Specific Instructions

Table of Contents

These instructions follow the line numbers on Form 1065-B. The accompanying schedules are discussed separately. Specific instructions for most of the lines are provided on the following pages. Lines that are not discussed in the instructions 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-B, Parts I or II, on Form 1125-A, on Schedule D, or Form 8949.

File only one Form 1065-B for each partnership. Mark “Duplicate Copy” on any copy you give to a partner.

Name, Address, and Employer Identification Number

Name.   Enter the legal name of the ELP as it appears in the partnership agreement.

  If the ELP has changed its name, check box G(2).

Address.   Enter the address of the principal place of business or the principal office of the ELP. 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 ELP 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 ELP'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 name of 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 ELP has had a change of address (including a change to an “in care of” address), check box G(3). If the partnership changes its mailing address or 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 ELP (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 ELP 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 F. Total Assets

Enter the ELP's total assets at the end of the tax year, as determined by the accounting method regularly used in keeping the ELP's books and records. If there were no assets at the end of the tax year, enter “0.

Item J. Schedule M-3 (Form 1065)

A partnership must complete Schedule M-3 (Form 1065), 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 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-B that is not required to file Schedule M-3 may voluntarily file Schedule M-3 instead of Schedule M-1.

If you are filing Schedule M-3, check box J at the top of page 1 of Form 1065-B to indicate that Schedule M-3 is attached. See the Instructions for Schedule M-3 (Form 1065) for more information.

Part I. Taxable Income or Loss from Passive Loss Limitation Activities

Report only amounts from passive loss limitation activities in Part I. See the earlier discussion of Passive Loss Limitation Activities. Do not report any tax-exempt interest income or income from the discharge of any indebtedness on lines 1a through 10. These amounts are accounted for separately by each partner and are reported in box 9 of Schedule K-1 (Form 1065-B). Income from discharge of indebtedness is also reported on line 8 of Schedule K, and tax-exempt interest income is reported on line 9 of Schedule K.

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 section 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); Rev. Proc. 2009-37, 2009-36 I.R.B. 309; and Regulations section 1.108(i)-2 for more information.

Special rule for filers of Form 8865.   Filers of Form 8865, Return of U.S. Persons With Regard to Certain Foreign Partnerships, had to 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 and Regulations section 1.108(i)-2 for details.

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 Schedule 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 and Regulations section 1.108(i)-2 for details.

Line 1a. Gross Receipts or Sales

Enter the gross receipts or sales from all trade or business operations except those that must be reported on lines 6 through 10. For example, do not include gross receipts from farming on this line. Instead, show the net profit (loss) from farming on line 7. Also, do not include rental activity income or portfolio income.

Advance payment.   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 most goods by an accrual method partnership, see Rev. Proc. 2004-34, 2004-22 I.R.B. 991, as clarified and modified by Rev. Proc. 2011-18, and modified by Rev. Proc. 2011-14, and clarified 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:
  • Personal property by a person who regularly sells or otherwise disposes of personal property of the same type on the installment plan or

  • 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. See section 453(l) for details and exceptions.

For sales of timeshares and residential lots reported under the installment method, the ELP's income tax is increased by the interest payable under section 453(l)(3). In determining the amount of interest payable, the partnership is treated as subject to tax at a 35% rate. To report this addition to the tax, see the instructions for line 26.

Enter 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.

  • 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 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. Enter 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-B, page 1, line 2, the amount from Form 1125-A, line 8.

See Form 1125-A and its instructions.

Line 4. Net Rental Real Estate Income (Loss)

Enter the net income or (loss) from rental real estate activities of the partnership from Form 8825. Attach this form to Form 1065-B. If the amount entered is from more than one activity, attach a statement identifying the amount from each activity.

Line 5. Net Income (Loss) From Other Rental Activities

Enter the net income from rental activities other than rental real estate activities. See Rental Activities, earlier, and Pub. 925 for the definition of rental activities. Include on this line the gain or (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. If the amount entered is from more than one activity, attach a statement identifying the amount from each activity.

Line 6. Ordinary Income (Loss) From Other Partnerships, Estates, and Trusts

Enter the ordinary income or (loss) shown on Schedule K-1 (Form 1065, 1065-B, or 1041) or other ordinary income (loss) from a foreign partnership, estate, or trust. Be sure to 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 rental activity income or (loss) from other partnerships, estates, or trusts on this line. Instead, report these amounts on line 20a of Form 8825 or line 5 of Form 1065-B, Part I.

Ordinary income or (loss) from another PTP is not reported on this line. Instead, report the amount separately on an attachment to line 15 of Schedule K and in box 9 of Schedule K-1.

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 PTP does not coincide with the tax year of the other partnership, estate, or trust, include the ordinary income or (loss) from the other entity in the tax year in which the other entity's tax year ends.

Line 7. 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-B. In figuring the partnership's net farm profit (loss), include any section 179 expense deduction. Do not include on this line any farm profit or (loss) from other partnerships. Report those amounts on line 6.

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.

Line 9. Net Gain (Loss) From Form 4797

Include only the 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 not reported on line 9. Instead, report them on line 19 of Form 8825 or line 5 of Form 1065-B, Part I.

An ELP that is a partner in another partnership must include on Form 4797, Sales of Business Property, its share of ordinary gains or (losses) from sales, exchanges, or involuntary conversions (other than casualties or thefts) of the other partnership's trade or business assets.

Line 10. Other Income (Loss)

Enter trade or business income or (loss) that is not included on lines 1a through 9. Examples of such income include the following.

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

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

  • Taxable income from insurance proceeds.

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

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

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

  • The amount of any deduction previously taken under section 179A that is subject to recapture. See Regulations section 1.179A-1 for details, including how to figure the recapture.

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

  • 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 this 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.

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

Deductions

Report only trade or business activity deductions on lines 12 through 24.

Do not report the following expenses on lines 12 through 24.

  • Rental activity expenses. Report these expenses on Form 8825 or on an attached statement for line 5 of Form 1065-B, Part I.

  • Deductions allocable to portfolio income. Report these deductions on page 2, Part II.

  • Nondeductible expenses (for example, expenses connected with the production of tax-exempt income). Report nondeductible expenses on an attached statement for line 15 of Schedule K and in box 9 of Schedule K-1.

  • Items the partnership must state separately that require separate computations by the partners. An example is foreign taxes paid. The distributive share of this expense is reported separately to each partner on Schedule K-1, box 9.

Limitations on Deductions

Section 263A uniform capitalization rules.   The uniform capitalization rules of section 263A 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. Tangible personal property produced by a partnership includes a film, sound recording, videotape, book, or similar property.

  • 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.

  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 ELP.

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.

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

  • Research and experimental costs under section 174.

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

  • Mining exploration and development costs.

Indirect costs.   ELPs 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 by reason of the performance of production or resale activities.

  For inventory, some of the indirect costs that must be capitalized are 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, in the year it begins business (unless the partnership elects to capitalize the full amount of such costs). 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 income tax 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 elections above by clearly electing to capitalize its start-up or organizational costs on its tax 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 23 in Part I. For amortization that begins 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 13 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 the credit. Do not reduce the amount of the allowable deduction for any portion of the credit that was passed through to the ELP from another pass-through entity.
  1. The work opportunity credit.

  2. The credit for increasing research activities.

  3. The disabled access credit.

  4. The empowerment zone employment credit.

  5. The Indian employment credit.

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

  7. The orphan drug credit.

  8. Credit for small employer pension plan startup costs.

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

  10. The low sulfur diesel fuel production credit.

  11. The mine rescue team training credit.

  12. The credit for employer differential wage payments.

  13. Credit for small employer health insurance premiums.

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

Film and television production expenses.   The partnership can elect to deduct certain costs of qualified film and television productions commencing before 2014. 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.

Reforestation expenditures.   The ELP can elect to amortize over 84 months up to $10,000 of qualified reforestation expenditures paid or incurred before October 23, 2004, from all qualified timber properties.

  For qualified reforestation expenditures paid or incurred after October 22, 2004, the partnership can elect to deduct up to $10,000 for each qualifying timber property. If the partnership makes this election, it must amortize over 84 months any amount not deducted. See Notice 2006-47, 2006-20 I.R.B. 892, for details on making this election. Provide a description of the qualified timber property on an attached statement to Form 1065-B. If the partnership is electing to deduct amounts for more than one qualified timber property, provide a description and the amount for each property on the statement.

  Report the deductible amount of these expenditures and any amortization deduction on line 23. For amortization that begins during the tax year, complete and attach Form 4562. See section 194 and Pub. 535 for more information.

Line 12. 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:

  • Form 5884, Work Opportunity Credit;

  • Form 8844, Empowerment Zone Employment Credit;

  • Form 8845, Indian Employment Credit;

  • Form 8923, Mine Rescue Team Training Credit; and

  • Form 8932, Credit for Employer Differential Wage Payments.

Do not reduce the amount of the allowable deduction for any portion of the credit that was passed through to the ELP from another pass-through entity. See the instructions for these forms 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 simplified employee plan (SEP) agreement or a SIMPLE IRA plan.

Line 13. 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 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 ELP'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 as an expense. Instead, they should be charged to a capital account. They are capital expenditures. However, they should be separately reported on Schedule K, line 7, and Schedule K-1, box 9.

Do not include distributive shares of partnership profits.

Report the guaranteed payments to the appropriate partners on Schedule K-1, box 9.

Line 14. 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 can be depreciated or amortized.

Line 15. 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 Schedule D.

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

Line 16. 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. You 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 12/31/2012 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
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 17. 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 17.

  • 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 14g, and Schedule K-1, box 9.

