated TMP must be (or have been) a general partner during the tax year and, in most cases, also must be a U.S. person. For details, see Regulations section 301.6231(a)(7)-1.

For a limited liability company (LLC), only a member manager of the LLC is treated as a general partner. A member manager is any owner of an interest in the LLC who, alone or together with others, has the continuing exclusive authority to make the management decisions necessary to conduct the business for which the LLC was formed. If there are no elected or designated member managers, each owner is treated as a member manager. For details, see Regulations section 301.6231(a)(7)-2.

Schedules K and K-1. Partners' Distributive Share Items

Purpose of Schedules

Although the partnership is not 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 are not reported on page 1 of Form 1065. These amounts are not combined with trade or business activity income (loss). Schedule K is used to report the totals of these and other amounts.

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 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.

Substitute Forms

The partnership does not need IRS approval to use a substitute Schedule K-1 if it is 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:T:M:S, 1111 Constitution Avenue NW, IR-6526, Washington, DC 20224.

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 do not conform to the specifications discussed in Pub. 1167, General Rules and Specifications for Substitute Forms and Schedules.

How Income Is Shared Among Partners

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, see section 706(d) before determining each partner's distributive share of any item of income, gain, loss, deduction, etc. Income (loss) is allocated to a partner only for the part of the year in which that person is a member of the partnership. The partnership will either allocate on a daily basis or divide the partnership year into segments and allocate income, loss, or special items in each segment among the persons who were partners during that segment. Partnerships that report their income on the cash basis must allocate interest expense, taxes, and any payment for services or for the use of property on a daily basis if there is any change in any partner's interest during the year.

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 does not provide for the partner's share of income, gain, loss, deduction, or credit, or if the allocation under the agreement does not 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.

Specific Instructions (Schedule K-1 Only)

General 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, if a foreign partnership meets each of the following four requirements, it is not 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).

  • The partnership had no gross income effectively connected with the conduct of a trade or business within the United States during its tax year.

  • All required Forms 1042 and 1042-S were filed by the partnership or another withholding agent as required by Regulations section 1.1461-1(b) and (c).

  • The tax liability for each foreign partner for amounts reportable under Regulations sections 1.1461-1(b) and (c) has been fully satisfied by the withholding of tax at the source.

  • The partnership is not a withholding foreign partnership as defined in Regulations section 1.1441-5(c)(2)(i).

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.

How To Complete Schedule K-1

In order to enable accurate scanning and processing of Schedule(s) K-1, please use a 10-point-Courier 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 M). 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.

Codes.   In box 11 and boxes 13 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 back of the Schedule K-1.

Attached statements.   Enter an asterisk (*) after the code, if any, in the column to the left of the dollar amount entry space for each item for which you have attached a statement providing additional information. For those informational items that cannot be reported as a single dollar amount, enter the code and asterisk in the left-hand column and enter “STMT” in the entry space to the right to indicate that the information is provided on an attached statement. More than one attached statement can be placed on the same sheet of paper and should be identified in alphanumeric order by box number followed by the letter code (if any). For example: “Box 20, Code T—Depletion information—oil and gas” (followed by the information the partner needs).

For electronically filed returns, the partnership must follow the instructions for attached statements as described in Pub. 4164 when reporting the additional information that may be required for each respective box. See Pub. 4164 for more information.

Too few entry spaces on Schedule K-1?   If the partnership has more coded items than the number of spaces in box 11 or boxes 13 through 20, do not enter a code or dollar amount in the last entry space of the box. In the last entry space, enter an asterisk in the left column and enter “STMT” in the entry space to the right. Report the additional items on an attached statement and provide the box number, code, description, and dollar amount or information for each additional item. For example: “Box 15, Code J—Work opportunity credit—$1,000.

Part I. Information About the Partnership

On each Schedule K-1, enter the name, address, and identifying number of the partnership.

Part II. Information About the Partner

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.

Items E and F

For an individual partner, enter the partner's social security number (SSN) or individual taxpayer identification number (ITIN). For all other partners, enter the partner's EIN. However, if a partner is an individual retirement arrangement (IRA), enter the identifying number of the custodian of the IRA. Do not enter the identification number of the person for whom the IRA is maintained.

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 are not eligible to obtain SSNs can apply for an ITIN on Form W-7, Application for IRS Individual Taxpayer Identification Number.

If a single member limited liability company (LLC) owns an interest in the partnership, and the LLC is treated as a disregarded entity for federal income tax purposes, enter the owner's identifying number in item E and the owner's name and address in item F.

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. Do not abbreviate the country name.

Item G

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.

Item H. Domestic/Foreign 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.

Item I1. What Type of Entity Is This Partner?

State whether the partner is an individual, a corporation, an estate, a trust, a partnership, a disregarded entity, an exempt organization, a foreign government, or a nominee (custodian). If the entity is a limited liability company (LLC) and it is treated as other than a disregarded entity 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 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.

Item J. Partner's Profit, Loss, and Capital

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%, do not include the beginning percentage for a partner that was not 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 does not 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.

Item K. Partner's Share of Liabilities

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. Do not include partnership-level qualified nonrecourse financing (defined below) on the line for nonrecourse liabilities.

If the partner terminated his or her 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 do not apply to losses from an activity of holding real property the partnership placed in service before 1987. The activity of holding mineral property does not qualify for this exception. Identify on an attached statement to Schedule K-1 the amount of any losses that are not 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 his or her 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 do not 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.

Item L. Partner's Capital Account Analysis

You are not required to complete item L if the answer to question 6 of Schedule B is “Yes.” If you are required to complete this item, see the instructions for Schedule M-2, later. Check the appropriate box that describes the method of accounting used to compute the partner's capital account.

  • Check the “Tax basis” box if the method of accounting used to compute the partner's capital account is based on the partnership's income and deductions for federal tax purposes.

  • Check the “GAAP” box if it is based on generally accepted accounting principles (GAAP).

  • Check the “Section 704(b) book” box if it is based on the capital accounting rules under Regulations section 1.704-1(b)(2)(iv).

  • Check the “Other” box if any other method is used to compute the partner's capital account and attach a statement describing the method and showing how the partner's capital account was computed.

Item M. Did the Partner Contribute Property With a Built-in Gain or Loss?

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.

  • A description of each property the partner contributed.

  • The date the property was contributed.

  • The amount of the property's built-in gain or loss.

Exception.

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 is not 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. Do not 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 fair market value 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 fair market value 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 with respect 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 fair market value 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 line 19b of Schedule K 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).

Specific Instructions (Schedules K and K-1, Part III, Except as Noted)

These instructions refer to the lines on Schedule K and the boxes on Schedule K-1.

Special Allocations

An item is specially allocated if it is 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 on Schedule K-1, box 11. 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.

Example.

A partnership has a long-term capital gain that is specially allocated to a partner and a net long-term capital gain reported on line 15 of Schedule D that must be reported on line 9a of Schedule K. Because specially allocated gains or losses are not reported on Schedule D, the partnership must report both the net long-term capital gain from Schedule D and the specially allocated gain on line 9a of Schedule K. Box 9a of the 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.

Income (Loss)

Line 1. Ordinary Business Income (Loss)

Enter the amount from page 1, line 22. Enter the income (loss) without reference to (a) the basis of the partners' interests in the partnership, (b) the partners' at-risk limitations, or (c) the passive activity limitations. These limitations, if applicable, are determined at the partner level.

Line 1 should not include rental activity income (loss) or portfolio income (loss).

Schedule K-1.   Enter each partner's distributive share of ordinary business income (loss) in box 1 of Schedule K-1. If the partnership has more than one trade or business activity, identify on an attached statement to Schedule K-1 the amount from each separate activity. See Passive Activity Reporting Requirements, earlier.

Line 2. Net Rental Real Estate Income (Loss)

Enter the net income (loss) from rental real estate activities of the partnership from Form 8825. Attach this form to Form 1065.

Schedule K-1.   Enter each partner's distributive share of net rental real estate income (loss) in box 2 of Schedule K-1. If the partnership has more than one rental real estate activity, identify on an attached statement to Schedule K-1 the amount attributable to each activity. See Passive Activity Reporting Requirements, earlier.

Line 3. Other Net Rental Income (Loss)

Enter on line 3a gross income from rental activities other than those reported on Form 8825. Include on line 3a gain (loss) from line 17 of Form 4797 that is attributable to the sale, exchange, or involuntary conversion of an asset used in a rental activity other than a rental real estate activity.

Enter on line 3b the deductible expenses of the activity. Attach a statement of these expenses to Form 1065.

Enter on line 3c the net income (loss).

See Rental Activities, earlier, and Pub. 925 for more information on rental activities.

Schedule K-1.   Enter each partner's distributive share of net income (loss) from rental activities other than rental real estate activities in box 3 of Schedule K-1. If the partnership has more than one rental activity reported in box 3, identify on an attached statement to Schedule K-1 the amount from each activity. See Passive Activity Reporting Requirements, earlier.

Line 4. Guaranteed Payments to Partners

Guaranteed payments to partners include:

  • Payments for salaries, health insurance, and interest deducted by the partnership and reported on Form 1065, page 1, line 10; Form 8825; or on Schedule K, line 3b;

  • Compensation deferred under a section 409A nonqualified deferred compensation plan that does not meet the requirements of section 409A reported on line 20c of Schedule K; and

  • Payments the partnership must capitalize. See the Instructions for Form 1065, line 10.

Generally, amounts reported on line 4 are not considered to be related to a passive activity. For example, guaranteed payments for personal services paid to a partner would not be passive activity income. Likewise, interest paid to any partner is not passive activity income.

A partnership must treat and report a transfer of partnership property to a partner in satisfaction of a guaranteed payment as a sale or exchange, and not a distribution. See Rev. Rul. 2007-40, 2007-25 I.R.B. 1426, for more details.

Schedule K-1.   Enter each partner's guaranteed payments in box 4 of Schedule K-1.

Portfolio Income

See Portfolio Income, earlier, for a definition of portfolio income.

Do not reduce portfolio income by deductions allocated to it. Report such deductions (other than interest expense) on line 13d of Schedule K. Report each partner's distributive share of deductions (other than interest) allocable to portfolio income in box 13 of Schedule K-1, using codes I, K, and L.

Interest expense allocable to portfolio income is generally investment interest expense reported on line 13b of Schedule K. Report each partner's distributive share of interest expense allocable to portfolio income in box 13 of Schedule K-1 using code H.

Line 5. Interest Income

Enter only taxable portfolio interest on this line. Taxable interest is interest from all sources except interest exempt from tax and interest on tax-free covenant bonds. Include interest income from the credit to holders of tax credit bonds. See the instructions for Other credits (code P) under Line 15f. Other Credits and the instructions for Form 8912 for details.

Schedule K-1.   Enter each partner's distributive share of interest income in box 5 of Schedule K-1. If the partnership is reporting interest income from clean renewable energy bonds or Midwestern tax credit bonds, attach a statement to Schedule K-1 that shows each partner's distributive share of interest income from these credits. Partners need this information to properly adjust the basis of their interest in the partnership.

Line 6a. Ordinary Dividends

Enter only taxable ordinary dividends on line 6a, including any qualified dividends reported on line 6b.

Schedule K-1.   Enter each partner's distributive share of ordinary dividends in box 6a of Schedule K-1.

Line 6b. Qualified Dividends

Enter qualified dividends on line 6b. Except as provided below, qualified dividends are dividends received from domestic corporations and qualified foreign corporations.

Exceptions.   The following dividends are not qualified dividends.
  • Dividends the partnership received on any share of stock held for less than 61 days during the 121-day period that began 60 days before the ex-dividend date. When determining the number of days the partnership held the stock, do not count certain days during which the partnership's risk of loss was diminished. The ex-dividend date is the first date following the declaration of a dividend on which the purchaser of a stock is not entitled to receive the next dividend payment. When counting the number of days the partnership held the stock, include the day the partnership disposed of the stock but not the day the partnership acquired it.

  • Dividends attributable to periods totaling more than 366 days that the partnership received on any share of preferred stock held for less than 91 days during the 181-day period that began 90 days before the ex-dividend date. When determining the number of days the partnership held the stock, do not count certain days during which the partnership's risk of loss was diminished. Preferred dividends attributable to periods totaling less than 367 days are subject to the 61-day holding period rule above.

  • Dividends that relate to payments that the partnership is obligated to make with respect to short sales or positions in substantially similar or related property.

  • Dividends paid by a regulated investment company that are not treated as qualified dividend income under section 854.

  • Dividends paid by a real estate investment trust that are not treated as qualified dividend income under section 857(c).

  See Pub. 550 for more details.

Qualified foreign corporation.   A foreign corporation is a qualified foreign corporation if it is:
  1. Incorporated in a possession of the United States or

  2. Eligible for benefits of a comprehensive income tax treaty with the United States that the Secretary determines is satisfactory for this purpose and that includes an exchange of information program. See Notice 2011-64, 2011-37 I.R.B. 231, for details.

  If the foreign corporation does not meet either 1 or 2, then it may be treated as a qualified foreign corporation for any dividend paid by the corporation if the stock associated with the dividend paid is readily tradable on an established securities market in the United States.

  However, qualified dividends do not include dividends paid by an entity which was a passive foreign investment company (defined in section 1297) in either the tax year of the distribution or the preceding tax year.

  See Notice 2004-71, 2004-45 I.R.B. 793, for more details.

Schedule K-1.   Enter each partner's distributive share of qualified dividends in box 6b of Schedule K-1.

Note.

In the case of a corporate partner, attach a statement to the Schedule K-1 explaining what part of the dividends included in boxes 6a and 6b is eligible for the “dividends received by corporations deduction” under section 243(a), (b), or (c).

If any amounts from line 6b are from foreign sources, see the instructions for lines 16d-f, later, for additional statements required.

Line 7. Royalties

Enter the royalties received by the partnership.

Schedule K-1.   Enter each partner's distributive share of royalties in box 7 of Schedule K-1.

Line 8. Net Short-Term Capital Gain (Loss)

Enter the gain (loss) that is portfolio income (loss) from Schedule D (Form 1065), line 7.

Schedule K-1.   Enter each partner's distributive share of net short-term capital gain (loss) in box 8 of Schedule K-1.

Line 9a. Net Long-Term Capital Gain (Loss)

Enter the gain or loss that is portfolio income (loss) from Schedule D (Form 1065), line 15.

Schedule K-1.   Enter each partner's distributive share of net long-term capital gain (loss) in box 9a of Schedule K-1.

If any gain or loss from lines 7 or 15 of Schedule D is from the disposition of nondepreciable personal property used in a trade or business, it may not be treated as portfolio income. Instead, report it on line 11 of Schedule K and report each partner's distributive share in box 11 of Schedule K-1 using code F.