  • Taxes allocable to a rental activity. Report these taxes on Form 8825. Report taxes allocable to a rental activity other than a rental real estate activity on Form 1065-B on an attachment to Part I, line 5.

  • Taxes allocable to portfolio income. Report these taxes on Form 1065-B in Part II, line 8 or 11.

  • Taxes paid or incurred for the production or collection of income, or for the management, conservation, or maintenance of property held to produce income. Also report these taxes on Form 1065-B in Part II, line 8 or 11.

    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 18. Interest

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

Do not deduct interest expense on the following.

  • 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 that is 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 any interest on debt that is allocable to an asset used to produce designated property. See section 263A(f) and Regulations sections 1.263A-8 through 1.263A-15.

  • 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 or (loss) from rental real estate activities on line 4. Interest allocable to a rental activity other than a rental real estate activity is used in arriving at net income or (loss) from a rental activity (other than a rental real estate activity). This net amount is reported on line 5.

  • Debt used to buy property held for investment. Do not include interest expense that is clearly and directly allocable to interest, dividend, royalty, or annuity income not derived in the ordinary course of a trade or business. Interest paid or incurred on debt used to purchase or carry investment property is reported on line 7 of Part II. See the instructions for Form 4952, Investment Interest Expense Deduction, for more information on investment property.

Temporary Regulations section 1.163-8T gives rules for 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 that debt is allocated. Debt is allocated by tracing disbursements of the debt proceeds to specific expenditures, as provided in the regulations.

Interest paid by an ELP to a partner for the use of capital should be entered on line 13 as guaranteed payments.

Prepaid interest can only be deducted over the period to which the prepayment applies.

Note.

Additional limitations on interest deductions apply when the ELP is a policyholder or beneficiary with respect to a life insurance, endowment, or annuity contract issued after June 8, 1997. For details, see section 264. Attach a statement showing the computation of the deduction disallowed under section 264.

Line 19. Depreciation and Section 179 Expense Deduction

Enter only the depreciation (including section 179 expense deduction) claimed on assets used in a trade or business activity. Enter on line 19b the depreciation (including section 179 expense deduction) 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 (including section 179 expense deduction) to enter on this line.

Complete and attach Form 4562 only if the ELP placed property in service during the tax year or claims depreciation on any car or other listed property.

Line 20. Depletion

An ELP computes the deduction for oil and gas depletion at the partnership level. The deduction is computed under the assumptions that the partnership is the taxpayer and that it qualifies for the percentage depletion deduction. In computing the depletion deduction, the 1,000-barrel-per-day limitation and the 65-percent-of-taxable-income limitation do not apply.

The amount of the depletion deduction is generally reported to each partner as a component of that partner's distributive share of taxable income or loss from passive loss limitation activities. However, the ELP must report information related to oil and gas activities to a partner who is a disqualified person in the same manner that it reports the information under the regular partnership tax law. See Partnerships Holding Oil and Gas Properties for more details.

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

Line 21. Retirement Plans, etc.

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 ELP contributes to an individual retirement arrangement (IRA) for employees, include the contribution in salaries and wages on Part I, line 12, or Form 1125-A, line 3, and not on line 21.

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. File this form for a plan that is not a one-participant plan.

  • 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).

Penalties may be assessed for failure to file these forms on time.

Note.

Form 5500 and its schedules must be filed electronically using the Employee Retirement Income Security Act (ERISA) filing acceptance system (EFAST2). For more information, see the EFAST2 website at www.efast.dol.gov.

Line 22. Employee Benefit Programs

Enter the ELP'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 21.

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 13 as guaranteed payments and on Schedule K, line 7, and Schedule K-1, box 9, of each partner on whose behalf the amounts were paid.

Line 23. Other Deductions

Enter the total allowable trade or business deductions that are not deductible elsewhere in Part I of Form 1065-B. 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 expenditures and organizational expenditures that the partnership has elected to amortize or deduct. See Limitations on Deductions for more details.

  • Film and television production expenses. See Limitations on Deductions for details.

  • Reforestation expense deduction. See Limitations on Deductions for details.

  • Endangered species recovery expenditures that were paid or incurred after December 31, 2008. See section 175 for details.

  • Deduction for certain energy efficient commercial building property placed in service after December 31, 2005. See section 179D, Notice 2006-52, 2006-26 I.R.B. 1175, and Notice 2008-40, 2008-14 I.R.B. 725.

  • Any negative net 481(a) adjustment.

Include on line 23 the deduction taken for amortization. Complete and attach Form 4562 if the ELP is claiming amortization of costs that begins during the tax year. The election to deduct intangible drilling costs under section 263(c) is made at the partnership level. An ELP also has the responsibility with respect to its partners who are not disqualified persons for making an election under section 59(e) to capitalize and amortize certain specified intangible drilling costs. However, disqualified persons make their own separate section 59(e) elections. See Partnerships Holding Oil and Gas Properties for more information. See Pub. 535 for more information on amortization.

Also, see Special Rules below for limits on certain other deductions.

Do not deduct the following on line 23.

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

  • Qualified expenditures to which an election under section 59(e) may apply.

  • Fines or penalties paid to a government for violating any law. Report these expenses on Schedule K, line 15.

  • Expenses allocable to tax-exempt income. Report these expenses on Schedule K, line 15.

  • Any amount that is allocable to a class of exempt income. See section 265(b) for exceptions.

  • 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.

  • 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 ELP 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 amount of 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 23 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. Report this deduction on an attachment to line 15 of Schedule K and in box 9 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 more 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 ELP can deduct amounts paid or incurred for membership dues in civic or public service organizations, professional organizations, 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 cannot 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 ELP 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.

  Generally, the ELP may be able to deduct otherwise nondeductible meals, travel, and entertainment 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.

Line 26. Tax

Net recapture taxes.   Recapture of the low-income housing credit under section 42(j) and investment credit under section 50 is imposed at the partnership level, and the amount of recapture is determined by assuming that the credit was fully utilized to reduce tax. The recapture of the qualifying therapeutic discovery project grant, under section 48D, is also imposed at the partnership level. Credit recapture does not result from any transfer of an interest in an ELP. Report partnership level recapture of low-income housing credit, investment credit, and qualifying therapeutic discovery project grant as follows.
  1. Apply the recapture to reduce any current year credit of the same type.

  2. Report any remaining recapture on line 26. The partnership is liable to pay any unapplied recapture amount. Complete Form 4255 for recapture of investment credit and qualifying therapeutic discovery project grant and Form 8611 for recapture of low-income housing credit and check the appropriate box on line 26.

  Report recapture of any other credit as a separately stated item in box 9 of Schedule K-1 using Code V.

Interest on deferred tax attributable to installment sales of certain timeshares and residential lots.   For sales of timeshares and residential lots reported under the installment method, the ELP's income tax is increased by the interest payable under section 453(l)(3). In determining the amount of interest payable, the partnership is treated as subject to tax at a 35% rate. Report this amount on line 26 with the notation “Section 453(l)(3) interest.” Attach a statement showing the computation.

Interest on tax deferred under the installment method for certain nondealer installment obligations.   If an obligation arising from the disposition of property to which section 453A applies is outstanding at the close of the year, the partnership must include the interest due under section 453A(c). In determining the amount of interest payable, the partnership is treated as subject to tax at a 35% rate. Report this amount on line 26 with the notation “Section 453A(c) interest.” Attach a statement showing the computation.

Line 27

Enter the total amounts from line 2 of Form 2439, Notice to Shareholder of Undistributed Long-Term Capital Gains, and line 17 of Form 4136, Credit for Federal Tax Paid on Fuels. The credit for tax paid on undistributed capital gains of a RIC or a REIT and the refundable credit for fuel used for certain purposes are allowed to the ELP. They are not separately reported to partners.

Line 28

You can e-file Form 1065-B and e-pay the balance due in a single step by authorizing an electronic funds withdrawal from your bank account when filing.

Electronic deposit requirement.   ELPs must use electronic funds transfer to make all federal tax deposits (such as deposits of employment tax, excise tax, and income tax). Forms 8109 and 8109-B, Federal Tax Deposit Coupon, cannot be used. Generally, electronic fund transfers are made using the Electronic Federal Tax Payment System (EFTPS). If you do not want to use EFTPS, you can arrange for your tax professional, financial institution, payroll service, or other trusted third party to make deposits on your behalf.

  To get more information about EFTPS or to enroll in EFTPS, visit www.eftps.gov or call 1-800-555-4477. Also see Publication 966, Electronic Federal Tax Payment System “A Guide To Getting Started.

Part II. Taxable Income or Loss From Other Activities

Report in Part II only income or (loss) and deductions from activities not included in Part I (for example, portfolio income and deductions). See Other Activities for a definition of portfolio income.

Line 1

Enter only taxable interest (not from passive loss limitation activities) on line 1.

Include interest income from the credit to holders of tax credit bonds. See 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.

Lines 2a Through 2c

Enter only taxable ordinary dividends on line 2a. On line 2b enter all qualified dividends from line 2a.

Qualified dividends.   Except as provided below, qualified dividends are dividends received after December 31, 2002, from domestic corporations and qualified foreign corporations.

Exceptions.

The following dividends are not qualified dividends.

  • Dividends the ELP 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, it cannot 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 ELP held the stock, include the day the ELP disposed of the stock but not the day the ELP 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 2006-101, 2006-47 I.R.B. 930, for details.

If the foreign corporation does not meet either 1 or 2, then it can 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 a passive foreign investment company (defined in section 1297).

Report the qualified dividend on line 3 of Schedule K. See Pub. 550 and Notice 2006-3, 2006-3 I.R.B. 306, for more details.

Line 5

Report and identify other income or (loss) on an attachment for line 5.

Line 7

Investment interest is interest paid or accrued on debt properly allocable to property held for investment. 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 does not include interest expense allocable to passive loss limitation activities.

To figure the deductible amount of investment interest, complete Form 4952. Enter the amount from line 8 of Form 4952.

Line 8

Include state and local income taxes paid by the ELP that would be allowed as itemized deductions on any partners' income tax returns if they were paid directly by the partner for the same purpose.

Line 9

Enter contributions or gifts actually paid during the tax year to or for the use of charitable and governmental organizations described in section 170(c). The total amount claimed may not be more than 10% of the ELP's taxable income (total income minus deductions) figured without regard to the deduction for charitable contributions. The deduction for certain contributions of ordinary income and capital gain property is reduced under section 170(e).

Substantiation requirements.   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 ELP's return or, if earlier, the date the partnership files its return. Do not attach the acknowledgment to the tax return, but keep it with the partnership's records. These rules apply in addition to the filing requirements for Form 8283, Noncash Charitable Contributions, discussed below.

Contributions of property.   If the deduction claimed for noncash contributions exceeds $500, complete Form 8283 and attach to Form 1065-B. See Pub. 526, Charitable Contributions, and Form 8283 for more information.

If the ELP made a qualified conservation contribution, under section 170(h), include the FMV 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.

Conservation contributions of agricultural or livestock production property.

Generally, conservation contributions of property used in (or available for) agricultural or livestock production made by an ELP that is a qualified farmer or rancher (as defined in section 170(b)(1)(E)(v)) are not subject to the 10% taxable income limit. Instead, the deduction for these contributions is allowed to the extent it does not exceed the excess of the partnership's taxable income over the amount of allowable charitable contributions. The carryover period for conservation contributions of agricultural or livestock production property exceeding the taxable income limitation is 15 years.

Charitable contributions of food inventory.

The deduction for the charitable contribution made before 2014 under section 170(e)(3) of qualified food 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 were sold at fair market value on the date of the gift) or (b) twice the amount of basis of the donated food.

The ELP's deduction for food inventory contributions cannot exceed 10% of the ELP's aggregate net income for the tax year from the business activities from which the food inventory contribution was made (including your share of net income from another partnership or S corporation businesses that made food inventory contributions that were passed through to the ELP as a partner or shareholder).

Contributions of used vehicles.

Special rules apply to contributions of used motor vehicles, boats, or airplanes with a claimed value of more than $500. See section 170(f)(12).

Reduced deduction for contributions of certain property.

For a charitable contribution of property, the ELP must reduce the contribution by the sum of:

  • The ordinary income and short-term capital gain that would have resulted if the property were sold at its FMV and

  • For certain contributions, the long-term capital gain that would have resulted if the property were sold at its FMV.

The reduction for the long-term capital gain applies to:

  • Contributions of tangible personal property for use by an exempt organization for a purpose or function unrelated to the basis for its exemption,

  • Contributions of any property to or for the use of certain private foundations except for stock for which market quotations are readily available (section 170(e)(5)), and

  • Any patent or certain other intellectual property contributed after June 3, 2004. See section 170(e)(1)(B). However, the partnership can deduct certain qualified donee income from this property. See section 170(m).

Nondeductible contributions.   Certain contributions made to an organization conducting lobbying activities are not deductible. See section 170(f)(9) for more details.

Lines 10a and 10b

Enter on line 10a miscellaneous itemized deductions as defined in section 67(b). These deductions include expenses for the production or collection of income under section 212, such as investment advisory fees, subscriptions to investment advisory publications, and the cost of safe deposit boxes. Multiply line 10a by 30% (.30) and enter the result on line 10b. The remaining 70% of the amount on line 10a is not allowed as a deduction to the partnership or its partners.

Line 11

Other allowable deductions include items such as:

  • Real estate taxes and personal property taxes on investment property,

  • Casualty and theft losses on income-producing property, and

  • Any penalty on the early withdrawal of savings.

Attach a statement for line 11 listing the type and amount of each allowable deduction for which there is no separate line in Part II of Form 1065-B.

Schedule B. Other Information

Question 1

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

Question 3

The partnership must answer “Yes” if during the tax year:

  • It owned an interest in another partnership (foreign or domestic) or

  • It was the “tax owner” of a foreign disregarded entity (FDE) under Regulations sections 301.7701-2 and 301.7701-3. The tax owner of an FDE is the person that is treated as owning the assets and liabilities of the FDE for purposes of U.S. income tax law.

If the partnership answered “Yes” to this question, it must do the following.

  1. Show each partnership's name, EIN (if any), and the country under whose laws the partnership was organized, on an attached statement, if the partnership directly or indirectly owned at least a 10% interest in any other foreign or domestic partnership (other than any partnership for which a Form 8865 is attached to the tax return).

  2. Complete and attach Form 8858, Information Return of U.S. Persons With Respect To Foreign Disregarded Entities, for each FDE. For more information, see the Instructions for Form 8858.

Note.

Clearly indicate whether each entity in the attached statement is a partnership or a disregarded entity.

Question 4. Foreign Partners

Answer “Yes” if the ELP had any foreign partners (for purposes of section 1446) at any time during the tax year. Otherwise, answer “No.

If the ELP 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.

Question 5

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 6

Answer “Yes” if the ELP 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. See the Instructions for Form 8918.

Question 7. Foreign Accounts

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

  1. At any time during the 2013 calendar year 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 ELP owns more than 50% of the stock in any corporation that would answer the question “Yes” based on item 1 above.

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

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

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

Question 8

The ELP 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.

Schedule D. Capital Gains and Losses

Purpose of Schedule

Use the Schedule D to report:

  • Certain transactions the ELP does not have to report on Form 8949.

  • The overall capital gains and losses from transactions listed on Form 8949.

  • Capital gains from installment sales from Form 6252, Installment Sale Income.

  • Capital gains and losses from like-kind exchange from Form 8824, Like-Kind Exchanges (and section 1043 conflict-of-interest sales).

  • Partnership's share of net capital gains and losses, including specially allocated capital gains and losses, from partnerships, estates, and trusts.

Do not report on Schedule D capital gains (losses) specially allocated to any partners. Enter specially allocated capital gains (losses) directly on line 4a or 4b of Schedule K, or on an attached statement for line 15 of Schedule K and in box 3, 4, or 9 of Schedule K-1, whichever applies. See How Income Is Shared Among Partners, earlier.

Note.

For more information, see Pub. 544, Sales and Other Dispositions of Assets, and Instructions for Form 8949. Do not report on Schedule D gains or losses from the sale or exchange of qualified preferred stock of the Federal National Mortgage Association (Fannie Mae) or the Federal Home Loan Mortgage Corporation (Freddie Mac). Instead, each partner's distributive share of such gains and losses must be reported as a separately stated item in box 9 of Schedule K-1 using Code V. See item 21, Other information (Code V), for more information.

What are Capital Assets?

Each item of property the partnership held (whether or not connected with its trade or business) is a capital asset except the following.

  • Stock in trade or other property included in inventory or held mainly for sale to customers.

  • Accounts or notes receivable acquired in the ordinary course of the trade or business for services rendered or from the sale of stock in trade or other property held mainly for sale to customers.

  • Depreciable or real property used in the trade or business, even if it is fully depreciated.

  • Certain copyrights; literary, musical, or artistic compositions; letters or memoranda; or similar property. See section 1221(a)(3).

  • U.S. Government publications, including the Congressional Record, that the partnership received from the Government, other than by purchase at the normal sales price, or that the partnership got from another taxpayer who had received it in a similar way, if the partnership's basis is determined by reference to the previous owner.

  • Certain commodities derivative financial instruments held by a dealer. See section 1221(a)(6).

  • Certain hedging transactions entered into in the normal course of the trade or business. See section 1221(a)(7).

  • Supplies regularly used in the trade or business.

Overview of Large Partnership Provisions

For ELPs, capital gains and losses generally are netted at the partnership level. A partner in a large partnership takes into account separately his distributive share of the partnership's net capital gain or net capital loss. Such net capital gain (loss) is treated as long-term capital gain (loss). The 28% rate gain (loss) is treated in the same manner.

Any excess of net short-term capital gain over net long-term capital loss is not separately stated. Instead, it is consolidated with the partnership's other taxable income.

A partner's distributive share is divided between passive loss limitation activities and other activities. Capital gain (loss) is allocated to passive loss limitation activities to the extent that it is from sales and exchanges of property used in connection with a trade or business or rental activity. Any excess is allocated to other activities (that is, portfolio income).

Section 1231 gains are also netted at the partnership level. The net gain is generally treated as long-term capital gain. The net loss is treated as an ordinary loss and is included in computing the partnership's taxable income.

Items for Special Treatment

  • Use Form 4797, Sales of Business Property, to report (a) sales or exchanges of property used in a trade or business, (b) sales or exchanges of depreciable or amortizable property, (c) sales or other dispositions of securities or commodities held in connection with a trading business, if the partnership made a mark-to-market election, (d) involuntary conversions (other than from casualties or thefts), and (e) the disposition of noncapital assets (other than inventory or property held primarily for sale to customers in the ordinary course of a trade or business).

  • Use Form 4684, Casualties and Thefts, to report involuntary conversions of property due to a casualty or theft.

  • Gains and losses from section 1256 contracts and straddles are reported on Form 6781, Gains and Losses From Section 1256 Contracts and Straddles.

  • An exchange of business or investment property for property of a like kind is reported on Form 8824, Like-Kind Exchanges.