Line 9b. Collectibles (28%) Gain (Loss)

Figure the amount attributable to collectibles from the amount reported on Schedule D (Form 1065), line 15. A collectibles gain (loss) is any long-term gain or deductible long-term loss from the sale or exchange of a collectible that is a capital asset.

Collectibles include works of art, rugs, antiques, metal (such as gold, silver, or platinum bullion), gems, stamps, coins, alcoholic beverages, and certain other tangible property.

Also, include gain (but not loss) from the sale or exchange of an interest in a partnership or trust held for more than 1 year and attributable to unrealized appreciation of collectibles. For details, see Regulations section 1.1(h)-1. Also attach the statement required under Regulations section 1.1(h)-1(e).

Schedule K-1.   Report each partner's distributive share of the collectibles (28%) gain (loss) in box 9b of Schedule K-1.

Line 9c. Unrecaptured Section 1250 Gain

The three types of unrecaptured section 1250 gain must be reported separately on an attached statement to Form 1065.

From the sale or exchange of the partnership's business assets.   Figure this amount in Part III of Form 4797 for each section 1250 property (except property for which gain is reported using the installment method on Form 6252) for which you had an entry in Part I of Form 4797. Subtract line 26g of Form 4797 from the smaller of line 22 or line 24. Figure the total of these amounts for all section 1250 properties. Generally, the result is the partnership's unrecaptured section 1250 gain. However, if the partnership is reporting gain on the installment method for a section 1250 property held more than 1 year, see the next paragraph.

  The total unrecaptured section 1250 gain for an installment sale of section 1250 property held more than 1 year is figured in a manner similar to that used in the preceding paragraph. However, the total unrecaptured section 1250 gain must be allocated to the installment payments received from the sale. To do so, the partnership generally must treat the gain allocable to each installment payment as unrecaptured section 1250 gain until all such gain has been used in full. Figure the unrecaptured section 1250 gain for installment payments received during the tax year as the smaller of (a) the amount from line 26 or line 37 of Form 6252 (whichever applies) or (b) the total unrecaptured section 1250 gain for the sale reduced by all gain reported in prior years (excluding section 1250 ordinary income recapture).

  
If the partnership chose not to treat all of the gain from payments received after May 6, 1997, and before August 24, 1999, as unrecaptured section 1250 gain, use only the amount the partnership chose to treat as unrecaptured section 1250 gain for those payments to reduce the total unrecaptured section 1250 gain remaining to be reported for the sale. See Regulations section 1.453-12.

From the sale or exchange of an interest in a partnership.   Also report as a separate amount any gain from the sale or exchange of an interest in a partnership attributable to unrecaptured section 1250 gain. See Regulations section 1.1(h)-1 and attach the statement required under Regulations section 1.1(h)-1(e).

From an estate, trust, REIT, or RIC.   If the partnership received a Schedule K-1 or Form 1099-DIV from an estate, a trust, a real estate investment trust (REIT), or a regulated investment company (RIC) reporting “unrecaptured section 1250 gain,” do not add it to the partnership's own unrecaptured section 1250 gain. Instead, report it as a separate amount. For example, if the partnership received a Form 1099-DIV from a REIT with unrecaptured section 1250 gain, report it as “Unrecaptured section 1250 gain from a REIT.

Schedule K-1.   Report each partner's distributive share of unrecaptured section 1250 gain from the sale or exchange of the partnership's business assets in box 9c of Schedule K-1. If the partnership is reporting unrecaptured section 1250 gain from an estate, trust, REIT, or RIC or from the partnership's sale or exchange of an interest in another partnership (as explained above), enter “STMT” in box 9c and an asterisk (*) in the left column of the box and attach a statement that separately identifies the amount of unrecaptured section 1250 gain from:
  • The sale or exchange of the partnership's business assets.

  • The sale or exchange of an interest in another partnership.

  • An estate, trust, REIT, or RIC.

If any amounts from line 9c are from foreign sources, see the instructions for lines 16d-f, later, for additional statements required.

Line 10. Net Section 1231 Gain (Loss)

Enter the net section 1231 gain (loss) from Form 4797, line 7.

Do not include net gain or loss from involuntary conversions due to casualty or theft. Report net gain or loss from involuntary conversions due to casualty or theft on line 11 of Schedule K (box 11, code B, of Schedule K-1). See the instructions for line 11 on how to report net gain (loss) due to a casualty or theft.

Schedule K-1.   Report each partner's distributive share of net section 1231 gain (loss) in box 10 of Schedule K-1. If the partnership has more than one rental, trade, or business activity, identify on an attached statement to Schedule K-1 the amount of section 1231 gain (loss) from each separate activity. See Passive Activity Reporting Requirements, earlier.

If any amounts from line 10 are from foreign sources, see the instructions for lines 16d-f, later, for additional statements required.

Line 11. Other Income (Loss)

Enter any other item of income or loss not included on lines 1 through 10. On the line to the left of the entry space for line 11, identify the type of income. If there is more than one type of income, attach a statement to Form 1065 that separately identifies each type and amount of income for each of the following categories. The codes needed for Schedule K-1 reporting are provided for each category.

Other portfolio income (loss) (code A).   Portfolio income not reported on lines 5 through 10.

  Report and identify other portfolio income or loss on an attached statement for line 11.

  For example, income reported to the partnership from a real estate mortgage investment conduit (REMIC), in which the partnership is a residual interest holder, would be reported on an attached statement for line 11. If the partnership holds a residual interest in a REMIC, report on the attached statement for box 11 of Schedule K-1 the partner's share of the following.
  • Taxable income (net loss) from the REMIC (line 1b of Schedules Q (Form 1066)).

  • Excess inclusion (line 2c of Schedules Q (Form 1066)).

  • Section 212 expenses (line 3b of Schedules Q (Form 1066)). Do not report these section 212 expense deductions related to portfolio income on Schedules K and K-1.

  Because Schedule Q (Form 1066) is a quarterly statement, the partnership must follow the Schedule Q instructions to figure the amounts to report to partners for the partnership's tax year.

Involuntary conversions (code B).   Net gain (loss) from involuntary conversions due to casualty or theft. The amount for this line is shown on Form 4684, Casualties and Thefts, line 38a, 38b, or 39.

  Each partner's share must be entered on Schedule K-1. Give each partner a schedule that shows the amounts to be reported on the partner's Form 4684, line 34, columns (b)(i), (b)(ii), and (c).

  If there was a gain (loss) from a casualty or theft to property not used in a trade or business or for income-producing purposes, notify the partner. The partnership should not complete Form 4684 for this type of casualty or theft. Instead, each partner will complete his or her own Form 4684.

Section 1256 contracts and straddles (code C).   Report any net gain or loss from section 1256 contracts from Form 6781, Gains and Losses From Section 1256 Contracts and Straddles.

Mining exploration costs recapture (code D).   Provide the information partners need to recapture certain mining exploration expenditures. See Regulations section 1.617-3.

Cancellation of debt (code E).   If cancellation of debt is reported to the partnership on Form 1099-C, report each partner's distributive share in box 11 using code E.

Note.

Include the amount of income the partnership must recognize for a transfer of a partnership interest in satisfaction of a partnership debt when the debt relieved exceeds the FMV of the partnership interest. See section 108(e)(8) for more information.

  
Do not report cancelled debt income deferred under section 108(i) using code E. Instead, report the deferred income using code F. For information on the section 108(i) election, see Election to defer income from cancelled debt, earlier.

Other income (loss) (code F).   Include any other type of income, such as the following.
  • The partner's distributive share of the partnership's gain or loss attributable to the sale or exchange of qualified preferred stock of the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). On an attached statement, show (a) the gain or loss attributable to the sale or exchange of the qualified preferred stock, (b) the date the stock was acquired by the partnership, and (c) the date the stock was sold or exchanged by the partnership. See Rev. Proc. 2008-64, 2008-47 I.R.B. 1195 for more information.

  • Recoveries of tax benefit items (section 111).

  • Gambling gains and losses subject to the limitations in section 165(d). Indicate on an attached statement whether or not the partnership is in the trade or business of gambling.

  • Disposition of an interest in oil, gas, geothermal, or other mineral properties. Report the following information on an attached statement to Schedule K-1:  
    (a) Description of the property;  
    (b) The partner's share of the amount realized on the sale, exchange, or involuntary conversion of each property (fair market value of the property for any other disposition, such as a distribution);  
    (c) The partner's share of the partnership's adjusted basis in the property (except for oil or gas properties); and  
    (d) Total intangible drilling costs, development costs, and mining exploration costs (section 59(e) expenditures) passed through to the partner for the property.  
    See Regulations section 1.1254-5 for more information.

  • Gains from the disposition of farm recapture property (see Form 4797) and other items to which section 1252 applies.

  • Any income, gain, or loss to the partnership under section 751(b).

  • Specially allocated ordinary gain (loss).

  • Any gain or loss from lines 7 or 15 of Schedule D that is not portfolio income (for example, gain or loss from the disposition of nondepreciable personal property used in a trade or business).

  • Any cancellation of debt income previously deferred as a result of a section 108(i) election that is includible in the current year. See section 108(i) for events that will cause previously deferred income to be reportable, and a special rule for allocating deferred income to the partners. For more information, see Election to defer income from cancelled debt, earlier. 
    Special rule for filers of Form 8865. Filers of Form 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships, cannot defer recognizing and reporting cancelled debt income on Form 8865, in accordance with the section 108(i) election, unless the foreign partnership filed a U.S. partnership return and made the election. A foreign partnership must file Form 1065 or Form 1065-B to make the section 108(i) election. These foreign partnerships also have an annual reporting requirement on Form 1065 or Form 1065-B for each tax year after the election until all items deferred under section 108(i) have been recognized. See Rev. Proc. 2009-37, 2009-36 I.R.B. 309 for details.

  • Gain from the sale or exchange of qualified small business (QSB) stock (as defined in the Instructions for Schedule D) that is eligible for the section 1202 exclusion. The section 1202 exclusion applies only to QSB stock held by the partnership for more than 5 years. Corporate partners are not eligible for the section 1202 exclusion. Additional limitations apply at the partner level. Report each partner's share of section 1202 gain on Schedule K-1. Each partner will determine if he or she qualifies for the section 1202 exclusion. Report on an attached statement to Schedule K-1 for each sale or exchange (a) the name of the corporation that issued the QSB stock, (b) the partner's share of the partnership's adjusted basis and sales price of the QSB stock, and (c) the dates the QSB stock was bought and sold.

  • Gain eligible for section 1045 rollover (replacement stock purchased by the partnership). Include only gain from the sale or exchange of qualified small business (QSB) stock (as defined in the Instructions for Schedule D) that was deferred by the partnership under section 1045 and reported on Form 8949/Schedule D. See the Instructions for Schedule D and the Instructions for Form 8949 for more details. The partnership makes the election for section 1045 rollover on a timely filed (including extensions) return for the year in which the sale occurred. Corporate partners are not eligible for the section 1045 rollover. Additional limitations apply at the partner level. Each partner will determine if he or she qualifies for the rollover. Report on an attached statement to Schedule K-1 for each sale or exchange (a) the name of the corporation that issued the QSB stock, (b) the partner's share of the partnership's adjusted basis and sales price of the QSB stock, (c) the dates the QSB stock was bought and sold, (d) the partner's distributive share of gain from the sale of the QSB stock, and (e) the partner's distributive share of the gain that was deferred by the partnership under section 1045. Do not include these amounts on line 11 of Schedule K.

  • Gain eligible for section 1045 rollover (replacement stock not purchased by the partnership). Include only gain from the sale or exchange of qualified small business (QSB) stock (as defined in the Instructions for Schedule D) the partnership held for more than 6 months but that was not deferred by the partnership under section 1045. See the Instructions for Schedule D for more details. A partner (other than a corporation) may be eligible to defer his or her distributive share of this gain under section 1045 if he or she purchases other QSB stock during the 60-day period that began on the date the QSB stock was sold by the partnership. Additional limitations apply at the partner level. Report on an attached statement to Schedule K-1 for each sale or exchange (a) the name of the corporation that issued the QSB stock, (b) the partner's share of the partnership's adjusted basis and sales price of the QSB stock, (c) the dates the QSB stock was bought and sold, and (d) the partner's distributive share of gain from the sale of the QSB stock.

  For more information, see Regulations section 1.1045-1. Do not include these amounts on line 11 of Schedule K.

Distribution of replacement QSB stock to a partner that reduces the interest of another partner in replacement QSB stock.

A partner must recognize gain upon a distribution of replacement QSB stock to another partner that reduces the partner's share of the replacement QSB stock held by a partnership. The amount of gain that the partner must recognize is based on the amount of gain that the partner would recognize upon a sale of the distributed replacement QSB stock for its fair market value on the date of the distribution, not to exceed the amount that the partner previously deferred under section 1045 with respect to the distributed replacement QSB stock. If the partnership distributed a partner's share of replacement QSB stock to another partner, the partnership must give the partner whose share of the replacement QSB stock is reduced (a) the name of the corporation that issued the replacement QSB stock, (b) the date the replacement QSB stock was distributed to another partner or partners, and (c) the partner's share of the partnership's adjusted basis and fair market value of the replacement QSB stock on such date.

Schedule K-1.   Enter each partner's distributive share of the other income categories listed earlier in box 11 of Schedule K-1. Enter the applicable code A, B, C, D, E, or F (as shown earlier).

  If you are reporting each partner's distributive share of only one type of income under code F, enter the code with an asterisk (F*) and the dollar amount in the entry space in box 11 and attach a statement that shows “Box 11, Code F,” and the type of income. If you are reporting multiple types of income under code F, enter the code with an asterisk (F*) and enter “STMT” in the entry space in box 11 and attach a statement that shows “Box 11, Code F,” and the dollar amount of each type of income.

  If the partnership has more than one trade or business or rental activity (for codes B through F), identify on an attached statement to Schedule K-1 the amount from each separate activity. See Passive Activity Reporting Requirements, earlier.

Deductions

Line 12. Section 179 Deduction

A partnership can elect to expense part of the cost of certain property the partnership purchased during the tax year for use in its trade or business or certain rental activities. See Pub. 946 for a definition of what kind of property qualifies for the section 179 expense deduction and the Instructions for Form 4562 for limitations on the amount of the section 179 expense deduction.

Complete Part I of Form 4562 to figure the partnership's section 179 expense deduction. The partnership does not take the deduction itself but instead passes it through to the partners. Attach Form 4562 to Form 1065 and show the total section 179 expense deduction on Schedule K, line 12.