  • Transactions by a securities dealer. See section 1236.

  • See Pub. 550, Investment Income and Expenses, for information on bonds and other debt instruments.

  • For certain real estate subdivided for sale that may be considered a capital asset, see section 1237.

  • Gain on the sale of depreciable property to a more-than-50%-owned entity, or to a trust in which the partnership is a beneficiary, is treated as ordinary gain.

  • For liquidating distributions from a corporation, see Pub. 550.

  • See section 1248 for gain on the sale or exchange of stock in certain foreign corporations.

  • For gain or loss on options to buy or sell, including closing transactions, see Pub. 550.

  • Gain or loss from a short sale of property. See Pub. 550 for details.

  • For undistributed capital gains from a RIC or a REIT, the partnership will receive information on Form 2439, Notice to Shareholder of Undistributed Long-Term Capital Gains.

  • See section 84 for the transfer of property to a political organization if the FMV of the property exceeds the partnership's adjusted basis in such property.

  • Any loss on the disposition of converted wetland or highly erodible cropland that is first used for farming after March 1, 1986, is reported as a long-term capital loss on Form 8949/Schedule D, but any gain on such a disposition is reported as ordinary income on Form 4797. See section 1257 for details.

  • See Rev. Rul. 84-111, 1984-2 C.B. 88, for the transfer of partnership assets and liabilities to a newly formed corporation in exchange for all of its stock.

  • See section 897 for the disposition of foreign investment in a U.S. real property interest.

  • Any loss from a sale or exchange of property between the partnership and certain related persons is not allowed, except for distributions in a complete liquidation of a corporation. See sections 267 and 707(b) for details.

  • Any loss from securities that are capital assets that become worthless during the year is treated as a loss from the sale or exchange of a capital asset on the last day of the tax year.

  • Nonrecognition of gain on sale of stock to an employee stock ownership plan (ESOP) or an eligible cooperative. See section 1042 and Temporary Regulations section 1.1042-1T for rules under which the partnership can elect not to recognize gain from the sale of certain stock to an ESOP or an eligible cooperative.

  • A nonbusiness bad debt must be treated as a short-term capital loss and can be deducted only in the year the debt becomes totally worthless. See Pub. 550 for more details.

  • Any loss from a wash sale of stock or securities (including contracts or options to acquire or sell stock or securities) cannot be deducted unless the partnership is a dealer in stock or securities and the loss was sustained in a transaction made in the ordinary course of the partnership's trade or business. A wash sale occurs if the partnership acquires (by purchase or exchange), or has a contract or option to acquire, substantially identical stock or securities within 30 days before or after the date of the sale or exchange. See section 1091. Report a wash sale transaction on Form 8949, Part l or II (with the appropriate box checked), depending on how long the ELP owned the stock or securities. Enter “W” in column (f) and enter as a positive number in column (g) the amount of the loss not allowed. Complete all remaining columns. See the Instructions for Form 8949.

  • Gain from installment sales. If the partnership sold property at a gain and it will receive a payment in a tax year after the year of sale, it generally must report the sale on the installment method unless it elects not to. However, the installment method cannot be used to report sales of stock or securities traded on an established securities market. Use Form 6252 to report the sale on the installment method. Also use Form 6252 to report any payment received during the tax year from a sale made in an earlier year that was reported on the installment method.

    If the ELP wants to elect out of the installment method, it must report the full amount of the gain on a timely filed return (including extensions). If the partnership filed Form 1065-B on time, the election can be made on an amended return filed no later than 6 months after the due date (excluding extensions) of the original return. Write “See attached Form 8082 for AAR per IRC section 6251; Filed pursuant to section 301.9100-2” in the top margin of the amended return, and file it at the same address the original return was filed. See Administrative Adjustment Requests, earlier.

  • A sale or other disposition of an interest in a partnership owning unrealized receivables or inventory items may result in ordinary gain or loss. See Pub. 541, Partnerships, for more details.

  • Certain constructive ownership transactions. Gain in excess of the gain that would have been recognized if the partnership had held a financial asset directly during the term of a derivative contract must be treated as ordinary income. See section 1260 for details.

Constructive sale treatment for certain appreciated positions.   Generally, the ELP must recognize gain (but not loss) on the date it enters into a constructive sale of any appreciated position in stock, a partnership interest, or certain debt instruments as if the position were disposed of at FMV on that date.

  The ELP is treated as making a constructive sale of an appreciated position when it (or a related person, in some cases) does one of the following.
  • Enters into a short sale of the same or substantially identical property (that is, a “short sale against the box”).

  • Enters into an offsetting notional principal contract relating to the same or substantially identical property.

  • Enters into a futures or forward contract to deliver the same or substantially identical property.

  • Acquires the same or substantially identical property (if the appreciated position is a short sale, offsetting notional principal contract, or a futures or forward contract).

Exception.

Generally, constructive sale treatment does not apply if:

  • The partnership closed the transaction before the end of the 30th day after the end of the year in which it was entered into,

  • The partnership held the appreciated position to which the transaction relates throughout the 60-day period starting on the date the transaction was closed, and

  • At no time during that 60-day period was the partnership's risk of loss reduced by holding certain other positions.

  For details and other exceptions to these rules, see Pub. 550.

Special rules for traders in securities.   Traders in securities are engaged in the business of buying and selling securities for their own account. To be engaged in business as a trader in securities, the ELP must meet all the following conditions.
  • The ELP must seek to profit from daily market movements in the prices of securities and not from dividends, interest, or capital appreciation.

  • The ELP's trading activity must be substantial.

  • The ELP must carry on the activity with continuity and regularity.

   The following facts and circumstances should be considered in determining if an ELP's activity is a business.
  • Typical holding periods for securities bought and sold.

  • The frequency and dollar amount of the ELP's trades during the year.

  • The extent to which the partners pursue the activity to produce income for a livelihood.

  • The amount of time devoted to the activity.

  Like an investor, a trader must report each sale of securities (taking into account commissions and any other costs of acquiring or disposing of the securities) on Form 8949/Schedule D or an attached statement containing all the same information for each sale in a similar format. However, if a trader made the mark-to-market election, each transaction is reported in Part II of Form 4797 instead of Form 8949/Schedule D. Regardless of whether a trader reports its gains and losses on Form 8949/Schedule D or Form 4797, the gain or loss from the disposition of securities is not taken into account when figuring net earnings from self-employment on Schedules K and K-1. See section 1402(i) for an exception that applies to section 1256 contracts.

  The limitation on investment interest expense that applies to investors does not apply to interest paid or incurred in a trading business. A trader reports interest expense and other expenses (excluding commissions and other costs of acquiring or disposing of securities) from a trading business in Part I of Form 1065-B.

  A trader also can hold securities for investment. The rules for investors generally will apply to those securities. Allocate interest and other expenses between the partnership's trading business and its investment securities. Investment interest expense is reported on line 7 of Part II, Form 1065-B.

Rollover of gain from qualified stock.   If the partnership sold qualified small business stock (defined later) it held for more than 6 months, it can postpone gain if it purchased other qualified small business stock during the 60-day period that began on the date of the sale. The partnership must recognize gain to the extent the sale proceeds exceed the cost of the replacement stock. Reduce the basis of the replacement stock by any postponed gain.

  If the partnership chooses to postpone gain, report the sale on Form 8949, Part I or II (with the appropriate box checked), as it would be reported if the election was not made. Then enter “R” in column (f). Enter the amount of the postponed gain as a negative number (in parentheses) in column (g). See the Instructions for Form 8949.

  Attach a statement to Form 1065-B that (a) identifies the replacement qualified small business stock, (b) shows the computation of the adjustment to the partnership's basis in the replacement stock for the amount of any postponed gain under section 1045, and (c) shows the dates on which the replacement stock was acquired by the ELP.

  
The ELP also must separately state the amount of the gain rolled over on qualified stock under section 1045 on an attachment to Form 1065-B, Schedule K, line 15. Each partner must determine if he or she qualifies for the rollover at the partner level or if he or she wants to opt out of the section 1045 election. Also, the partnership must separately state on that line any gain that would qualify for the section 1045 rollover at the partner level instead of the partnership level (because a partner was entitled to purchase replacement stock) and any gain on qualified stock that could qualify for an exclusion under section 1202.

  To be qualified small business stock, the stock must meet all of the following tests.
  • It must be stock in a C corporation (that is, not S corporation stock).

  • It must have been originally issued after August 10, 1993.

  • As of the date the stock was issued, the corporation was a qualified small business. A qualified small business is a domestic C corporation with total gross assets of $50 million or less (a) at all times after August 9, 1993, and before the stock was issued, and (b) immediately after the stock was issued. Gross assets include those of any predecessor of the corporation. All corporations that are members of the same parent-subsidiary controlled group are treated as one corporation.

  • The partnership must have acquired the stock at its original issue (either directly or through an underwriter), either in exchange for money or other property or as pay for services (other than as an underwriter) to the corporation. In certain cases, the partnership can meet the test if it acquired the stock from another person who met this test (such as by gift or inheritance) or through a conversion or exchange of qualified small business stock held by the partnership.

  • During substantially all the time the partnership held the stock:

    1. The corporation was a C corporation,

    2. At least 80% of the value of the corporation's assets were used in the active conduct of one or more qualified businesses (defined below), and

    3. The issuing corporation was not a foreign corporation, domestic international sales corporation (DISC), former DISC, interest charge domestic international sales corporation (IC-DISC), former IC-DISC, corporation that has made (or that has a subsidiary that has made) a section 936 election, regulated investment company (RIC), real estate investment trust (REIT), real estate mortgage investment conduit (REMIC), financial asset securitization investment trust (FASIT), or cooperative.

Note.

A specialized small business investment company (SSBIC) is treated as having met test 2 above.

  A qualified business is any business other than the following.
  • One involving services performed in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, or brokerage services.

  • One whose principal asset is the reputation or skill of one or more employees.

  • Any banking, insurance, financing, leasing, investing, or similar business.

  • Any farming business (including raising or harvesting of trees).

  • Any business involving the production of products for which percentage depletion can be claimed.

  • Any business of operating a hotel, motel, restaurant, or similar business.

Exclusion of gain from DC Zone assets.   If the ELP sold or exchanged a District of Columbia Enterprise Zone (DC Zone) asset that it held for more than 5 years, it may be able to exclude the qualified capital gain. The DC Zone asset must have been acquired after 1997, but before 2012, to qualify as an asset for which the partnership may be able to take the exclusion. The sale or exchange of DC Zone capital assets include the following.
  • Stock in a domestic corporation that was a DC Zone business.

  • Interest in a partnership that was a DC Zone business.

  Report the sale or exchange of property used in the partnership's DC Zone business on Form 4797.

Gains not qualified for exclusion.

The following gains do not qualify for the exclusion of gain from DC Zone assets.

  • Gain on the sale of an interest in a partnership which is a DC Zone business attributable to unrecaptured section 1250 gain. See the instructions for line 15 of Schedule K for information on how to report unrecaptured section 1250 gain.

  • Gain on the sale of an interest in a partnership or S corporation, which is a DC Zone business, attributable to real property or an intangible asset which is not an integral part of the DC Zone business.

  • Gain from a related-party transaction. See Sales and Exchanges Between Related Persons in Pub. 544.

See section 1400B for more details on DC Zone assets and special rules.

How to report.

Report the sale or exchange on Form 8949, Part II (with the appropriate box checked), as it would be reported if the exclusion was not taken. Enter “X” in column (f) and enter the amount of the exclusion as a negative number (in parentheses) in column (g). See the Instructions for Form 8949.

Undistributed long-term gains from a regulated investment company (RIC) or real estate investment trust (REIT).   Report the partnership's share of long-term gains from Form 2439, Notice to Shareholder of Undistributed Long-Term Capital Gains, on Form 8949, Part II (with box F checked). Enter “From Form 2439” in column (a). Enter the gain in column (h). Leave all other columns blank. See the Instructions for Form 8949.

Specific Instructions

Complete all necessary pages of Form(s) 8949 before completing lines 1b, 2, 3, 8b, 9, or 10 of Schedule D.

Rounding Off to Whole Dollars

Cents can be rounded to whole dollars on the Schedule D. If cents are rounded to whole dollars, all amounts must be rounded. To round, drop cent amounts under 50 and increase cent amounts over 49 to the next dollar. For example, $1.49 becomes $1 and $1.50 becomes $2.

If two or more amounts have to be added to figure the amount to enter on a line, include cents when adding the amounts and round only the total.

Lines 1a and 8a—Transaction Not Reported on Form 8949

The partnership can report on line 1a (for short-term transactions) or line 8a (for long-term transactions) the aggregate totals from any transactions (except sales of collectibles) for which:

  • The partnership received a Form 1099-B (or substitute statement) that shows basis was reported to the IRS and does not show a nondeductible wash sale loss in box 5, and

  • The partnership does not need to make any adjustments to the basis or type of gain or loss (short term or long term) reported on Form 1099-B (or substitute statement), or to its gain or loss. See How To Complete Form 8949, Columns (f) and (g), in the Form 8949 instructions for details about possible adjustments to the partnership's gain or loss.

If the partnership chooses to report these transactions on lines 1a and 8a, do not report them on Form 8949.

Figure gain or loss on each line. Subtract the cost or other basis in column (e) from the proceeds (sales price) in column (d). Enter the gain or loss in column (h). Enter negative amounts in parentheses.

Example 1—basis reported to the IRS.

The partnership received a Form 1099-B reporting the sale of stock held for 3 years and showing proceeds (in box 2a) of $6,000 and cost or other basis (in box 3) of $2,000. Box 6b is checked, meaning that basis was reported to the IRS. The partnership does not need to make any adjustments to the amounts reported on Form 1099-B or enter any codes. This was its only 2013 transaction. Instead of reporting this transaction on Form 8949, the partnership can enter $6,000 in column (d), $2,000 in column (e), and $4,000 ($6,000 – $2,000) in column (h).

Example 2—basis not reported to the IRS.

. The partnership received a Form 1099-B showing proceeds (in box 2a) of $6,000 and cost or other basis (in box 3) of $2,000. Box 6b is not checked, meaning that basis was not reported to the IRS. Do not report this transaction on line 1a or line 8a. Instead, report the transaction on Form 8949. Complete all necessary pages of Form 8949 before completing line 1b, 2, 3, 8b, 9, or 10 of Schedule D.

Example 3—adjustment.

The partnership received a Form 1099-B showing proceeds (in box 2a) of $6,000 and cost or other basis (in box 3) of $2,000. Box 6b is checked, meaning that basis was reported to the IRS. However, the basis shown in box 3 is incorrect. Do not report this transaction on line 1a or line 8a. Instead, report the transaction on Form 8949. See the instructions for Form 8949, columns (f), (g), and (h). Complete all necessary pages of Form 8949 before completing line 1b, 2, 3, 8b, 9, or 10 of Schedule D.

Lines 1b, 2, 3, 8b, 9, and 10, Column (h)—Transactions Reported on Form 8949

Figure gain or loss on each line. First, subtract cost or other basis (column (e)) from proceeds/sales price (column (d)). Then combine the result with any adjustments in column (g). Enter the gain or loss in column (h). Enter negative amounts in parentheses.

Example 1–gain.

Column (d) is $6,000 and column (e) is $2,000. Enter $4,000 in column (h).

Example 2–loss.

Column (d) is $6,000 and column (e) is $8,000. Enter ($2,000) in column (h).

Example 3–adjustment.

Column (d) is $6,000, column (e) is $2,000, and column (g) is ($1,000). Enter $3,000 ($6,000–$2,000–$1,000) in column (h).

Line 14—Capital Gains and Losses From Other Partnerships, Estates, and Trusts

See the Schedule K-1 or other information supplied to the ELP by the other partnership, estate, or trust.

Part IV-Net Capital Gain (Loss) From Passive Loss Limitation Activities

Line 21.   Redetermine the amount on line 18 by taking into account only gains and losses from passive loss limitation activities.

Schedules K and K-1. Partners' Shares of Income, Credits, Deductions, etc.

Purpose of Schedules

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   (page 4 of Form 1065-B) is a summary schedule of all the partners' shares of the partnership's income, credits, deductions, etc.

Schedule K-1   (Form 1065-B) shows each partner's separate share. Attach a copy of each Schedule K-1 to the Form 1065-B 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-B) or specific instructions for each item reported on the partner's Schedule K-1 (Form 1065-B).

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-B) 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

Generally, allocate shares of income, gain, loss, deduction, or credit among the partners according to the partnership agreement for sharing income or loss. However, partners can agree to allocate specific items in a ratio different from the ratio for sharing income or loss.

In determining the amounts required to be separately taken into account by a partner, those provisions of the large partnership rules governing computation of taxable income are applied separately with respect to that partner by taking into account that partner's distributive share of the partnership's items of income, gain, loss, deduction, or credit. This rule permits partnerships to make otherwise valid special allocations of partnership items to partners.

Report the specially allocated items in the appropriate box of the applicable partner's Schedule K-1 and the total on the appropriate line of Schedule K, instead of on Parts I or II of Form 1065-B or Form 1125-A, or Schedules D. For example, specially allocated net capital gain from passive activities is entered in box 4a of Schedule K-1, and the total is entered on line 4a of Schedule K, along with any net capital gain from line 21 of 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 (for example, 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 for Schedules K and K-1

Generally, the ELP 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.

However, if a foreign partnership meets each of the following four requirements, it is not required to file or provide Schedule 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 sections 1.1461-1(b) and (c).

  • The tax liability of each 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.

On each Schedule K-1, enter the names, addresses, and identifying numbers of the partner and partnership and the partner's distributive share of each item.

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 SSN of the person for whom the IRA is maintained.

Foreign partners without a U.S. taxpayer identifying number should be notified by the partnership of the necessity of obtaining one. Certain aliens who are not eligible to obtain an SSN can apply for an ITIN on Form W-7, Application for IRS Individual Taxpayer Identification Number.

If a married couple each had an interest in the partnership, prepare a separate Schedule K-1 for each of them. If a married couple held an interest together, prepare one Schedule K-1 if the two of them are considered to be one partner.

Use the codes listed under the instructions for Box 9 Codes (Schedule K-1) to report various items. If more space is needed, include the information in an attachment to box 9.

Due date.   Unlike other partnerships, an ELP must provide a Schedule K-1 to each partner by the first March 15 following the close of the partnership's tax year. For calendar year 2013 partnerships, the due date is March 17, 2014.

Partner's Share of Liabilities (Schedule K-1)

Enter each partner's share of:

  • Nonrecourse liabilities,

  • Partnership-level qualified nonrecourse financing, and

  • Other liabilities.

Nonrecourse liabilities” are those liabilities of the partnership for which no partner 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 ELP 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 liabilities for each activity. See Pub. 925, Passive Activity and At-Risk Rules, 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 attachment to Schedule K-1 the amount of any losses that are not subject to the at-risk rules.

If the ELP 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 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.

Note.

The following line numbers correspond with Schedule K. However, each line instruction also provides reporting information for Schedule K-1. Letter codes are listed under Box 9 Codes (Schedule K-1) for entries in box 9 of Schedule K-1.