The partnership must reduce the basis of the asset by the amount of the section 179 expense elected by the partnership, even if a portion of that amount cannot be passed through to its partners that year and must be carried forward because of limitations at the partnership level. Do not reduce the partnership's basis in section 179 property to reflect any portion of the section 179 expense that is allocable to a partner that is a trust or estate.

Identify on an attached statement to Schedules K and K-1 the cost of section 179 property placed in service during the year that is qualified enterprise zone, qualified section 179 disaster assistance property or qualified real property. See the Instructions for Form 4562 for more details.

See the instructions for line 20c of Schedule K for sales or other dispositions of property for which a section 179 deduction has passed through to partners and for the recapture rules if the business use of the property dropped to 50% or less.

Schedule K-1.   Report each partner's distributive share of the section 179 expense deduction in box 12 of Schedule K-1. If any part of the section 179 expense deduction is attributable to qualified real property, report the partner's distributive share of that amount on an attached statement. If the partnership has more than one rental, trade, or business activity, identify on an attached statement to Schedule K-1 the amount of section 179 deduction from each separate activity. See Passive Activity Reporting Requirements, earlier.

  Do not complete box 12 of Schedule K-1 for any partner that is an estate or trust; estates and trusts are not eligible for the section 179 expense deduction.

Line 13a. Contributions

Generally, no deduction is allowed for any contribution of $250 or more unless the partnership obtains a written acknowledgment from the charitable organization that shows the amount of cash contributed, describes any property contributed, and gives an estimate of the value of any goods or services provided in return for the contribution. The acknowledgment must be obtained by the due date (including extensions) of the partnership return or, if earlier, the date the partnership files its return. Do not attach the acknowledgment to the partnership return, but keep it with the partnership's records. These rules apply in addition to the filing requirements for Form 8283, Noncash Charitable Contributions, described below.

Cash contributions of any amount must be supported by a dated bank record or receipt.

Enter charitable contributions made during the tax year. Attach a statement to Form 1065 that separately identifies the partnership's contributions for each of the following categories. See Limits on Deductions in Pub. 526, Charitable Contributions, for information on adjusted gross income (AGI) limitations on deductions for charitable contributions.

The codes needed for Schedule K-1 reporting are provided for each category.

Cash contributions (50%) (code A).   Enter cash contributions subject to the 50% AGI limitation.

Cash contributions (30%) (code B).   Enter cash contributions subject to the 30% AGI limitation.

Noncash contributions (50%) (code C).   Enter noncash contributions subject to the 50% AGI limitation. If property other than cash is contributed and if the claimed deduction for one item or group of similar items of property exceeds $5,000, the partnership must give each partner a copy of Form 8283 to attach to the partner's tax return.

Qualified conservation contributions.

The AGI limit for qualified conservation contributions under section 170(h) is 50%. The carryover period is 15 years. See section 170(b) and Notice 2007-50, 2007-25 I.R.B. 1430, for details. Report qualified conservation contributions with a 50% AGI limitation on Schedule K-1 in box 13 using code C. Do not include in the amount reported using code C the conservation contributions of property used in agriculture or livestock production reported on Schedule K-1 using code G.

Charitable contributions of food inventory.

Attach a statement to Schedule K-1 that shows:

  • The deduction for charitable contributions made before 2014 under section 170(e)(3) of qualified inventory that was donated for the care of the ill, needy, and infants (see section 170(e)(3)(C)). To qualify for the deduction, the food must meet all the quality and labeling standards imposed by federal, state, and local laws and regulations. The amount of the charitable contribution for donated food inventory is the lesser of (a) the basis of the donated food plus one-half of the appreciation (gain if the donated food was sold at fair market value on the date of the gift) or (b) twice the amount of basis of the donated food.

  • The partner's distributive share of the net income for the tax year from the partnership's trades or businesses that made the contribution of food inventory.

Do not include the amount of food inventory contributions in the amount reported in box 13 using code C. These contributions must be reported separately on an attached statement because partners must separately determine the limitations on the deduction.

Noncash contributions (30%) (code D).   Enter noncash contributions subject to the 30% AGI limitation.

Capital gain property to a 50% organization (30%) (code E).   Enter capital gain property contributions subject to the 30% AGI limitation.

Capital gain property (20%) (code F).   Enter capital gain property contributions subject to the 20% AGI limitation.

Contributions of property.   See Contributions of Property in Pub. 526 and Pub. 561, Determining the Value of Donated Property, for information on noncash contributions and contributions of capital gain property. If the deduction claimed for noncash contributions exceeds $500, complete Form 8283 and attach it to Form 1065.

  If the partnership made a qualified conservation contribution under section 170(h), also include the fair market value of the underlying property before and after the donation, as well as the type of legal interest contributed, and describe the conservation purpose furthered by the donation. Give a copy of this information to each partner.

Nondeductible contributions.   Certain contributions made to an organization conducting lobbying activities are not deductible. See section 170(f)(9) for more details. Also, see Contributions You Cannot Deduct in Pub. 526 for more examples of nondeductible contributions.

Contributions (100%) (code G).   Enter qualified conservation contributions of property used in agriculture or livestock production. The contribution must be subject to a restriction that the property remain available for such production. See section 170(b) for details.

Qualified conservation contributions of property used in agriculture or livestock production.

If the partnership is a qualified farmer or rancher (as defined in section 170(b)(1)(E)(v)), show each partner's distributive share of qualified conservation contributions of property used in agriculture or livestock production. Partners will have to separately determine whether they qualify for the 50% or 100% AGI limitation for these contributions. Do not include the amounts reported on the attached statement using code G in the amount reported on Schedule K-1 for qualified conservation contributions using code C.

Schedule K-1.   Report each partner's distributive share of charitable contributions in box 13 of Schedule K-1 using codes A through G for each of the contribution categories shown above. The partnership must attach a copy of its Form 8283 to the Schedule K-1 of each partner if the deduction for any item or group of similar items of contributed property exceeds $5,000, even if the amount allocated to any partner is $5,000 or less.

Line 13b. Investment Interest Expense

Include on this line the interest properly allocable to debt on property held for investment purposes. Property held for investment includes property that produces income (unless derived in the ordinary course of a trade or business) from interest, dividends, annuities, or royalties; and gains from the disposition of property that produces those types of income or is held for investment.

Investment interest expense does not include interest expense allocable to a passive activity.

Investment income and investment expenses other than interest are reported on lines 20a and 20b, respectively. This information is needed by partners to determine the investment interest expense limitation (see Form 4952, Investment Interest Expense Deduction, for details).

Schedule K-1.   Report each partner's distributive share of investment interest expense in box 13 of Schedule K-1 using code H.

Lines 13c(1) and 13c(2). Section 59(e)(2) Expenditures

Generally, section 59(e) allows each partner to make an election to deduct their distributive share of the partnership's otherwise deductible qualified expenditures ratably over 10 years (3 years for circulation expenditures). The deduction is taken beginning with the tax year in which the expenditures were made (or for intangible drilling and development costs, over the 60-month period beginning with the month in which such costs were paid or incurred).

The term “qualified expenditures” includes only the following types of expenditures paid or incurred during the tax year.

  • Circulation expenditures.

  • Research and experimental expenditures.

  • Intangible drilling and development costs.

  • Mining exploration and development costs.

If a partner makes the election, these items are not treated as AMT tax preference items.

Because the partners are generally allowed to make this election, the partnership cannot deduct these amounts or include them as AMT items on Schedule K-1. Instead, the partnership passes through the information the partners need to figure their separate deductions.

On line 13c(1), enter the type of expenditures claimed on line 13c(2). Enter on line 13c(2) the qualified expenditures paid or incurred during the tax year for which an election under section 59(e) may apply. Enter this amount for all partners whether or not any partner makes an election under section 59(e).

On an attached statement, identify the property for which the expenditures were paid or incurred. If the expenditures were for intangible drilling costs or development costs for oil and gas properties, identify the month(s) in which the expenditures were paid or incurred. If there is more than one type of expenditure or more than one property, provide the amounts (and the months paid or incurred if required) for each type of expenditure separately for each property.

Schedule K-1.   Report each partner's distributive share of section 59(e) expenditures in box 13 of Schedule K-1 using code J. On an attached statement, identify (a) the type of expenditure, (b) the property for which the expenditures are paid or incurred, and (c) for oil and gas properties only, the month in which intangible drilling costs and development costs were paid or incurred. If there is more than one type of expenditure or the expenditures are for more than one property, provide each partner's distributive share of the amounts (and the months paid or incurred for oil and gas properties) for each type of expenditure separately for each property.

Line 13d. Other Deductions

Enter deductions not included on lines 12, 13a, 13b, 13c(2), and 16l. On the line to the left of the entry space for this line, identify the type of deduction. If there is more than one type of deduction, attach a statement to Form 1065 that separately identifies the type and amount of each deduction for the following categories. The codes needed for Schedule K-1 reporting are provided for each category.

Note.

Do not include the domestic production activities informational amounts in the total for line 13d.

Deductions—royalty income (code I).   Enter deductions related to royalty income.

Deductions—portfolio (2% floor) (code K).   Enter deductions related to portfolio income that are subject to the 2% of AGI floor (see the Instructions for Schedule A (Form 1040)).

Deductions—portfolio (other) (code L).   Enter any other deductions related to portfolio income.

  No deduction is allowed under section 212 for expenses allocable to a convention, seminar, or similar meeting. Because these expenses are not deductible by partners, the partnership does not report these expenses on line 13d of Schedule K. The expenses are nondeductible and are reported as such on line 18c of Schedule K and in box 18 of Schedule K-1 using code C.

Schedule K-1.

In box 13, report the partner's distributive share of deductions related to portfolio income that are reported on line 13d of Schedule K using codes I (for deductions related to royalty income), K (for deductions related to portfolio income and subject to the 2% of AGI floor), or L (for other deductions related to portfolio income).

Amounts paid for medical insurance (code M).   Enter amounts paid during the tax year for insurance that constitutes medical care for the partner (including the partner's spouse, dependents, and children under age 27 who are not dependents).

Educational assistance benefits (code N).   Enter amounts paid during the tax year for educational assistance benefits paid to a partner.

Dependent care benefits (code O).   Enter amounts paid during the tax year for dependent care benefits paid on behalf of each partner.

Preproductive period expenses (code P).   If the partnership is required to use an accrual method of accounting under section 447 or 448(a)(3), it must capitalize these expenses. If the partnership is permitted to use the cash method, enter the amount of preproductive period expenses that qualify under Regulations section 1.263A-4(d). An election not to capitalize these expenses must be made at the partner level. See Uniform Capitalization Rules in Pub. 225, Farmer's Tax Guide.

Commercial revitalization deduction from rental real estate activities (code Q).   Enter the commercial revitalization deduction on line 13d only if it is for a rental real estate activity. If the deduction is for a nonrental building, enter it on line 20 of Form 1065. See the instructions for line 20, earlier, for more information.

Pensions and IRAs (code R).   Enter the payments for a partner to an IRA, qualified plan, or simplified employee pension (SEP) or SIMPLE IRA plan. If a qualified plan is a defined benefit plan, a partner's distributive share of payments is determined in the same manner as his or her distributive share of partnership taxable income. For a defined benefit plan, attach to the Schedule K-1 for each partner a statement showing the amount of benefit accrued for the tax year.

Reforestation expense deduction (code S).   The partnership can elect to deduct a limited amount of its reforestation expenditures paid or incurred during the tax year. The amount the partnership can elect to deduct is limited to $10,000 for each qualified timber property. See section 194(c) for a definition of reforestation expenditures and qualified timber property. The partnership must amortize over 84 months any amount not deducted. See the instructions for line 20, earlier. See Notice 2006-47, 2006-20 I.R.B. 892, for details on making the election.

Schedule K-1.

Enter the partner's distributive share of the allowable reforestation expenses in box 13 of Schedule K-1 using code S and attach a statement that provides a description of the qualified timber property. If the partnership is electing to deduct amounts from more than one qualified timber property, provide a description and the amount for each property.

Domestic production activities deduction (codes T, U, and V).   The partnership does not compute the domestic production activities deduction, but must provide its partners the information they need to compute the deduction on Form 8903, Domestic Production Activities Deduction. If the partnership meets certain requirements (explained below), it can choose to calculate qualified production activities income (QPAI) and Form W-2 wages (W-2 wages) at the partnership level and report these amounts on Schedule K-1 for its qualified partners using codes U and V. See QPAI and Form W-2 wages computed at partnership level, below, for details.

  If the partnership does not compute QPAI and W-2 wages at the partnership level or it has partners that are required to compute QPAI at the partner level, it must report on Schedule K-1 using code T the partner's distributive share of the information listed under QPAI and Form W-2 wages computed at partner level, below.

QPAI and Form W-2 wages computed at partner level (code T).

If the partnership does not calculate QPAI and W-2 wages at the partnership level, attach a statement to Schedule K-1 using code T providing each partner's distributive share of the following information. Identify any amounts from oil-related production activities and list them separately. Do not include these amounts in the total reported on line 13d of Schedule K.

  • Domestic production gross receipts (DPGR).

  • Gross receipts from all sources.

  • Cost of goods sold allocable to DPGR.

  • Cost of goods sold from all sources.

  • Total deductions, expenses, and losses directly allocable to DPGR.

  • Total deductions, expenses, and losses directly allocable to a non-DPGR class of income.

  • Other deductions, expenses, and losses not directly allocable to DPGR or another class of income.

  • W-2 wages properly allocable to DPGR.

  • Any other information a partner needs to use the section 861 method to allocate and apportion cost of goods sold and deductions between DPGR and other receipts.

See Form 8903 and its instructions for more details. If the partnership chooses to compute QPAI at the partnership level, see the instructions below.

QPAI and Form W-2 wages computed at partnership level (codes U and V).

Eligible partnerships (discussed below) can choose to compute QPAI and W-2 wages at the partnership level and report each qualified partner's distributive share of QPAI (using code U) and W-2 wages (using code V) on Schedule K-1. See the special rules for non-qualifying partners of an eligible section 861 partnership, below. Generally, the partnership must allocate QPAI to its partners in the same proportion as gross income and allocate W-2 wages in the same proportion as wage expense. For information on computing QPAI and W-2 wages at the partnership level, see Rev. Proc. 2007-34, 2007-23 I.R.B. 1345, and the Instructions for Form 8903. See the eligibility requirements and reporting rules for each type of eligible partnership, below. Qualifying in-kind partnerships and expanded affiliated group partnerships (defined in Regulations section 1.199-3(i)(7) and (8)) are not eligible to compute QPAI and W-2 wages at the partnership level.

QPAI from oil-related activities.   Partnerships computing QPAI at the partnership level must report the total amount of QPAI (including QPAI from oil-related activities) using code U and attach a statement for code U to separately report the amount of oil-related QPAI (if any).