Line 1. Taxable Income (Loss) From Passive Loss Limitation Activities

Enter the amount from Form 1065-B, page 1, line 25, on Schedule K, line 1a. Enter the income or (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.

Allocate the income (loss) from passive loss limitation activities (line 1a of Schedule K) to interests held as a general partner as follows.

Step 1. Allocate the amount reported on line 1a to the following categories.

  • Trade or business activities.

  • Rental real estate activities.

  • Other rental activities.

Step 2. Report on lines 1b(1), 1b(2), and 1b(3) of Schedule K that portion of each amount from Step 1 that will be allocated to interests held as a general partner (the combined distributive shares and any separate allocations for all general partner interests).

General partners in an ELP must separately account for any items attributable to passive loss limitation activities to the extent necessary to comply with the passive activity rules.

Because general partners must comply with the passive activity rules, report the information on lines 1b(1), 1b(2), and 1b(3) of Schedule K separately for each activity of the partnership using Codes A1, B1, and C1 in box 9 of Schedule K-1. The remaining amount on line 1d of Schedule K is reported in box 1 of Schedule K-1 for limited partners (including interests held as a limited partner by general partners).

Line 2. Taxable Income (Loss) From Other Activities

On Schedule K, line 2, enter the amount from Form 1065-B, Part II, line 13. Report amounts for both general and limited partners in box 2 of Schedule K-1.

Line 3. Qualified Dividends

Enter the qualified dividends from other activities from Form 1065-B, Part II, line 2b. Report amounts for both general and limited partners in box 3 of Schedule K-1.

Line 4a. Net Capital Gain (Loss) From Passive Loss Limitation Activities

Enter the net capital gain or (loss) from passive loss limitation activities from Schedule D (Form 1065-B), line 21. Report the amount allocated to interests held as a limited partner in box 4a of Schedule K-1.

Because general partners must comply with the passive activity rules, report the line 4a amount allocated to interests held as a general partner separately for each activity using Codes A2, B2, and C2, in box 9 of Schedule K-1.

Line 4b. Net Capital Gain (Loss) From Other Activities

Enter the net capital gain (loss) from other activities from Schedule D (Form 1065-B), line 24. Report this amount to all partners in box 4b of Schedule K-1.

Lines 5 and 6

For an ELP, the alternative minimum tax (AMT) adjustments and preferences are combined at the partnership level. The partnership computes net AMT adjustments separately for passive loss limitation activities and other activities.

In determining a partner's alternative minimum taxable income, a partner's distributive share of any net AMT adjustment is taken into account instead of making separate AMT adjustments for different partnership items. The net AMT adjustment is determined by using the adjustments and preferences applicable to individuals for partners other than corporations, and by using the adjustments and preferences applicable to corporations for corporate partners. See Form 6251, Alternative Minimum Tax—Individuals, and Form 4626, Alternative Minimum Tax—Corporations, to figure the partnership's AMT adjustments and preferences.

The net passive AMT adjustment is reported on line 5 of Schedule K and in box 5 of Schedule K-1 for interests held as a limited partner. Because general partners must comply with the passive activity rules, report the amounts allocated to interests held as a general partner separately for each activity in box 9 using Codes A5, B7, and C5.

The net other AMT adjustment is reported on line 6 of Schedule K and in box 6 of Schedule K-1 for all partners.

Line 7. 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-B, Part I, line 13; on a statement attached to line 5, Part I; or on Form 8825;

  • Compensation deferred under a section 409A nonqualified deferred compensation plan that does not meet the requirements of section 409A reported on line 15 of Schedule K; and

  • Payments the partnership must capitalize. See the instructions for Part I, line 13.

Report guaranteed payments to the partners receiving them in box 9 of Schedule K-1 using Code F.

The transfer of property to a partner as part or all of a guaranteed payment is a sale or exchange of property and must be reported on Schedule D of the Form 1065-B. See Rev. Rul. 2007-40, 2007-25 I.R.B. 1426 for details.

Line 8. Income From Discharge of Indebtedness

Do not include on line 8 any income from discharge of indebtedness for which the partnership has made the election to defer income from the cancellation of the debt. See Election to defer income from cancelled debt, earlier.

Income from the discharge of indebtedness is separately reported to each partner. In addition, the section 108 rules governing the income are the same as for other partnerships.

Enter the income from discharge of indebtedness on line 8 of Schedule K and in box 9 of Schedule K-1 for each partner using Code G.

Note.

Include the amount of income the partnership must recognize for a transfer of a partnership interest, after October 21, 2004, 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.

Line 9. Tax-Exempt Interest Income

Enter tax-exempt interest income, including any exempt-interest dividends received from a mutual fund or other regulated investment company. Individuals must report this amount on line 8b of Form 1040. The adjusted basis of the partner's interest is increased by the amount shown on this line under section 705(a)(1)(B). Report this amount to partners in box 9 of Schedule K-1 using Code H.

Line 10. General Credits

The term “general credits” means any credit, other than the low-income housing credit, the rehabilitation credit from rental real estate activities, and the foreign tax credit.

General credits are separately reported to partners as a single item. A partner's distributive share of general credits is taken into account as a current year general business credit. The tax liability limit for the general business credit is applied at the partner level.

Combine the following credits and report them under “general credits” on line 10.

  • Credit for backup withholding on dividends, interest, and other types of income.

  • Qualified railroad track maintenance credit (Form 8900).

  • Investment credit (other than rehabilitation credits from rental real estate activities) (Form 3468).

  • Work opportunity credit (Form 5884).

  • Biofuel producer credit (Form 6478).

  • Credit for increasing research activities (Form 6765).

  • Disabled access credit (Form 8826).

  • Renewable electricity, refined coal, and Indian coal production credit (Form 8835).

  • Empowerment zone employment credit (Form 8844).

  • Indian employment credit (Form 8845).

  • Credit for employer social security and Medicare taxes paid on certain employee tips (Form 8846).

  • Orphan drug credit (Form 8820).

  • Biodiesel and renewable diesel fuels credit (Form 8864).

  • New markets credit (Form 8874).

  • Credit for small employer pension plan startup costs (Form 8881).

  • Credit for employer-provided childcare facilities and services (Form 8882).

  • Low sulfur diesel fuel production credit (Form 8896).

  • General credits from other ELPs.

  • Distilled spirits credit (Form 8906).

  • Nonconventional source fuel credit (Form 8907).

  • 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).

  • Credit to holders of tax credit bonds (Form 8912).

  • 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).

Exception.

The refundable credit for federal tax paid on fuels and the refund or credit for tax paid on undistributed capital gains of a RIC or a REIT are claimed by the partnership. Therefore, they are not separately reported to partners.

General credits are reported as a single figure on line 10 of Schedule K and are reported in box 7 of Schedule K-1 for limited partners. However, for general partners, credits allocable to passive loss limitation activities must be separately stated for each trade or business activity, rental real estate activity, and rental activity other than rental real estate. Provide this information to general partners in box 9 of Schedule K-1 using Codes A4, B4, and C4 so they can comply with section 469. Also, if general business credits are included on the Schedule K-1, provide the partners the information needed to show that the ELP meets the requirements of section 38(c)(5)(C).

Line 11. 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-B. Complete and attach Form 8609-A, Annual Statement for Low-Income Housing Credit, and Form 8586, Low-Income Housing Credit, to Form 1065-B.

Report this credit for buildings placed in service before 2008 on line 11. If part or all of the credit is for buildings placed in service after 2007, enter “STMT” on line 11 and attach a statement showing separately the amount of the credit for buildings placed in service after 2007, and the amount of the credit for buildings placed in service before 2008.

Schedule K-1.   For limited partners, if all of the low-income housing credit is for buildings placed in service before 2008, report each limited partner's distributive share of the credit in box 8. If part or all of the credit is for buildings placed in service after 2007, enter “STMT” in box 8 and attach a statement that separately provides each limited partner's distributive share of the credit for buildings placed in service before 2008, and the credit for buildings placed in service after 2007.

  For general partners, enter code B5 in box 9 and attach a statement showing separately each partner's distributive share of the credit for buildings placed in service before 2008, and the credit for buildings placed in service after 2007. Also, credits allocable to passive loss limitation activities must be separately stated for each rental real estate activity so general partners can comply with the passive activity limitation requirements of section 469.

Line 12. Rehabilitation Credit From Rental Real Estate Activities

Report the rehabilitation credit from rental real estate activities on line 12. Complete the lines on Form 3468, Investment Credit, that apply to the rehabilitation credit and attach it to Form 1065-B.

For limited partners, report the rehabilitation credit from rental real estate activities reported on line 12 in box 9 of Schedule K-1 using Code I. However, for general partners, credits allocable to passive loss limitation activities must be separately stated for each rental real estate activity. For general partners, report the rehabilitation credit reported on line 12 in box 9 of Schedule K-1 using Code B6 so general partners can comply with section 469.

Note.

Any rehabilitation credits from an activity other than a rental real estate activity are included in general credits reported on line 10 of Schedule K.

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

1a Income (loss) from Schedule K, line 1b(1) 1a      
b Certain rental real estate activity income (loss) from Schedule K, line 1b(2) (see instructions) 1b      
c Other rental activity income (loss) from Schedule K, line 1b(3) 1c      
d Net loss from Form 4797, Part II, line 17, included on lines 1a through 1c 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 lines 1a through 1c 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 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 9 of Schedule K-1 3c  
           
4a Guaranteed payments to partners (Schedule K, line 7) 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 9 of Schedule K-1 4c  
5 Net earnings (loss) from self-employment. Combine lines 3c and 4c. Enter here and on Schedule K, line 13a 5  

Line 13. Net Earnings From Self-Employment

General partners.   General partners' net earnings (loss) from self-employment do not include the following.
  • Dividends on any shares of stock and interest on any bonds, debentures, notes, etc., unless the dividend or interest income is 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.