Eligible partnerships.   Eligible partnerships include the following three.

1. Eligible section 861 partnership.

An eligible section 861 partnership is a partnership that satisfies each of the following requirements for its current tax year.

  • It has at least 100 partners on any day during the partnership's tax year.

  • At least 70% of the partnership is owned, at all times during its tax year, by qualifying partners. A qualifying partner is a partner that, on each day during the partnership's tax year that the partner owns an interest in the partnership: (a) is not a general partner or a managing member of a partnership organized as a limited liability company, (b) does not materially participate in the activities of the partnership, (c) does not own, alone or combined with the interests of all related persons, 5% or more of the profits or capital interests in the partnership, or (d) is not an ineligible partnership (qualifying in-kind partnerships and expanded affiliated group partnerships defined in Regulations section 1.199-3(i)(7) and (8)).

  • It has DPGR.

An eligible section 861 partnership must use the section 861 method of cost allocation to figure QPAI and W-2 wages (see the Instructions for Form 8903 for details). The partnership cannot allocate QPAI and W-2 wages computed at the partnership level to non-qualifying partners (qualifying partners are defined as part of the definition of an eligible section 861 partnership, above). Instead, it must attach a statement to the Schedule K-1 for each non-qualifying partner that provides the partner's distributive share of the items listed under QPAI and Form W-2 wages computed at partner level (code T), earlier. The partnership items allocated to non-qualifying partners must be excluded for purposes of computing QPAI and W-2 wages at the partnership level.

2. Eligible widely held pass-through partnership.

An eligible widely held pass-through partnership is a partnership that satisfies each of the following requirements for the current tax year.

  • It has average annual gross receipts for the 3 tax years preceding the current tax year of $100 million or less, or has total assets at the end of the current tax year of $10 million or less.

  • It has total cost of goods sold and deductions that, together, are $100 million or less.

  • It has DPGR.

  • On every day during the current tax year, all of its partners are individuals, estates, or trusts described (or treated as described) in section 1361(c)(2).

  • On every day during the current tax year, no partner owns, alone or combined with the ownership interests of all related persons, more than 10% of the profits or capital interests in the partnership.

An eligible widely held pass-through partnership must use the simplified deduction method of cost allocation to figure QPAI and W-2 wages (see the Instructions for Form 8903 for details).

3. Eligible small pass-through partnership.

An eligible small pass-through partnership is a partnership that satisfies each of the following requirements for the current tax year.

  • The partnership satisfies one of the following: (a) it has average annual gross receipts for the 3 tax years preceding the current tax year of $5 million or less, (b) it is engaged in the trade or business of farming and is not required to use the accrual method of accounting, or (c) it is eligible to use the cash method of accounting under Rev. Proc. 2002-28, 2002-18 I.R.B. 815, as modified by Rev. Proc. 2011-14, 2011-4 I.R.B. 330 (that is, it has average annual gross receipts of $10 million or less and is not excluded from using the cash method under section 448).

  • It has total costs of goods sold and deductions that, together, are $5 million or less.

  • It has DPGR.

  • It does not have a partner that is an ineligible partnership (qualifying in-kind partnerships and expanded affiliated group partnerships defined in Regulations section 1.199-3(i)(7) and (8)).

An eligible small pass-through partnership must use the small business simplified overall method to figure QPAI and W-2 wages (see the Instructions for Form 8903 for details).

Note.

If a partnership satisfies the requirements for more than one type of eligible partnership, it may choose any one of the allocation methods for which it qualified to figure QPAI and W-2 wages. See Rev. Proc. 2007-34 for more information on the eligibility requirements and rules for computing QPAI and W-2 wages at the partnership level.

Other deductions (code W).   Include any other deductions, such as:
  • Amounts paid by the partnership that would be allowed as itemized deductions on any of the partners' income tax returns if they were paid directly by a partner for the same purpose. These amounts include, but are not limited to, expenses under section 212 for the production of income other than from the partnership's trade or business. However, do not enter expenses related to portfolio income or investment interest expense reported on line 13b of Schedule K on this line.

  • Any penalty on early withdrawal of savings not reported on line 13b because the partnership withdrew its time savings deposit before its maturity.

  • Soil and water conservation expenditures, and endangered species recovery expenditures (section 175).

  • Expenditures paid or incurred for the removal of architectural and transportation barriers to the elderly and disabled that the partnership has elected to treat as a current expense. See section 190.

  • Film and television production expenses. The partnership can elect to deduct certain costs of a qualified film or television production commencing before 2014 if the aggregate cost of the production does not exceed $15 million. There is a higher dollar limitation for productions in certain areas. Provide a description of the film or television production on an attached statement. If the partnership makes the election for more than one film or television production, attach a statement to Schedule K-1 that shows each partner's distributive share of the qualified expenditures separately for each production. The deduction is subject to recapture under section 1245 if the election is voluntarily revoked or the production fails to meet the requirements for the deduction. See section 181 and the related regulations for details.

  • Interest expense allocated to debt-financed distributions. See Notice 89-35, 1989-1 C.B. 675, or Pub. 535 for more information.

  • Interest paid or accrued on debt properly allocable to each general partner's share of a working interest in any oil or gas property (if the partner's liability is not limited). General partners that did not materially participate in the oil or gas activity treat this interest as investment interest; for other general partners, it is trade or business interest.

  • Contributions to a capital construction fund. See Pub. 595.

  • The partnership's original issue discount (OID) deduction deferred under section 108(i)(2) that is allowable as a deduction in the current year. The aggregate amount of OID that is deferred is generally allowed as a deduction ratably over the five-year period the deferred COD income is includible in income under section 108(i). For more information, see Election to defer income from cancelled debt, earlier. 
    Special rule for filers of Form 8865. Filers of Form 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships, cannot report a section 108(i) OID deduction on Form 8865, in accordance with the section 108(i) election, unless the foreign partnership filed a U.S. partnership return and made the election. A foreign partnership must file Form 1065, Form 1065-B, or Form 1065X to make the section 108(i) election. These foreign partnerships also have an annual reporting requirement on Form 1065 or Form 1065-B for each tax year after the election until all items deferred under section 108(i) have been recognized. See Rev. Proc. 2009-37, 2009-36 I.R.B. 309 for details.

Schedule K-1.   Enter each partner's distributive share of the deduction categories listed earlier in box 13 of Schedule K-1 or provide the information required on an attached statement for the deduction. Enter the applicable code I, K, L, M, N, O, P, Q, R, S, T, U, V, or W (as shown earlier).

  If you are reporting only one type of deduction under code W, enter code W with an asterisk (W*) and the dollar amount in the entry space in box 13 and attach a statement that shows the box number, code, and type of deduction. If you are reporting multiple types of deductions under code W, enter the code with an asterisk (W*), enter “STMT” in the dollar amount entry space in box 13, and attach a statement that shows the box number, code, and the dollar amount of each type of deduction.

  If the partnership has more than one trade or business activity, identify on an attached statement to Schedule K-1 the amount for each separate activity. See Passive Activity Reporting Requirements, earlier.

Self-Employment

Note.

If the partnership is an options dealer or a commodities dealer, see section 1402(i) before completing lines 14a, 14b, and 14c, to determine the amount of any adjustment that may have to be made to the amounts shown on the Worksheet for Figuring Net Earnings (Loss) From Self-Employment, below. If the partnership is engaged solely in the operation of a group investment program, earnings from the operation are not self-employment earnings for either general or limited partners.

General partners.   General partners' net earnings (loss) from self-employment do not include:
  • Dividends on any shares of stock and interest on any bonds, debentures, notes, etc., unless the dividends or interest are received in the course of a trade or business, such as a dealer in stocks or securities or interest on notes or accounts receivable.

  • Rentals from real estate, except rentals of real estate held for sale to customers in the course of a trade or business as a real estate dealer or payments for rooms or space when significant services are provided.

  • Royalty income, except royalty income received in the course of a trade or business.

  See the instructions for Schedule SE (Form 1040), Self-Employment Tax, for more information.

Limited partners.   Generally, a limited partner's share of partnership income (loss) is not included in net earnings (loss) from self-employment. Limited partners treat as self-employment earnings only guaranteed payments for services they actually rendered to, or on behalf of, the partnership to the extent that those payments are payment for those services.

Line 14a. Net Earnings (Loss) From Self-Employment

Schedule K.   Enter on line 14a the amount from line 5 of the worksheet.

Schedule K-1.   Do not complete this line for any partner that is an estate, trust, corporation, exempt organization, or individual retirement arrangement (IRA).

  Enter in box 14 of Schedule K-1 each individual general partner's share of the amount shown on line 3c of the worksheet and each individual limited partner's share of the amount shown on line 4c of the worksheet, using code A.

Line 14b. Gross Farming or Fishing Income

Enter on line 14b the partnership's gross farming or fishing income from self-employment. Individual partners need this amount to figure net earnings from self-employment under the farm optional method in Section B, Part II of Schedule SE (Form 1040). Enter each individual partner's distributive share in box 14 of Schedule K-1 using code B.

Line 14c. Gross Nonfarm Income

Enter on line 14c the partnership's gross nonfarm income from self-employment. Individual partners need this amount to figure net earnings from self-employment under the nonfarm optional method in Section B, Part II of Schedule SE (Form 1040). Enter each individual partner's share in box 14 of Schedule K-1 using code C.

Worksheet Instructions

Line 1b.   Include on line 1b any part of the net income (loss) from rental real estate activities from Schedule K, line 2, that is from:
  1. Rentals of real estate held for sale to customers in the course of a trade or business as a real estate dealer or

  2. Rentals for which services were rendered to the occupants (other than services usually or customarily rendered for the rental of space for occupancy only). The supplying of maid service is such a service; but the furnishing of heat and light, the cleaning of public entrances, exits, stairways and lobbies, trash collection, etc., are not considered services rendered to the occupants.

Lines 3b and 4b.   Allocate the amounts on these lines in the same way Form 1065, page 1, line 22, is allocated to these particular partners.

Line 4a.   Include in the amount on line 4a any guaranteed payments to partners reported on Schedule K, line 4, and Schedule K-1, box 4, and derived from a trade or business as defined in section 1402(c). Also include other ordinary business income and expense items (other than expense items subject to separate limitations at the partner level, such as the section 179 expense deduction) reported on Schedules K and K-1 that are used to figure self-employment earnings under section 1402.

Worksheet for Figuring Net Earnings (Loss) From Self-Employment

1a Ordinary business income (loss) (Schedule K, line 1) 1a      
b Net income (loss) from certain rental real estate activities (see instructions) 1b      
c Other net rental income (loss) (Schedule K, line 3c) 1c      
d Net loss from Form 4797, Part II, line 17, included on line 1a, above. Enter as a positive amount 1d      
e Combine lines 1a through 1d 1e      
2 Net gain from Form 4797, Part II, line 17, included on line 1a, above 2      
3a Subtract line 2 from line 1e. If line 1e is a loss, increase the loss on line 1e by the amount on line 2 3a      
b Part of line 3a allocated to limited partners, estates, trusts, corporations, exempt organizations, and IRAs 3b      
c Subtract line 3b from line 3a. If line 3a is a loss, reduce the loss on line 3a by the amount on line 3b. Include each individual general partner's share in box 14 of Schedule K-1, using code A 3c  
4a Guaranteed payments to partners (Schedule K, line 4) derived from a trade or business as defined in section 1402(c) (see instructions) 4a      
b Part of line 4a allocated to individual limited partners for other than services and to estates, trusts, corporations, exempt organizations, and IRAs 4b      
c Subtract line 4b from line 4a. Include each individual general partner's share and each individual limited partner's share in box 14 of Schedule K-1, using code A 4c  
5 Net earnings (loss) from self-employment. Combine lines 3c and 4c. Enter here and on Schedule K, line 14a 5  

Credits

Note.

Do not attach Form 3800, General Business Credit, to Form 1065.

Low-Income Housing Credit

Section 42 provides a credit that can be claimed by owners of low-income residential rental buildings. To qualify for this credit, the partnership must file Form 8609, Low-Income Housing Credit Allocation and Certification, separately with the IRS. Do not attach Form 8609 to Form 1065. Complete and attach Form 8609-A, Annual Statement for Low-Income Housing Credit and Form 8586, Low-Income Housing Credit to Form 1065.

Line 15a. Low-Income Housing Credit (Section 42(j)(5))

Enter on line 15a the total low-income housing credit for property with respect to which a partnership is to be treated under section 42(j)(5) as the taxpayer to which the low-income housing credit was allowed.

If the partnership invested in another partnership to which the provisions of section 42(j)(5) apply, report on line 15a the credit reported to the partnership on Schedule K-1 (Form 1065), box 15, code A and code C.

Schedule K-1.   Report in box 15 of Schedule K-1 each partner's distributive share of the low-income housing credit reported on line 15a of Schedule K. Use code A to report credits attributable to buildings placed in service before 2008. Use code C to report credits attributable to buildings placed in service after 2007. If the partnership has credits from more than one rental activity, identify on an attached statement to Schedule K-1 the amount for each separate activity. See Passive Activity Reporting Requirements, earlier.

Line 15b. Low-Income Housing Credit (Other)

Enter on line 15b any low-income housing credit not reported on line 15a. This includes any credit reported to the partnership on Schedule K-1 (Form 1065), box 15, using code B and code D.

Schedule K-1.   Report in box 15 of Schedule K-1 each partner's distributive share of the low-income housing credit reported on line 15b of Schedule K. Use code B to report credits attributable to buildings placed in service before 2008. Use code D to report credits attributable to buildings placed in service after 2007. If the partnership has credits from more than one rental activity, identify on an attached statement to Schedule K-1 the amount for each separate activity. See Passive Activity Reporting Requirements, earlier.

Line 15c. Qualified Rehabilitation Expenditures (Rental Real Estate)

Enter on line 15c the total qualified rehabilitation expenditures related to rental real estate activities of the partnership. See the Instructions for Form 3468 for details on qualified rehabilitation expenditures.

Schedule K-1.   Report each partner's distributive share of qualified rehabilitation expenditures related to rental real estate activities in box 15 of Schedule K-1 using code E. Attach a statement to Schedule K-1 that provides the information and the partner's distributive share of the amounts the partner will need to complete lines 11b through 11j and line 11m of Form 3468. See the Instructions for Form 3468 for details. If the partnership has expenditures from more than one rental real estate activity, identify on an attached statement to Schedule K-1 the amount for each separate activity. See Passive Activity Reporting Requirements, earlier.

  
Qualified rehabilitation expenditures for property not related to rental real estate activities must be reported in box 20, using code D.

Line 15d. Other Rental Real Estate Credits

Enter on line 15d any other credit (other than credits reported on lines 15a through 15c) related to rental real estate activities. On the dotted line to the left of the entry space for line 15d, identify the type of credit. If there is more than one type of credit, attach a statement to Form 1065 that identifies the type and amount for each credit. These credits may include any type of credit listed in the instructions for line 15f.

Schedule K-1.   Report in box 15 of Schedule K-1 each partner's distributive share of other rental real estate credits using code F. If you are reporting each partner's distributive share of only one type of rental real estate credit under code F, enter the code with an asterisk (F*) and the dollar amount in the entry space in box 15 and attach a statement that shows “Box 15, Code F,” and type of credit. If you are reporting multiple types of rental real estate credit under code F, enter the code with an asterisk (F*) and enter “STMT” in the entry space in box 15 and attach a statement that shows “Box 15, Code F,” and the type and dollar amount of the credits. If the partnership has credits from more than one rental real estate activity, identify on the attached statement the amount of each type of credit for each separate activity. See Passive Activity Reporting Requirements, earlier.

Line 15e. Other Rental Credits

Enter on line 15e any other credit (other than credits reported on lines 15a through 15d) related to rental activities. On the dotted line to the left of the entry space for line 15e, identify the type of credit. If there is more than one type of credit, attach a statement to Form 1065 that identifies the type and amount for each credit. These credits may include any type of credit listed in the instructions for line 15f.

Schedule K-1.   Report in box 15 of Schedule K-1 each partner's distributive share of other rental credits using code G. If you are reporting each partner's distributive share of only one type of rental credit under code G, enter the code with an asterisk (G*) and the dollar amount in the entry space in box 15 and attach a statement that shows “Box 15, Code G,” and type of credit. If you are reporting multiple types of rental credit under code G, enter the code with an asterisk (G*) and enter “STMT” in the entry space in box 15 and attach a statement that shows “Box 15, Code G,” and the type and dollar amount of the credits. If the partnership has credits from more than one rental activity, identify on the attached statement the amount of each type of credit for each separate activity. See Passive Activity Reporting Requirements, earlier.

Line 15f. Other Credits

Enter on line 15f any other credit, except credits or expenditures shown or listed for lines 15a through 15e. If any of these credits are attributable to rental activities, enter the amount on line 15d or 15e. On the dotted line to the left of the entry space for line 15f, identify the type of credit. If there is more than one type of credit or if there are any credits subject to recapture, attach a statement to Form 1065 that separately identifies each type and amount of credit and credit recapture information for the following categories. The codes needed for box 15 of Schedule K-1 are provided in the heading of each category.

Undistributed capital gains credit (code H).   This credit represents taxes paid on undistributed capital gains by a regulated investment company (RIC) or a real estate investment trust (REIT). As a shareholder of a RIC or beneficiary of a REIT, the partnership will receive notice of the amount of tax paid on undistributed capital gains on Form 2439, Notice to Shareholder of Undistributed Long-Term Capital Gains.

Biofuel producer credit (code I).   Complete Form 6478 to figure the credit. Attach it to Form 1065. Include the amount shown on line 2 of Form 6478 in the partnership's income on line 7 of Form 1065. See section 40(f) for an election the partnership can make to not have the credit apply.

Work opportunity credit (code J).   Complete Form 5884 to figure the credit. Attach it to Form 1065.

Disabled access credit (code K).   Complete Form 8826 to figure the credit. Attach it to Form 1065.

Empowerment zone employment credit (code L).   Complete Form 8844 to figure the credit. Attach it to Form 1065.

Credit for increasing research activities (code M).   Complete Form 6765 to figure the credit. Attach it to Form 1065.

Credit for employer social security and Medicare taxes paid on certain employee tips (code N).    Complete Form 8846 to figure the credit. Attach it to Form 1065.

Backup withholding (code O).   This credit is for backup withholding on dividends, interest, and other types of income of the partnership.

Other credits (code P).   Attach a statement to Form 1065 that identifies the type and amount of any other credits not reported elsewhere, such as:
  • New markets credit. Complete Form 8874 to figure the credit. Attach it to Form 1065.

  • Nonconventional source fuel credit. Complete Form 8907 to figure the credit and attach it to Form 1065.

  • Qualified railroad track maintenance credit. Complete Form 8900 to figure the credit and attach it to Form 1065.

  • Unused investment credit from the qualifying advanced coal project credit, qualifying gasification project credit, or qualifying advanced energy project credit allocated from cooperatives.

  • Unused investment credit from the rehabilitation credit or energy credit allocated from cooperatives.

  • Renewable electricity, refined coal, and Indian coal production credit. See Rev. Proc. 2007-65, as modified by Announcement 2009-69 and Announcement 2007-112, for a safe harbor method for allocating the credit for wind energy production. Complete Form 8835 to figure the credit. Attach a statement to Form 1065 and Schedule K-1 showing separately the amount of the credit from Part I and from Part II of Form 8835. Attach Form 8835 to Form 1065.

  • Indian employment credit. Complete Form 8845 to figure the credit and attach it to Form 1065.

  • Orphan drug credit. Complete Form 8820 to figure the credit and attach it to Form 1065.

  • Credit for small employer pension plan startup costs. Complete Form 8881 to figure the credit and attach it to Form 1065.

  • Credit for employer-provided childcare facilities and services. Complete Form 8882 to figure the credit and attach it to Form 1065.

  • Biodiesel and renewable diesel fuels credit. Complete Form 8864 to figure the credit and attach it to Form 1065. If this credit includes the small agri-biodiesel producer credit, identify on a statement attached to Schedule K-1 (a) each partner's distributive share of the small agri-biodiesel producer credit included in the total credit allocated to the partner, (b) the number of gallons for which the partnership claimed the small agri-biodiesel producer credit, and (c) the partnership's productive capacity for agri-biodiesel.

  • Low sulfur diesel fuel production credit. Complete Form 8896 to figure the credit and attach it to Form 1065.

  • General credits from an electing large partnership.

  • Distilled spirits credit (Form 8906).

  • Energy efficient home credit (Form 8908).

  • Energy efficient appliance credit (Form 8909).

  • Alternative motor vehicle credit (Form 8910).

  • Alternative fuel vehicle refueling property credit (Form 8911).

  • Clean renewable energy bond credit (Form 8912). The amount of this credit (excluding any credits from other partnerships, estates, and trusts) must also be reported as interest income on line 5 of Schedule K.

  • Midwestern tax credit bond credit (Form 8912). The amount of this credit (excluding any credits from other partnerships, estates, and trusts) must also be reported as interest income on line 5 of Schedule K.

  • New clean renewable energy bond credit (Form 8912). The amount of this credit (excluding any credits from other partnerships, estates, and trusts) must also be reported as interest income on line 5 of Schedule K. In addition, the amount of this credit must also be reported as a cash distribution on line 19a of Schedule K.

  • Qualified energy conservation bond credit (Form 8912). The amount of this credit (excluding any credits from other partnerships, estates, and trusts) must also be reported as interest income on line 5 of Schedule K. In addition, the amount of this credit must also be reported as a cash distribution on line 19a of Schedule K.

  • Qualified zone academy bond credit (Form 8912). The amount of this credit (excluding any credits from other partnerships, estates, and trusts) must also be reported as interest income on line 5 of Schedule K. In addition, the amount of this credit must also be reported as a cash distribution on line 19a of Schedule K.

  • Qualified school construction bond credit (Form 8912). The amount of this credit (excluding any credits from other partnerships, estates, and trusts) must also be reported as interest income on line 5 of Schedule K. In addition, the amount of this credit must also be reported as a cash distribution on line 19a of Schedule K.

  • Build America bond credit (Form 8912). The amount of this credit (excluding any credits from other partnerships, estates, and trusts) must also be reported as interest income on line 5 of Schedule K. In addition, the amount of this credit must also be reported as a cash distribution on line 19a of Schedule K.

  • Mine rescue team training credit (Form 8923).

  • Agricultural chemicals security credit (Form 8931).

  • Credit for employer differential wage payments (Form 8932).

  • Carbon dioxide sequestration credit (Form 8933).

  • Qualified plug-in electric drive motor vehicle credit (Form 8936).

  • Credit for small employer health insurance premiums (Form 8941).

Schedule K-1.   Enter in box 15 of Schedule K-1 each partner's distributive share of the credits listed above. See additional Schedule K-1 reporting information provided in the instructions above. Enter the applicable code, H through P, in the column to the left of the dollar amount entry space.

  If you are reporting each partner's distributive share of only one type of credit under code P, enter the code with an asterisk (P*) and the dollar amount in the entry space in box 15 and attach a statement that shows “Box 15, Code P,” and type of credit. If you are reporting multiple types of credit under code P, enter the code with an asterisk (P*) and enter “STMT” in the entry space in box 15 and attach a statement that shows “Box 15, Code P,” and the type and dollar amount of the credits. If the partnership has credits from more than one activity, identify on an attached statement to Schedule K-1 the amount of each type of credit for each separate activity. See Passive Activity Reporting Requirements, earlier.

Foreign Transactions

Lines 16a through 16n must be completed if the partnership has foreign income, deductions, or losses, or has paid or accrued foreign taxes.

Attach a statement to Schedule K-1 for these coded items providing the information described below. If the partnership had income from, or paid or accrued taxes to, more than one country or U.S. possession, see the requirement for an attached statement in the instruction for line 16a, below. See Pub. 514, Foreign Tax Credit for Individuals, and the Instructions for Form 1116, for more information.

Line 16a. Name of Country or U.S. Possession (Code A)

Enter the name of the foreign country or U.S. possession from which the partnership had income or to which the partnership paid or accrued taxes. If the partnership had income from, or paid or accrued taxes to, more than one foreign country or U.S. possession, enter “See attached” and attach a statement for each country for lines 16a through 16n (codes A through N and code Q of Schedule K-1). On Schedule K-1, if there is more than one country enter code A followed by an asterisk (A*), enter “STMT,” and attach a statement to Schedule K-1 for each country for the information and amounts coded A through N and code Q.

Line 16b. Gross Income From All Sources (Code B)

Enter the partnership's gross income from all sources (both U.S. and foreign).

Line 16c. Gross Income Sourced at Partner Level (Code C)

Enter the total gross income of the partnership that is required to be sourced at the partner level. This includes income from the sale of most personal property other than inventory, depreciable property, and certain intangible property. See Pub. 514 and section 865 for details.

You must attach a statement to Form 1065 showing the following information.

  • The amount of this gross income (without regard to its source) in each category identified in the instructions for lines 16d, 16e, and 16f, including each of the listed categories.

  • Specifically identify gains on the sale of personal property other than inventory, depreciable property, and certain intangible property on which a foreign tax of 10% or more was paid or accrued. Also list losses on the sale of such property if the foreign country would have imposed a 10% or higher tax had the sale resulted in a gain. In addition, separately identify the amounts of such gains or losses within each separate limitation category that are long term capital gains and losses or collectibles (28%) gains and losses. See Determining the Source of Income From the Sales or Exchanges of Certain Personal Property in Pub. 514 and section 865.

Lines 16d–16f. Foreign Gross Income Sourced at Partnership Level

Separately report gross income from sources outside the United States by category of income as follows. See Pub. 514 for more information on the categories of income.

You must attach a statement to Form 1065 that specifies foreign source qualified dividends, unrecaptured section 1250 gains, and net section 1231 gain (loss).

Line 16d. Passive category (code D).   Passive category foreign source income. This category includes the following income.
  • Passive income.

  • Dividends from a domestic international sales corporation (DISC) or a former DISC.

  • Distributions from a former foreign sales corporation.

See Line 16f. Other (code F) for exceptions.

  
Passive income does not include export financing interest.

Line 16e. General category (code E).   General category foreign source income. Include all foreign income sourced at the partnership level that is not passive category income. See Line 16f. Other (code F) for exceptions.

Line 16f. Other (code F).   Attach a statement separately showing the amount of foreign source income included in the following categories:
  • Section 901(j) income, and

  • Certain income re-sourced by treaty.

Lines 16g–16h. Deductions Allocated and Apportioned at Partner Level

Line 16g. Interest expense (code G).   Enter on line 16g the partnership's total interest expense (including interest equivalents under Temporary Regulations section 1.861-9T(b)). Do not include interest directly allocable under Temporary Regulations section 1.861-10T to income from a specific property. This type of interest is allocated and apportioned at the partnership level and is included on lines 16i through 16k.

Line 16h. Other (code H).   Enter the total of all other deductions or losses that are required to be allocated at the partner level. For example, include on line 16h research and experimental expenditures (see Regulations section 1.861-17(f)).

Lines 16i–16k. Deductions Allocated and Apportioned at Partnership Level to Foreign Source Income

Separately report partnership deductions that are allocated and apportioned at the partnership level by category of income as follows. See Pub. 514 for more information.

Note.

Creditable foreign expenditures generally must be allocated in accordance with each partner's interest in the partnership. See Treasury Decision 9292, 2006-47 I.R.B. 914 for details.

Line 16i (code I).   Enter the amount of deductions allocated and apportioned at the partnership level to passive category foreign source income (defined in the instructions for line 16d).

Line 16j. General category (code J).   Enter the amount of deductions allocated and apportioned at the partnership level to general category foreign source income (defined in the instructions for line 16e).

Line 16k. Other (code K).   Attach a statement separately showing the amount of deductions allocated and apportioned at the partnership level to the following two categories:
  • Section 901(j) income, and

  • Certain income re-sourced by treaty.

Line 16l. Total Foreign Taxes Paid or Accrued

Enter in U.S. dollars the total foreign taxes (described in section 901 or section 903) that were paid or accrued by the partnership (according to its method of accounting for such taxes). Enter the amount paid on line 16l. Translate these amounts into U.S. dollars by using the applicable exchange rate (see Pub. 514).

Foreign taxes paid (code L).   If the partnership uses the cash method of accounting, check the Paid box and enter foreign taxes paid during the tax year on line 16l. Report each partner's distributive share in box 16 of Schedule K-1 using code L.

Foreign taxes accrued (code M).   If the partnership uses the accrual method of accounting, check the Accrued box and enter foreign taxes accrued on line 16l. Report each partner's distributive share in box 16 of Schedule K-1 using code M.

A partnership reporting foreign taxes using the cash method can make an irrevocable election to report these taxes using the accrual method for the year of the election and all future years. Make this election by reporting all foreign taxes using the accrual method on line 16l and check the Accrued box (see Regulations section 1.905-1).

Attach a statement reporting the following information.

  1. The total amount of foreign taxes (including foreign taxes on income sourced at the partner level) relating to each category of income (see instructions for lines 16d–16f).

  2. The dates on which the taxes were paid or accrued, the exchange rates used, and the amounts in both foreign currency and U.S. dollars, for:

    • Taxes withheld at source on interest.