Schedule K.   Enter on line 13a the amount from line 5 of the worksheet below. On line 13b, enter the amount of gross nonfarm income from self-employment.

Note.

For purposes of self-employment tax, no income from an electing large partnership is treated as fishing or farming income.

Schedules K-1.   Do not complete box 9 for any partner that is an estate, trust, corporation, exempt organization, or individual retirement arrangement (IRA).

  Using Code J1, enter in box 9 of Schedule K-1 each individual general partner's share of the amount shown on line 5 of the worksheet below and each individual limited partner's share of the amount shown on line 4c of the worksheet. Using Code J2, enter the partner's share of gross nonfarm income in box 9.

Worksheet Instructions

Line 1b.   Include on line 1b any part of the net income (loss) from rental real estate activities from Schedule K, line 1b(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.

Line 4a.   Include any guaranteed payments to partners reported on Schedule K, line 7, and derived from a trade or business as defined in section 1402(c). Also, include other ordinary income and expense items reported on Schedules K and K-1 that are used to figure self-employment earnings under section 1402.

Line 14. Foreign Tax Credit Information

Lines 14a through 14h must be completed if the partnership has foreign income, deductions, or losses or has paid or accrued foreign taxes. See Pub. 514, Foreign Tax Credit for Individuals, for more information.

Line 14a. Name of Foreign Country or U.S. Possession

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 ELP received 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 14a through 14h.

Using Code K1, enter this information in box 9 of Schedule K-1 or on an attached statement.

Line 14b. Gross Income From All Sources

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

Using Code K2, enter this information in box 9 of Schedule K-1 or on an attached statement.

Line 14c. Gross Income Sourced at Partner Level

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

  • The amount of this gross income (without regard to its source) in each category identified in the instructions for line 14d, 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. See Determining the Source of Income From the Sales or Exchanges of Certain Personal Property in Pub. 514 and section 865.

Using Code K3, enter this information in box 9 of Schedule K-1 or on an attached statement.

Line 14d. Foreign Gross Income Sourced at Partnership Level

Separately report gross income from sources outside the United States by category of income as follows. For partnership and corporate partners only, attach a statement identifying the total amount of foreign gross income in each category of income attributable to foreign branches. See Pub. 514 for information on the categories of income.

You must attach a statement to Form 1065-B that specifies foreign source qualified dividends and foreign source capital gains (losses) within each separate limitation category.

Line 14d(1).   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 (FSC).

    See line 14d(3) for exceptions.

  
Passive income does not include export financing interest.

  Using Code K4(a), enter this information in box 9 of Schedule K-1 or on an attached statement.

Line 14d(2).   General category foreign source income. Include all foreign income sourced at the partnership level that is not passive category income. See line 14d(3) for exceptions.

  Using Code K4(b), enter this information in box 9 of Schedule K-1 or on an attached statement.

Line 14d(3).   Other category foreign source income. Attach a statement listing section 901(j) income and income re-sourced by treaty.

  Using Code K4(c), enter this information in box 9 of Schedule K-1 or on an attached statement.

Line 14e. Deductions Allocated and Apportioned at Partner Level

Enter on line 14e(1) 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 14f(1) through (3).

Using Code K5, enter the total interest expense in box 9 of Schedule K-1 or on an attached statement.

On line 14e(2), enter the total of all other deductions or losses that are required to be allocated at the partner level. For example, include on line 14e(2) research and experimental expenditures (see Regulations section 1.861-17(f)). Using Code K6, enter this information in box 9 of Schedule K-1 or on an attached statement.

Line 14f. Deductions Allocated and Apportioned at Partnership Level to Foreign Source Income

Separately report partnership deductions that are allocated and apportioned at the partnership level to (1) passive category foreign source income, (2) general category foreign source income, and (3) the other category of foreign source income. See the instructions for line 14d, earlier, for a description of categories (1)–(3). Also, 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.

For partnership and corporate partners only, attach a statement identifying the total amount of deductions apportioned to each category of income shown in the instructions for line 14d that are attributable to foreign branches.

Using Code K7(a) for passive category foreign source income, Code K7(b) for general category foreign source income, and Code K7(c) for the other category of foreign source income, enter this information in box 9 of Schedule K-1 or on an attached statement.

Line 14g. Total Foreign Taxes

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). Translate these amounts into U.S. dollars by using the applicable exchange rate (see Pub. 514).

Line 14g. Foreign taxes paid.   If the partnership uses the cash method of accounting, enter foreign taxes paid during the year on line 14g and check the “Paid” box. Report each partner's distributive share in box 9 of Schedule K-1 using Code K8(a).

Line 14g. Foreign taxes accrued.   If the partnership uses the accrual method of accounting, enter foreign taxes accrued on line 14g and check the “Accrued” box. Report each partner's distributive share in box 9 of Schedule K-1 using Code K8(b).

A partnership reporting foreign taxes using the cash method can make an irrevocable election to report the 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 14g (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 line 14d).

  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, and

    • Other foreign taxes paid or accrued.

Splitter arrangements under section 909.   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).

Line 14h. Reduction in Taxes Available for Credit

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

Separately show the reductions for the following.

  • 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).

Using Code K9 for reduction in taxes available for credit, enter this information in box 9 of Schedule K-1 or on an attached statement.

28% Rate Gain Worksheet—Line 15

1. Enter the total of all collectibles gain or (loss) from items reported on lines 8a through 14, column (h) of Schedule D (Form 1065-B). 1.  
2. If Schedule D, line 7, is a (loss), enter here. Otherwise, enter -0-. 2.  
3. Combine lines 1 and 2. If zero or less, enter -0-. 3.  
4. Redetermine the amount on line 3 by taking into account 28% rate gain and losses from passive loss limitation activities. Report the amount allocated to interests held as a limited partner in box 9 of Schedule K-1 using Code D. Report amounts allocated to general partners using Codes A3, B3, and C3, in box 9 of Schedule K-1. 4.  
5. Subtract line 4 from line 3. Report the amount to all partners in box 9 of Schedule K-1 using Code E. 5.  

Line 15

Attach a statement listing other items and amounts required to be reported separately to partners. Enter each partner's share in box 9 or on an attached statement to Schedule K-1. Examples of items to report include the following.

Distribution of replacement QSB stock to a partner that reduces another partner's interest 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 should 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. Use Code M8 to report this information, and include this information on the relevant attachment prepared for Code M8.

  1. Any information a partnership must separately report to its disqualified partners regarding its oil and gas activities. See Partnerships Holding Oil and Gas Properties for more information. Enter this information as Code L in box 9 of Schedule K-1 or on an attached statement.

  2. Other tax-exempt income. On the statement for line 15, enter all income of the partnership exempt from tax other than tax-exempt interest income (for example, life insurance proceeds). The adjusted basis of the partner's interest is increased by the amount shown on this line under section 705(a)(1)(B). Enter this amount as Code M1 in box 9 of Schedule K-1.

  3. Nondeductible expenses. Enter nondeductible expenses paid or incurred by the partnership. Do not include capital expenditures or items the deduction for which is deferred to a later tax year. The adjusted basis of the partner's interest is decreased by the amount shown on this line under section 705(a)(2)(B). Enter this amount as Code M2 in box 9 of Schedule K-1.

  4. Unrelated business taxable income. Any information a partner that is a tax-exempt organization may need to figure that partner's 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 the Instructions for Form 990-T, Exempt Organization Business Income Tax Return, and Pub. 598, Tax on Unrelated Business Income of Exempt Organizations, for more information. Enter this amount as Code M3 in box 9 of Schedule K-1.

  5. Amounts paid during the tax year for health insurance coverage, for a partner (including that partner's spouse, dependents, and any children under age 27 who are not dependents). See Chapter 6 of Pub. 535 for more information. Enter this amount as Code M4 in box 9 of Schedule K-1.

  6. Distributions of money (cash and marketable securities). Enter the total distributions to each partner of cash and marketable securities that are treated as money under section 731(c)(1). 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 this amount includes marketable securities treated as money, state separately on an attachment (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). Also include the amount of the credit for the following bonds that are treated as distributions under sections 54A(g) and 54AA(f)(2). These bonds include new clean renewable energy bonds, qualified energy conservation bonds, qualified zone academy bonds, and build America bonds. These credit amounts are included in the credit to holders of these tax credit bonds that is included in the ELP's general credit. See the Instructions for Form 8912 for more information. Enter this information as Code M5 in box 9 of Schedule K-1 or on an attached statement.

  7. Distributions of property other than money. Enter the total distributions of property other than money. In computing the amount of the distribution, use the adjusted basis of the property to the partnership immediately before the distribution. On an attachment also include the adjusted basis and FMV of each property distributed. Enter this information as Code M6 in box 9 of Schedule K-1 or on an attached statement.

  8. 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 partial section 1202 exclusion. The section 1202 exclusion applies only to QSB stock issued after August 10, 1993, and 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 using Code M7 in box 9 of Schedule K-1. Each partner will determine if he or she qualifies for the section 1202 exclusion. Report with Code M7 on an attachment 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.

  9. 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 Schedule D. See the instructions for Schedule D for more details. The partnership makes the election for a 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 with Code M8 on an attachment 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 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.

  10. 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 with Code M9 on an attachment 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.