    • Taxes withheld at source on dividends.

    • Taxes withheld at source on rents and royalties.

    • Other foreign taxes paid or accrued.

Line 16m. Reduction in Taxes Available for Credit (Code N)

Enter the total reduction in taxes available for credit. Attach a statement showing the reductions for:

  • Taxes on foreign mineral income (section 901(e)).

  • Taxes on foreign oil and gas extraction income and foreign oil-related income (section 907(a)).

  • Taxes attributable to boycott operations (section 908).

  • Failure to timely file (or furnish all of the information required on) Forms 5471 and 8865.

  • Foreign income taxes paid or accrued during the current tax year that have been suspended under section 909.

  • Any other items (specify).

Line 16n. Other Foreign Tax Information

  • Foreign trading gross receipts (code O). Report the partner's distributive share of foreign trading gross receipts from line 15 of Form 8873 using code O. See Extraterritorial Income Exclusion, earlier.

  • Extraterritorial income exclusion (code P). If the partnership is not permitted to deduct the extraterritorial income exclusion as a non-separately stated item, attach a statement to Schedule K-1 showing the partner's distributive share of the extraterritorial income exclusion reported on line 52 of Form 8873. Also identify the activity to which the exclusion is related.

  • Other foreign transactions (code Q). Enter in box 16 of Schedule K-1 any other foreign transaction information the partners need to prepare their tax returns using code Q. Attach a statement that separately identifies any arrangement, along with the taxes paid or accrued in connection with the arrangement, in which the partnership participates that would qualify as a splitter arrangement under section 909 if one or more partners are covered persons with respect to an entity that took into account related income from the arrangement. Also indicate whether the partnership has taken into account any related income from any such splitter arrangement. (See section 909 and the related regulations.)

Alternative Minimum Tax (AMT) Items

Lines 17a through 17f must be completed for all partners except certain small corporations exempt from the alternative minimum tax (AMT) under section 55(e).

Enter items of income and deductions that are adjustments or tax preference items for the AMT. See Form 6251, Alternative Minimum Tax—Individuals; Form 4626, Alternative Minimum Tax—Corporations; or Schedule I (Form 1041), Alternative Minimum Tax—Estates and Trusts, to determine the amounts to enter and for other information.

Do not include as a tax preference item any qualified expenditures to which an election under section 59(e) may apply. Instead, report these expenditures on line 13c(2). Because these expenditures are subject to an election by each partner, the partnership cannot figure the amount of any tax preference related to them. Instead, the partnership must pass through to each partner in box 13, code J, of Schedule K-1 the information needed to figure the deduction.

Schedule K-1.   Report each partner's distributive share of amounts reported on lines 17a through 17f (concerning alternative minimum tax items) in box 17 of Schedule K-1 using codes A through F, respectively. If the partnership is reporting items of income or deduction for oil, gas, and geothermal properties, you may be required to identify these items on a statement attached to Schedule K-1 (see the instructions for Oil, Gas, and Geothermal Properties—Gross Income and Deductions, later, for details). Also see the requirement for an attached statement in the instructions for line 17f.

Line 17a. Post-1986 Depreciation Adjustment

Figure the adjustment for line 17a based only on tangible property placed in service after 1986 (and tangible property placed in service after July 31, 1986, and before 1987 for which the partnership elected to use the general depreciation system). Do not make an adjustment for motion picture films, videotapes, sound recordings, certain public utility property (as defined in section 168(f)(2)), property depreciated under the unit-of-production method (or any other method not expressed in a term of years), qualified Indian reservation property, property eligible for a special depreciation allowance, qualified revitalization expenditures, or the section 179 expense deduction.

For property placed in service before 1999, refigure depreciation for the AMT as follows (using the same convention used for the regular tax).

  • For section 1250 property (generally, residential rental and nonresidential real property), use the straight line method over 40 years.

  • For tangible property (other than section 1250 property) depreciated using the straight line method for the regular tax, use the straight line method over the property's class life. Use 12 years if the property has no class life.

  • For any other tangible property, use the 150% declining balance method, switching to the straight line method the first tax year it gives a larger deduction, over the property's AMT class life. Use 12 years if the property has no class life.

Note.

See Pub. 946 for a table of class lives.

For property placed in service after 1998, refigure depreciation for the AMT only for property depreciated for the regular tax using the 200% declining balance method. For the AMT, use the 150% declining balance method, switching to the straight line method the first tax year it gives a larger deduction, and the same convention and recovery period used for the regular tax.

Figure the adjustment by subtracting the AMT deduction for depreciation from the regular tax deduction and enter the result on line 17a. If the AMT deduction is more than the regular tax deduction, enter the difference as a negative amount. Depreciation capitalized to inventory must also be refigured using the AMT rules. Include on this line the current year adjustment to income, if any, resulting from the difference.

Line 17b. Adjusted Gain or Loss

If the partnership disposed of any tangible property placed in service after 1986 (or after July 31, 1986, if an election was made to use the General Depreciation System), or if it disposed of a certified pollution control facility placed in service after 1986, refigure the gain or loss from the disposition using the adjusted basis for the AMT. The property's adjusted basis for the AMT is its cost or other basis minus all depreciation or amortization deductions allowed or allowable for the AMT during the current tax year and previous tax years. Enter on this line the difference between the regular tax gain (loss) and the AMT gain (loss). If the AMT gain is less than the regular tax gain, or the AMT loss is more than the regular tax loss, or there is an AMT loss and a regular tax gain, enter the difference as a negative amount.

If any part of the adjustment is allocable to net short-term capital gain (loss), net long-term capital gain (loss), or net section 1231 gain (loss), attach a statement that identifies the amount of the adjustment allocable to each type of gain or loss.

For a net long-term capital gain (loss), also identify the amount of the adjustment that is collectibles (28%) gain (loss).

For a net section 1231 gain (loss), also identify the amount of adjustment that is unrecaptured section 1250 gain.

Line 17c. Depletion (Other Than Oil and Gas)

Do not include any depletion on oil and gas wells. The partners must figure their oil and gas depletion deductions and preference items separately under section 613A.

Refigure the depletion deduction under section 611 for mines, wells (other than oil and gas wells), and other natural deposits for the AMT. Percentage depletion is limited to 50% of the taxable income from the property as figured under section 613(a), using only income and deductions for the AMT. Also, the deduction is limited to the property's adjusted basis at the end of the year as figured for the AMT. Figure this limit separately for each property. When refiguring the property's adjusted basis, take into account any AMT adjustments made this year or in previous years that affect basis (other than the current year's depletion).

Enter the difference between the regular tax and AMT deduction. If the AMT deduction is greater, enter the difference as a negative amount.

Oil, Gas, and Geothermal Properties—Gross Income and Deductions

Generally, the amounts to be entered on lines 17d and 17e are only the income and deductions for oil, gas, and geothermal properties that are used to figure the partnership's ordinary income (loss) (line 22 of Form 1065).

If there are any items of income or deductions for oil, gas, and geothermal properties included in the amounts that are required to be passed through separately to the partners on Schedule K-1 (items not reported on line 1 of Schedule K-1), give each partner a statement that shows, for the box in which the income or deduction is included, the amount of income or deductions included in the total amount for that box. Do not include any of these direct pass-through amounts on line 17d or 17e.

Figure the amounts for lines 17d and 17e separately for oil and gas properties that are not geothermal deposits and for all properties that are geothermal deposits.

Give each partner a statement that shows the separate amounts included in the computation of the amounts on lines 17d and 17e of Schedule K.

Line 17d. Oil, Gas, and Geothermal Properties—Gross Income

Enter the total amount of gross income (within the meaning of section 613(a)) from all oil, gas, and geothermal properties received or accrued during the tax year and included on page 1, Form 1065.

Line 17e. Oil, Gas, and Geothermal Properties—Deductions

Enter any deductions allowed for the AMT that are allocable to oil, gas, and geothermal properties.

Line 17f. Other AMT Items

Attach a statement to Form 1065 and Schedule K-1 that shows other items not shown on lines 17a through 17e that are adjustments or tax preference items or that the partner needs to complete Form 6251, Form 4626, or Schedule I (Form 1041). See these forms and their instructions to determine the amount to enter.

Other AMT items include the following.

  • Accelerated depreciation of real property under pre-1987 rules.

  • Accelerated depreciation of leased personal property under pre-1987 rules.

  • Long-term contracts entered into after February 28, 1986. Except for certain home construction contracts, the taxable income from these contracts must be figured using the percentage of completion method of accounting for the AMT.

  • Losses from tax shelter farm activities. No loss from any tax shelter farm activity is allowed for the AMT.

  • Any information needed by certain corporate partners to compute the adjusted current earnings (ACE) adjustment.

Schedule K-1.   If you are reporting each partner's distributive share of only one type of AMT item under code F, enter the code with an asterisk (F*) and the dollar amount in the entry space in box 17 and attach a statement that shows the type of AMT item. If you are reporting multiple types of AMT items under code F, enter the code with an asterisk (F*) and enter “STMT” in the entry space in box 17 and attach a statement that shows the dollar amount of each type of AMT item.

Tax-Exempt Income and Nondeductible Expenses

Line 18a. Tax-exempt interest income.   Enter on line 18a tax-exempt interest income, including any exempt-interest dividends received from a mutual fund or other regulated investment company.

Line 18b. Other tax-exempt income.   Enter on line 18b all income of the partnership exempt from tax other than tax-exempt interest.

Line 18c. Nondeductible expenses.   Enter on line 18c nondeductible expenses paid or incurred by the partnership.

  Do not include separately stated deductions shown elsewhere on Schedules K and K-1, capital expenditures, or items the deduction for which is deferred to a later tax year.

Schedule K-1.   Report in box 18 of Schedule K-1 each partner's distributive share of amounts reported on lines 18a, 18b, and 18c of Schedule K (concerning items affecting partners' basis) using codes A through C, respectively. Attach a statement to Schedule K-1 for the amounts included in line 18b that are exempt by reason of section 892 and describe the nature of the income.

Distributions

Line 19a. Distributions of cash and marketable securities.   Enter on line 19a the total distributions to each partner of cash and marketable securities that are treated as money under section 731(c)(1). Also include the amount of the credits to holders of tax credit bonds that are treated as cash distributions under section 54A(g) and 54AA(f)(2). The instructions for the separate credits (see Other Credits (Code P) under Line 15f. Other Credits) state when the amount of the credit must be reported as a cash distribution. Do not include distributions of section 737 property (see Distributions subject to section 737 (code B), below). Generally, marketable securities are valued at FMV on the date of distribution. However, the value of marketable securities does not include the distributee partner's share of the gain on the securities distributed to that partner. See section 731(c)(3)(B) for details.

  If the amount on line 19a includes marketable securities treated as money, state separately on an attached statement to Schedules K and K-1 (a) the partnership's adjusted basis of those securities immediately before the distribution and (b) the FMV of those securities on the date of distribution (excluding the distributee partner's share of the gain on the securities distributed to that partner).

Line 19b. Distributions of other property.   Enter on line 19b the total distributions to each partner of property not included on line 19a. In box 19 of Schedule K-1, distributions of section 737 property will be reported separately from other property. The codes used when reporting amounts from line 19b in box 19 of Schedule K-1 appear in the heading for the categories.

Distributions subject to section 737 (code B).

If a partner contributed section 704(c) built-in gain property within the last 7 years and the partnership made a distribution of property to that partner other than the previously contributed built-in gain property, attach a statement to the distributee partner's Schedule K-1 that provides the following information.

  • The fair market value of the distributed property (other than money).

  • The amount of money received in the distribution.

  • The net precontribution gain of the partner. This is the net gain (if any) that would have been recognized by the distributee partner under section 704(c)(1)(B) if all the following property had been distributed by the partnership to another partner. This property includes all property contributed by the distributee partner during the 7 years prior to the distribution and that is still held by the partnership at the time of the distribution (see section 737).

For more information, see Recognition of Precontribution Gain on Certain Partnership Distributions, earlier.

Other property (code C).

Include all distributions of property not included on line 19a and that are not section 737 property. In computing the amount of the distribution, use the adjusted basis of the property to the partnership immediately before the distribution. In addition, attach a statement showing the adjusted basis and fair market value of each property distributed.

Schedule K-1.   Report in box 19 each partner's distributive share of the amount on line 19a using code A. If a statement is attached, enter an asterisk after the code (A*) and “STMT” in the entry space, and attach the required statement. For line 19b, report distributions subject to section 737 in box 19 using code B with an asterisk (B*) and “STMT” in the entry space, and attach the required statement. For distributions of other property, report each partner's distributive share of the amount in box 19 using code C with an asterisk (C*) and “STMT” in the entry space, and attach the required statement.

Other Information

Lines 20a and 20b. Investment Income and Expenses

Enter on line 20a the investment income included on lines 5, 6a, 7, and 11, of Schedule K. Do not include other portfolio gains or losses on this line.

Investment income includes gross income from property held for investment, the excess of net gain attributable to the disposition of property held for investment over net capital gain from the disposition of property held for investment, any net capital gain from the disposition of property held for investment that each partner elects to include in investment income under section 163(d)(4)(B)(iii), and any qualified dividend income that the partner elects to include in investment income. Generally, investment income and investment expenses do not include any income or expenses from a passive activity. See Regulations section 1.469-2(f)(10) for exceptions.

Property subject to a net lease is not treated as investment property because it is subject to the passive loss rules. Do not reduce investment income by losses from passive activities.

Enter investment expenses on line 20b. Investment expenses are deductible expenses (other than interest) directly connected with the production of investment income. See the Instructions for Form 4952 for more information.

Schedule K-1.   Report each partner's distributive share of amounts reported on lines 20a and 20b (investment income and expenses) in box 20 of Schedule K-1 using codes A and B, respectively.

  If there are other items of investment income or expense included in the amounts that are required to be passed through separately to the partners on Schedule K-1, such as net short-term capital gain or loss, net long-term capital gain or loss, and other portfolio gains or losses, give each partner a statement identifying these amounts.

Line 20c. Other Items and Amounts

Report the following information on a statement attached to Form 1065. On Schedule K-1 enter the appropriate code in box 20 for each information item followed by an asterisk in the left-hand column of the entry space (for example,“C*”). In the right-hand column, enter “STMT.” The codes are provided for each information category.

Fuel tax credit information (code C).   Report the number of gallons of each fuel sold or used during the tax year for a nontaxable use qualifying for the credit for taxes paid on fuel, type of use, and the applicable credit per gallon. See Form 4136, Credit for Federal Tax Paid on Fuels, for details.

Qualified rehabilitation expenditures (other than rental real estate) (code D).   Enter total qualified rehabilitation expenditures from activities other than rental real estate activities. See the Instructions for Form 3468 for details on qualified rehabilitation expenditures.

Note.

Report qualified rehabilitation expenditures related to rental real estate activities on line 15c.

Schedule K-1.

Report each partner's distributive share of qualified rehabilitation expenditures related to activities other than rental real estate activities in box 20 of Schedule K-1 using code D. Attach a statement to Schedule K-1 that provides the information and the partner's distributive share of the amounts the partner will need to complete lines 11b through 11j and line 11m of Form 3468. See the Instructions for Form 3468 for details. If the partnership has expenditures from more than one activity, identify on a statement attached to Schedule K-1 the amount for each separate activity. See Passive Activity Reporting Requirements, earlier.

Basis of energy property (code E).   See the Instructions for Form 3468 for details on basis of energy property. In box 20 of Schedule K-1, enter code E followed by an asterisk and enter “STMT” in the entry space for the dollar amount. Attach a statement to Schedule K-1 that provides the information and the partner's distributive share of the amounts the partner will need to figure the amounts to report on lines 12a-d, 12f, 12g, 12i, 12j, 12l, 12m, 12o, and 12q-s of Form 3468. See the Instructions for Form 3468 for details.

Recapture of low-income housing credit (codes F and G).    If recapture of part or all of the low-income housing credit is required because (a) the prior year qualified basis of a building decreased or (b) the partnership disposed of a building or part of its interest in a building, see Form 8611, Recapture of Low-Income Housing Credit. Complete lines 1 through 7 of Form 8611 to determine the amount of credit to recapture. Use code F on Schedule K-1 to report recapture of the low-income housing credit from a section 42(j)(5) partnership. Use code G to report recapture of any other low-income housing credit. See the instructions for lines 15a and 15b, earlier, for more information.

Note.

If a partner's ownership interest in a building decreased because of a transaction at the partner level, the partnership must provide the necessary information to the partner to enable the partner to figure the recapture.

  
The disposal of a building or an interest therein will generate a credit recapture unless it is reasonably expected that the building will continue to be operated as a qualified low-income building for the remainder of the building's compliance period.

  See Form 8586, Form 8611, and section 42 for more information.

Recapture of investment credit (code H).    Complete and attach Form 4255, Recapture of Investment Credit, when investment credit property is disposed of, or it no longer qualifies for the credit, before the end of the recapture period or the useful life applicable to the property. State the type of property at the top of Form 4255, and complete lines 2, 4, and 5, whether or not any partner is subject to recapture of the credit.

  Attach to each Schedule K-1 a separate statement providing the information the partnership is required to show on Form 4255, but list only the partner's distributive share of the cost of the property subject to recapture. Also indicate the lines of Form 4255 on which the partners should report these amounts.

Recapture of other credits (code I).   On an attached statement to Schedule K-1, provide any information partners will need to report recapture of credits (other than recapture of low-income housing and investment credit reported on Schedule K-1 using codes F, G, and H). Examples of credits reported using code I when subject to recapture include:
  • The qualified plug-in electric vehicle credit. See section 30(e)(5) for details.

  • The new markets credit. See Form 8874 and Form 8874-B, Notice of Recapture Event for New Markets Credit, for details.

  • The Indian employment credit. See section 45A(d) for details.

  • The credit for employer-provided childcare facilities and services. See section 45F(d).

  • The alternative motor vehicle credit. See section 30B(h)(8).

  • The alternative fuel vehicle refueling property credit. See section 30C(e)(5).

  • The new qualified plug-in electric drive motor vehicles credit. See section 30D(f)(5).

Look-back interest—completed long-term contracts (code J).   If the partnership is closely held (defined in section 460(b)(4)) and it entered into any long-term contracts after February 28, 1986, that are accounted for under either the percentage of completion-capitalized cost method or the percentage of completion method, it must attach a statement to Form 1065 showing the information required in items (a) and (b) of the instructions for lines 1 and 3 of Part II of Form 8697. It must also report the amounts for Part II, lines 1 and 3, to its partners. See the Instructions for Form 8697 for more information.

Look-back interest—income forecast method (code K).   If the partnership is closely held (defined in section 460(b)(4)) and it depreciated certain property placed in service after September 13, 1995, under the income forecast method, it must attach to Form 1065 the information specified in the instructions for Form 8866, line 2, for the 3rd and 10th tax years beginning after the tax year the property was placed in service. It must also report the line 2 amounts to its partners. See the Instructions for Form 8866 for more details.

Dispositions of property with section 179 deductions (code L).   This represents gain or loss on the sale, exchange, or other disposition of property for which a section 179 deduction has been passed through to partners. The partnership must provide all the following information with respect to such dispositions (see the instructions for line 6, earlier).
  • Description of the property.

  • Date the property was acquired and placed in service.

  • Date of the sale or other disposition of the property.

  • The partner's share of the gross sales price or amount realized.

  • The partner's share of the cost or other basis plus expense of sale (reduced as explained in the instructions for Form 4797, line 21).

  • The partner's share of the depreciation allowed or allowable, determined as described in the instructions for Form 4797, line 22, but excluding the section 179 deduction.

  • The partner's share of the section 179 deduction (if any) passed through for the property and the partnership's tax year(s) in which the amount was passed through.

  • If the disposition is due to a casualty or theft, a statement indicating so, and any additional information needed by the partner.

  • For an installment sale made during the partnership's tax year, any information the partner needs to complete Form 6252. The partnership also must separately report the partner's share of all payments received for the property in future tax years. (Installment payments received for sales made in prior tax years should be reported in the same manner used in prior tax years.) See the Instructions for Form 6252 for details.

Recapture of section 179 deduction (code M).    This amount represents recapture of section 179 deduction if business use of the property dropped to 50% or less before the end of the recapture period. If the business use of any property (placed in service after 1986) for which a section 179 deduction was passed through to partners dropped to 50% or less (for a reason other than disposition), the partnership must provide all the following information.
  • The partner's distributive share of the original basis and depreciation allowed or allowable (not including the section 179 deduction).

  • The partner's distributive share of the section 179 deduction (if any) passed through for the property and the partnership's tax year(s) in which the amount was passed through.

  See Regulations section 1.179-1(e) for details.

Interest expense for corporate partners (code N).   Report as an information item each corporate partner's distributive share of the total amount of interest expense reported elsewhere on this return. A corporate partner's distributive share of interest income, interest expense, and partnership liabilities are treated as income, expense, and liabilities of the corporation for purposes of the limitation on the deduction for interest under section 163(j).

Section 453(l)(3) information (code O).   Supply any information needed by a partner to compute the interest due under section 453(l)(3). If the partnership elected to report the dispositions of certain 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 on tax attributable to the installment payments received during the tax year.

Section 453A(c) information (code P).   Supply any information needed by a partner to compute the interest due under section 453A(c). If an obligation arising from the disposition of property to which section 453A applies is outstanding at the close of the year, each partner's tax liability must be increased by the tax due under section 453A(c) on the partner's distributive share of the tax deferred under the installment method.

Section 1260(b) information (code Q).   Supply any information needed by a partner to figure the interest due under section 1260(b). If the partnership had gain from certain constructive ownership transactions, each partner's tax liability must be increased by the partner's distributive share of interest due on any deferral of gain recognition. See section 1260(b) for details, including how to figure the interest.

Interest allocable to production expenditures (code R).   Supply any information needed by a partner to properly capitalize interest as required by section 263A(f). See Section 263A uniform capitalization rules, earlier, for more information.

CCF nonqualified withdrawal (code S).   Report nonqualified withdrawals by the partnership from a capital construction fund to partners. See Pub. 595.

Depletion information—oil and gas (code T).   Report gross income and other information relating to oil and gas well properties to partners to allow them to figure the depletion deduction for oil and gas well properties. Allocate to each partner a proportionate share of the adjusted basis of each partnership oil or gas property. See section 613A(c)(7)(D) for details.

  The partnership cannot deduct depletion on oil and gas wells. Each partner must determine the allowable amount to report on his or her return. See Pub. 535 for more information.

Amortization of reforestation costs (code U).   Report the amortizable basis of reforestation expenditures paid or incurred before October 23, 2004, for which the partnership elected amortization, and the tax year the amortization began for the current tax year and the 7 preceding tax years. The amortizable basis cannot exceed $10,000 for each of those tax years.

Unrelated business taxable income (code V).   Report any information a partner that is a tax-exempt organization may need to figure its share of unrelated business taxable income under section 512(a)(1) (but excluding any modifications required by paragraphs (8) through (15) of section 512(b)). Partners are required to notify the partnership of their tax-exempt status. See Form 990-T, Exempt Organization Business Income Tax Return, and Pub. 598, Tax on Unrelated Business Income of Exempt Organizations, for more information.

Precontribution gain (loss) (code W).   If the partnership distributed any section 704(c) property to any partner other than the contributing partner, and the date of the distribution was within 7 years of the date the section 704(c) property was contributed to the partnership, the distribution must be treated as if it were a sale by the contributing partner taking place on the date of the distribution. Section 704(c) property is property that had a fair market value which was either greater or less than the contributing partner's adjusted basis at the time the property was contributed to the partnership. See Dispositions of Contributed Property, earlier, for more information. If the partnership made such a distribution during its tax year, attach a statement to the contributing partner's Schedule K-1 that provides the following information.
  • The amount of the gain or loss that would have been allocated to the contributing partner if the partnership had sold the section 704(c) property at its fair market value at the time of the distribution. See section 704(c)(1)(B) for details.

  • The character of the gain or loss which would have resulted if the partnership had sold the section 704(c) property to the distributee partner.

  Enter code W in box 20 of Schedule K-1 with an asterisk (W*) and enter “STMT,” and attach the required statement.

Section 108(i) information (code X).    Report the following.
  • For the deferred cancellation of debt (COD) income, report the partner's deferred amount that has not been included in income in the current or prior tax years.

  • For the deferred original issue discount (OID) deduction, report the partner's share of the partnership's OID deduction deferred under section 108(i)(2)(A)(i) that has not been deducted in the current or prior tax years.

  • For the section 752(b) distribution, report the partner's share of the deferred section 752 amount that is treated as a distribution of money to the partner under section 752 in the current tax year.

  • For the deferred section 752(b) distribution, report the partner's deferred section 752 amount remaining as of the end of the current tax year.

Net investment income (code Y).    Use code Y to report any information that may be relevant for partners to compute their net investment income tax when the information is not otherwise identifiable elsewhere on Schedule K-1. Attach a statement that shows a description and dollar amount of each relevant item.

  Examples of items reported using code Y may include the following.
  • Net rental real estate income reported on Form 1065, Schedule K, line 2, and other net rental income reported on Form 1065, Schedule K, line 3c, derived from a section 212 for-profit activity (and not from a section 162 trade or business).

  • Gains and Losses from dispositions of assets attributable to a section 212 for-profit activity (and not from a section 162 trade or business).

  • Gain reported on the installment sale basis (or attributable to a private annuity) that is attributable to the disposition of property held in a trade or business.

  • Gain or loss from the disposition of a partnership interest, but only if such partnership was engaged, directly or indirectly, in one or more trades or businesses, and at least one of those trades or businesses was not trading in financial instruments or commodities.

  • The partner’s distributive share of interest income, or interest expense, which is attributable to a loan between the partnership and the partner (self-charged interest).

  • If the partnership received a Form 1065, Schedule K-1, the detail and amounts reported to the partnership on code Y.

  • If the partnership received a Form 1065-B, Schedule K-1, the detail and amounts reported to the partnership.

  • If the partnership received a Form 1041, Schedule K-1, the amount of the adjustment reported.

  • Guaranteed payments (reported on Form 1065, Schedule K, line 4) unrelated to services, such as for the use of capital or attributable to section 736(a)(2) payments for unrealized receivables or goodwill.

  • In the case of a common trust fund, any items of income or loss that may be taken into account in computing the participant’s net investment income (other than qualified dividends, and short-term and long-term capital gains).

In addition, Regulations section 1.1411-10 provides special rules with respect to stock of CFCs and PFICs owned by the partnership. If the partnership owns directly or indirectly stock of a CFC or PFIC, then additional reporting may be required under code Y.

CFCs and QEFs.   In the case of stock of CFCs and QEFs directly or indirectly owned by the partnership, the partnership must provide the name and EIN (if one has been issued) for each CFC and QEF the stock of which is owned by the partnership for which an election under Regulations section 1.1411-10(g) is not in effect and with respect to which the partnership is not engaged in a trade or business described in section 1411(c)(2). For each of these entities, the partnership must provide the following information on an entity-by-entity basis (to the extent such information is not otherwise identifiable elsewhere on Schedule K-1).
  • Section 951(a) inclusions.

  • Section 1293(a)(1)(A) inclusions.

  • Section 1293(a)(1)(B) inclusions.

  • Section 959(d) distributions subject to section 1411.

  • Section 1293(c) distributions subject to section 1411.

  • Amount of gain or loss derived with respect to dispositions of the stock of CFCs and QEFs that is taken into account for section 1411 purposes.

  • Amounts that are derived with respect to the disposition of the stock of CFCs and QEFs and included in income as a dividend under section 1248 for section 1411 purposes.

  In the case of stock of CFCs and QEFs directly or indirectly owned by the partnership for which an election under Regulations section 1.1411-10(g) is in effect, the partnership must provide the following information (to the extent such information is not otherwise identifiable elsewhere on Schedule K-1), on either an aggregate basis or an entity-by-entity basis.
  • Section 951(a) inclusions.

  • Section 1293(a)(1)(A) inclusions.

  • Section 1293(a)(1)(B) inclusions.

  In the case of stock of CFCs and QEFs directly or indirectly owned by the partnership with respect to which the partnership is engaged in a trade or business described in section 1411(c)(2), the partnership must provide the following information (to the extent such information is not otherwise identifiable elsewhere on the Schedule K-1), on either an aggregate or an entity-by-entity basis, or may aggregate this information with other income derived by the partnership that is net investment income under section 1411(c)(1)(A)(ii):
  • Section 951(a) inclusions.

  • Section 1293(a)(1)(A) inclusions.

  • Section 1293(a)(1)(B) inclusions.

Mark-to-Market PFICs.   In the case of stock of PFICs directly or indirectly owned by the partnership for which an election under section 1296 is in effect, the partnership must provide the following information (to the extent such information is not otherwise identifiable elsewhere on Schedule K-1), on either an aggregate basis or an entity-by-entity basis (except as provided below).
  • Amounts included in income under section 1296(a)(1).

  • Amounts deducted from income under section 1296(a)(2).

  In the case of PFIC stock owned directly or indirectly by the partnership for which an election under section 1296 is in effect and with respect to which the partnership is engaged in a trade or business described in section 1411(c)(2), the partnership may aggregate this information with other income derived by the partnership that is net investment income under section 1411(c)(1)(A)(ii).

Section 1291 Funds.   In the case of stock of PFICs directly or indirectly owned by the partnership with respect to which direct or indirect partners are subject to section 1291, the partnership must provide the following information (to the extent such information is not otherwise identifiable elsewhere on Schedule K-1), on an entity-by-entity basis.
  • Excess distributions made by a PFIC with respect to which a partner is subject to section 1291.

  • Gains derived with respect to the disposition of stock of a PFIC with respect to which a partner is subject to section 1291.

Other information (code Z).   Report to each partner:
  • Any information a partner that is a publicly traded partnership may need to determine if it meets the 90% qualifying income test of section 7704(c)(2). Partners are required to notify the partnership of their status as a publicly traded partnership.

  • If a partner that is a corporation elected under section 168(k)(4) to accelerate the corporation's pre-2006 AMT credit carryforward in lieu of bonus depreciation, it is required to notify the partnership in writing of this election so the partnership can adjust the electing corporate partner's distributive share of partnership items that include bonus depreciation. See Rev. Proc. 2009-16, 2009-6 I.R.B. 449, as modified by Rev. Proc. 2009-33, 2009-29 I.R.B. 150, for more information about the written notification that the electing corporate partner must provide the partnership. The partnership is required to recompute the partner's distributive share of the depreciation on any eligible qualified property or extension property placed in service by the partnership to eliminate bonus depreciation and use the straight line depreciation method for such property. On an attached statement, list each partnership item that includes bonus depreciation and show the electing corporate partner's adjustment for each item that results from the recomputed depreciation and elimination of the bonus depreciation. See section 168(k)(4) for more information.

  • If the partnership participates in a transaction that must be disclosed on Form 8886, both the partnership and its partners may be required to file Form 8886. The partnership must determine if any of its partners are required to disclose the transaction and provide those partners with information they will need to file Form 8886. This determination is based on the category(s) under which a transaction qualified for disclosures. See Form 8886 and its instructions for details.

  • Compensation to partners deferred under a section 409A nonqualified deferred compensation plan that does not meet the requirements of section 409A. Include in this amount any earnings on these deferrals. This amount must also be included on line 4 of Schedule K, Guaranteed payments. For details, see the regulations under section 409A. These regulations do not provide guidance on the application of section 409A to arrangements between partnerships and partners. For interim guidance on such arrangements, see Q&A-7 in Notice 2005-1, 2005-2 I.R.B. 274, and the information provided in the preamble to these regulations (T.D. 9321). Also see Notice 2006-79, 2006-43 I.R.B. 763, Notice 2007-86, 2007-46 I.R.B. 990, and Notice 2008-113, 2008-51 I.R.B. 1305 for additional information on transitional and relief rules.

  • Any income or gain reported on lines 1 through 11 of Schedule K that qualifies as inversion gain, if the partnership is an expatriated entity or is a partner in an expatriated entity. For details, see section 7874. Attach a statement to Form 1065 that shows the amount of each type of income or gain included in the inversion gain. The partnership must report each partner's distributive share of the inversion gain in box 20 of Schedule K-1 using code Z. Attach a statement to Schedule K-1 that shows the partner's distributive share of the amount of each type of income or gain included in the inversion gain.

  • Qualifying advanced coal project property. Attach a statement to Schedule K-1 showing the partner's distributive share of the amounts that the partner will use when figuring the amounts to report on lines 5a through 5c of the partner's Form 3468. See the Instructions for Form 3468 for details.

  • Qualifying gasification project property. Attach a statement to Schedule K-1 showing the partner's distributive share of the amounts that the partner will use when figuring the amounts to report on lines 6a and 6b of the partner's Form 3468. See the Instructions for Form 3468 for details.

  • Qualified advanced energy project credit. Attach a statement to Schedule K-1 showing the partner's distributive share of the amounts that the partner will use when figuring the amount to report on line 7 of the partner's Form 3468. See the Instructions for Form 3468 for details.

  • The information needed to complete Schedule P (Form 1120-F), List of Foreign Partner Interests in Partnerships, on an attached statement for a partner that is (a) A corporation (identified as a foreign partner under Regulations section 1.1446-1(c)(3)) or (b) A partnership (domestic or foreign) if you know, or have reason to know, that one or more of the partners is a foreign corporation. 
    If the partnership allocates effectively connected income to the partner, provide the information needed to complete lines 1 through 10, 13, 14, 15b, 17a, 17b, and 18 of Schedule P (Form 1120-F). If the partnership does not allocate effectively connected income to the partner, provide the information needed to complete lines 13, 14, and 18 of Schedule P (Form 1120-F). The information must be provided in a format which references the specific line numbers on Schedule P for which the information is provided. For more information, see the Instructions for Schedule P (Form 1120-F). 
    Exceptions. The statement is not required in the following situations. 
    1. The direct or indirect foreign corporate partner provides the partnership with a valid Form W-8BEN or Form W-8BEN-E (within the meaning of Regulations section 1.1446-2(b)(2)(iii)) on which the corporation claims an exemption from U.S. tax by operation of an income tax treaty or reciprocal agreement on the grounds that none of the income is attributable to a permanent establishment of the partner. 
    2. The partnership does not allocate any effectively connected income to the partner (foreign corporation or partnership) and the partnership receives a written statement from the partner (corporation or partnership) indicating that the information is not needed to determine its (or its direct or indirect partner(s)) U.S. federal income tax liabilities.

  • The partner's distributive share of any conservation reserve program payments made to the partnership.

  • If the partnership has deductions attributable to a farming business and receives an applicable subsidy, report the aggregate gross income or gain and the aggregate deductions from the farming business and any information the partners need to comply with the limitation on excess farm losses of certain taxpayers under section 461(j).

  • Any other information the partners need to prepare their tax returns.

Analysis of Net Income (Loss)

For each type of partner shown, enter the portion of the amount shown on line 1 that was allocated to that type of partner. Foreign government partners are treated as corporate partners. Report all amounts for LLC members on the line for limited partners. The sum of the amounts shown on line 2 must equal the amount shown on line 1. In addition, the amount on line 1 must equal the amount on line 9, Schedule M-1 (if the partnership is required to complete Schedule M-1). If the partnership files Schedule M-3, the amount on line 1 must equal the amount in column (d) of line 26, Part II.

In classifying partners who are individuals as “active” or “passive,” the partnership should apply the rules below. In applying these rules, a partnership should classify each partner to the best of its knowledge and belief. It is assumed that in most cases the level of a particular partner's participation in an activity will be apparent.

  1. If the partnership's principal activity is a trade or business, classify a general partner as “active” if the partner materially participated in all partnership trade or business activities; otherwise, classify a general partner as “passive.

  2. If the partnership's principal activity consists of a working interest in an oil or gas well, classify a general partner as “active.

  3. If the partnership's principal activity is a rental real estate activity, classify a general partner as “active” if the partner actively participated in all of the partnership's rental real estate activities; otherwise, classify a general partner as “passive.

  4. Classify as “passive” all partners in a partnership whose principal activity is a rental activity other than a rental real estate activity.

  5. If the partnership's principal activity is a portfolio activity, classify all partners as “active.

  6. Classify as “passive” all limited partners in a partnership whose principal activity is a trade or business or rental activity.

  7. If the partnership cannot make a reasonable determination whether a partner's participation in a trade or business activity is material or whether a partner's participation in a rental real estate activity is active, classify the partner as “passive.

Schedule L. Balance Sheets per Books

Note.

Schedules L, M-1, and M-2 are not required to be completed if the partnership answered “Yes” to question 6 of Schedule B.

The balance sheets should agree with the partnership's books and records. Attach a statement explaining any differences. There are additional requirements for completing Schedule L for partnerships that are required to file Schedule M-3 (see the Instructions for Schedule M-3 for details).

Partnerships reporting to the Interstate Commerce Commission (ICC) or to any national, state, municipal, or other public officer may send copies of their balance sheets prescribed by the ICC or national, state, or municipal authorities, as of the beginning and end of the tax year, instead of completing Schedule L. However, statements filed under this procedure must contain sufficient information to enable the IRS to reconstruct a balance sheet similar to that contained on Form 1065 without contacting the partnership during processing.

All amounts on the balance sheet should be reported in U.S. dollars. If the partnership's books and records are kept in a foreign currency, the balance sheet should be translated in accordance with U.S. generally accepted accounting principles (GAAP).

Exception.

If the partnership or any qualified business unit of the partnership uses the U.S. dollar approximate separate transactions method, Schedule L should reflect the tax balance sheet prepared and translated into U.S. dollars according to Regulations section 1.985-3(d), and not a U.S. GAAP balance sheet.

Partnerships Required To File Schedule M-3

For partnerships required to file Schedule M-3, the amounts reported on Schedule L must be amounts from financial statements used to complete Schedule M-3. If the partnership prepares non-tax-basis financial statements, Schedule M-3 and Schedule L must report non-tax-basis financial statement amounts. If the partnership does not prepare non-tax-basis financial statements, Schedule L must be based on the partnership's books and records and may show tax-basis balance sheet amounts if the partnership books and records reflect only tax-basis amounts.

Line 5. Tax-Exempt Securities

Include on this line:

  1. State and local government obligations, the interest on which is excludable from gross income under section 103(a), and

  2. Stock in a mutual fund or other regulated investment company that distributed exempt-interest dividends during the tax year of the partnership.

Line 7a. Loans to Partners (or Persons Related to Partners)

Include on this line loans to partners or persons related to partners. Persons are related if they have a relationship specified in sections 267(b) or 707(b). Amounts included here should not be included elsewhere on lines 1 through 14.

Line 14. Total Assets

Generally, total assets at the beginning of the year (Schedule L, line 14, column (b)), must equal total assets at the close of the prior tax year (Schedule L, line 14, column (d)). If total assets at the beginning of the year do not equal total assets at the close of the prior year, attach a statement explaining the difference.

For purposes of measuring total assets at the end of the year, the partnership's assets may not be netted against or reduced by partnership liabilities. In addition, asset amounts may not be reported as a negative number. If the partnership has an interest in another partnership and uses a tax-basis method for Schedule L, it must show as an asset the adjusted basis of its interest in the other partnership and separately show as a liability its share of the other partnership's liabilities (which are included in the computation of its adjusted basis). See the Partner's Instructions for Schedule K-1 for details on how to figure the adjusted basis of a partnership interest. If Schedule L is non-tax-basis, investment in a partnership may be shown as appropriate under the non-tax-basis accounting method of the partnership including, if required by the non-tax-basis accounting method of the partnership, the equity method of accounting for investments, but must be shown as a non-negative amount.

Example.

Partnership A prepares a tax-basis Schedule L and is a general partner in Partnership B, a general partnership. Partnership A's adjusted basis in Partnership B at the end of the tax year is $16 million. Partnership A's share of Partnership B's liabilities is $20 million, which is included in the $16 million adjusted basis amount. On its Schedule L, Partnership A must report $16 million on line 8 as the amount of its investment asset in Partnership B and report on line 20 its $20 million share of Partnership B's liabilities. These amounts cannot be netted on Schedule L.

Line 18. All Nonrecourse Loans

Nonrecourse loans are those liabilities of the partnership for which no partner bears the economic risk of loss. If the partnership's nonrecourse liabilities include its share of the liabilities of another partnership, the partnership's share of those liabilities must be reflected on line 18.

Line 19a. Loans From Partners (or Persons Related to Partners)

Include on this line loans from partners or persons related to partners. Persons are related if they have a relationship specified in sections 267(b) or 707(b). Amounts included here should not be included elsewhere on lines 15 through 22.

Line 20. Other Liabilities

A partnership that is a partner in a tiered partnership must include as a liability on line 20 the partner's share of the tiered partnership's liabilities to the extent they are recourse liabilities to the partner.

Schedule M-1. Reconciliation of Income (Loss) per Books With Income (Loss) per Return

Note.

Schedule M-3 may be required instead of Schedule M-1. See Item J. Schedule C and Schedule M-3, earlier. See the Instructions for Schedule M-3 for more information.

Line 2

Report on this line income included on Schedule K, lines 1, 2, 3c, 5, 6a, 7, 8, 9a, 10, and 11, not recorded on the partnership's books this year. Describe each such item of income. Attach a statement if necessary.

Line 3. Guaranteed Payments

Include on this line guaranteed payments shown on Schedule K, line 4 (other than amounts paid for insurance that constitutes medical care for a partner, a partner's spouse, a partner's dependents, and a partner's children under age 27 who are not dependents).

Line 4b. Travel and Entertainment

Include on this line:

  • Meal and entertainment expenses not deductible under section 274(n).

  • Expenses for the use of an entertainment facility. See section 274(a)(1)(B).

  • The part of business gifts over $25. See section 274(b).

  • Expenses of an individual allocable to conventions on cruise ships over $2,000. See section 274(h)(2).

  • Employee achievement awards over $400. See section 274(j)(2)(A).

  • The part of the cost of entertainment tickets that exceeds face value (also subject to 50% limit). See section 274(l)(1)(A).

  • The part of the cost of skyboxes that exceeds the face value of nonluxury box seat tickets. See section 274(l)(2).

  • The part of the cost of luxury water travel expenses not deductible under section 274(m). See section 274(m)(1)(A).

  • Expenses for travel as a form of education. See section 274(m)(2).

  • Nondeductible club dues. See section 274(a)(3).

  • Other nondeductible travel and entertainment expenses.

Schedule M-2. Analysis of Partners' Capital Accounts

Show what caused the changes during the tax year in the partners' capital accounts as reflected on the partnership's books and records. The amounts on Schedule M-2 should equal the total of the amounts reported in item L of all the partners' Schedules K-1.

The partnership may use tax-basis amounts or apply the rules in Regulations section 1.704-1(b)(2)(iv) to determine the partners' capital accounts in Schedule M-2 and item L of the partners' Schedules K-1. If the beginning and ending capital accounts reported under these rules differ from the amounts reported on Schedule L, attach a statement reconciling any differences.

Line 2. Capital Contributed During Year

Include on line 2a the amount of money contributed and on line 2b the amount of property contributed by each partner to the partnership as reflected on the partnership's books and records.

Line 3. Net Income (Loss) per Books

Enter on line 3 the net income (loss) shown on the partnership books used in maintaining the partner's capital accounts for purposes of Schedule K-1.

Line 6. Distributions

Line 6a. Cash.   Enter the amount of money distributed to each partner by the partnership. For purposes of line 6a, “money” includes marketable securities, as described in section 731(c).

Line 6b. Property.   Enter the amount of property distributed to each partner by the partnership as reflected on the partnership's books and records. Include withdrawals from inventory for the personal use of a partner.


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