  11. Unrecaptured section 1250 gain. Use the worksheet, earlier, to figure the unrecaptured section 1250 gain.

  12. 28% rate gain (loss). Use the worksheet above to figure the 28% rate gain (loss) (that is, collectibles gain or loss). A collectibles gain or 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, metals (such as gold, silver, and platinum bullion), gems, stamps, coins, alcoholic beverages, and certain other tangible property. Also include on the worksheet any gain (but not loss) from the sale or exchange of an interest in a partnership or trust held 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).

  13. Any information needed by a partner to figure the interest due under section 1260(b). If any portion of a constructive ownership transaction was open in any prior year, each partner's tax liability must be increased by the partner's pro rata share of interest due on any deferral of gain recognition. See section 1260(b) for details, including how to figure the interest.

  14. Extraterritorial income exclusion. See the instructions under Extraterritorial Income Exclusion for the information and codes that are required to be reported in box 9 of Schedule K-1.

  15. Any income or gain reported on lines 1 through 4 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-B 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 9 of Schedule K-1 using Code P. 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.

  16. Commercial revitalization deduction from rental real estate activities. Enter this amount as Code Q in box 9 of Schedule K-1. If the deduction is for a nonrental building, it is deducted by the partnership on line 23 of Form 1065-B. See the instructions under Line 23. Deductions for more information.

  17. For corporate partners only, enter the following information in box 9 for purposes of the interest deduction limitations under section 163(j). Using Code R1, enter the corporate partner's distributive share of interest income reported in Parts I and II of the return. Using Code R2, enter the corporate partner's distributive share of interest expense reported in Parts I and II of the return.

  18. Domestic production activities deduction (Codes S1, S2, and S3).

    The partnership does not compute the domestic production activities deduction, but must provide its partners with 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 S2 and S3. See QPAI and Form W-2 wages computed at partnership level (Codes S2 and S3), 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 and W-2 wages at the partner level, it must report on Schedule K-1, using Code S1, the partner's distributive share of the information listed under QPAI and Form W-2 wages computed at partner level (Code S1), next.

    QPAI and Form W-2 wages computed at partner level (Code S1). If the partnership does not calculate QPAI and W-2 wages at the partnership level, attach a statement to Schedule K-1 providing each partner's distributive share of the following information for Code S1 of box 9. Identify any amounts from oil-related production activities and list them separately.

    • 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 and Form W-2 wages at the partnership level, see the instructions below.

    QPAI and Form W-2 wages computed at partnership level (Codes S2 and S3). Eligible partnerships 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 S2) and W-2 wages (using Code S3) 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, available at www.irs.gov/pub/irs-irbs/irb07-23.pdf, 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 S2 and attach a statement for Code S2 to separately report the amount of oil-related QPAI (if any).

    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.

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

      2. 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)).

      3. 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 S1) above. 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.

      1. 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.

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

      3. It has DPGR.

      4. 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).

      5. 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.

      1. 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 (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).

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

      3. It has DPGR.

      4. 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 qualifies 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.

  19. 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. Enter this amount in box 9 of Schedule K-1 using Code T. This amount must also be included on line 7 of Schedule K, Guaranteed Payments to Partners. If the section 409A deferred compensation was part of a transaction in which the partner was not acting as a member of the partnership (under section 707(a)), report the income and section 409A deferred compensation information on Form 1099-MISC.

  20. Net investment income (code U). Use code U to report any information that may be relevant for partners to figure their net investment income tax when the information is not otherwise identifiable elsewhere on Schedule K-1. Attach a statement that shows “Box 9, Code U” and a description and dollar amount of each relevant item.

    Examples of items reported using code U may include the following.

    • Taxable income (loss) from rental real estate activities reported on Form 1065-B, Schedule K, line 1b(2), and taxable income (loss) from other rental activities reported on Form 1065-B, Schedule K, line 1b(3), 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 properly 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-B, Schedule K-1, the detail and amounts reported to the partnership using code U.

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

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

    • Guaranteed payments (reported onForm 1065-B, Schedule K, line 7 unrelated to services, such as for the use of capital or attributable to section 736(a)(2) payments for unrealized receivables or goodwill.

    • Deductions included in Part ll that are not deductible for net investment income tax purposes. For example:

    1. Charitable contributions included on line 9.

    2. Other deductions included on line 10b or 11.

    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 U.

    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. 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 the disposition 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.

    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.

    • Amounts included in income under section 1296(a)(1).

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

    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.

  21. Other information (Code V). Use Code V to report the following items.

    • Recapture of credits. Report the recapture of any credit (other than partnership level low-income housing credit or investment credit) as a separately stated item. See the instructions under Line 26. Tax for reporting partnership level recapture of the low-income housing credit and investment credit.

    • Any information a partner that is a PTP 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 PTP.

    • 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 disclosure. See the Instructions for Form 8886 for details.

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

    • 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.

    • Section 108(i) information. Report the following.

      1. 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.

      2. 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.

      3. 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.

      4. 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.

      5. For previously deferred COD, report the partner's deferred amount 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.

      6. For the current OID deduction, report the partner's share of any OID deduction previously deferred under section 108(i)(2) that is allowed 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 Regard 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 a return and made this 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 and Regulations section 1.108(i)-2 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 of 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 (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 share of the credit for each separate bond credit that was reported on the partnership's Form 8912. Report the following separately: Clean renewable energy bond credit, Midwestern tax credit bond credit, new clean renewable energy bond credit, qualified energy conservation bond credit, qualified forestry conservation bond credit, qualified zone academy bond credit, qualified school construction bond credit, and build America bond credit.

    • Any information the partner needs to determine whether the partnership is an eligible small business if the partnership is reporting any general business credits. A partnership is an eligible small business if its average annual gross receipts for the three preceding tax years were $50 million or less. See section 38(c)(5)(C) for more information.

      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 a partner may need to file his or her return that is not shown elsewhere on Schedule K-1. Enter this information on an attachment to Schedule K-1.

Instructions for the Unrecaptured Section 1250 Gain Worksheet

Lines 1 through 3.   If the partnership had more than one property described on line 1, complete lines 1 through 3 for each property on a separate worksheet. Enter the total of the line 3 amounts for all properties on line 3 and go to line 4.

Unrecaptured Section 1250 Gain Worksheet—Line 15

  If any of the following apply, the partnership does not have to complete all of the worksheet. Instead, follow the instructions below.  
Go to line 4 if the partnership's only unrecaptured section 1250 gain is from an installment sale of trade or business property held more than 1 year that the partnership is reporting on Form 6252.  
Go to line 5 if the partnership's only unrecaptured section 1250 gain is from a Schedule K-1 reporting such gain from another partnership.  
Go to line 10 if the partnership's only unrecaptured section 1250 gain is from the sale or exchange of an interest in another partnership.  
Go to line 11 if the partnership's only unrecaptured section 1250 gain is from a Schedule K-1, Form 1099-DIV, or Form 2439 reporting such gain from an estate, trust, real estate investment trust, or regulated investment company (including a mutual fund).  
  1. If the partnership had a section 1250 property in Part III of Form 4797 for which there was an entry in Part I of Form 4797 (but not on Form 6252), enter the smaller of line 22 or line 24 of Form 4797 for that property. If the partnership had more than one such property, see instructions 1.    
  2. Enter the amount from Form 4797, line 26g, for the property for which the partnership made an entry on line 1 2.    
  3. Subtract line 2 from line 1 3.    
  4. Enter the total unrecaptured section 1250 gain included on line 26 or 37 of Form(s) 6252 from installment sales of trade or business property held more than 1 year (see instructions) 4.    
  5. Enter the total of any amounts reported to the partnership on Schedules K-1 from another partnership as “unrecaptured section 1250 gain 5.    
  6. Add lines 3 through 5 6.    
  7. Enter the smaller of line 6 or the gain, if any, from Form 4797, line 7 7.        
  8. Enter the amount, if any, from Form 4797, line 8 8.        
  9. Subtract line 8 from line 7. If zero or less, enter -0- 9.    
  10. Enter the gain from the sale or exchange of an interest in another 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) 10.    
  11. Enter the total of any amounts reported to the partnership on Schedule K-1, Form 1099-DIV, or Form 2439 as “Unrecaptured section 1250 gain” from an estate, trust, real estate investment trust, or mutual fund (or other regulated investment company) 11.    
  12. Add lines 9 through 11. This is the partnership's “unrecaptured section 1250 gain.” Report each partner's distributive share with Code N in box 9 of Schedule K-1 12.    
Line 4.   The total unrecaptured section 1250 gain for an installment sale of property held more than 1 year is figured for the year of sale in a manner similar to that used to figure line 3 of the worksheet. However, the 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). However, 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.

Box 9 Codes (Schedule K-1)

The following codes should be used to describe the information located in box 9.

  • Code A1—General partner's taxable income (loss) from trade or business activities.

  • Code A2—General partner's net capital gain (loss) from trade or business activities.

  • Code A3—General partner's 28% rate gain (loss) from trade or business activities.

  • Code A4—General partner's general credits from trade or business activities.

  • Code A5—General partner's alternative minimum tax adjustment from trade or business activities.

  • Code B1—General partner's taxable income (loss) from rental real estate activities.

  • Code B2—General partner's net capital gain (loss) from rental real estate activities (for the entire year).

  • Code B3—General partner's 28% rate gain (loss) from rental real estate activities.

  • Code B4—General partner's general credits from rental real estate activities.

  • Code B5—General partner's low-income housing credit from rental real estate activities.

  • Code B6—General partner's rehabilitation credit from rental real estate activities.

  • Code B7—General partner's alternative minimum tax adjustment from rental real estate activities.

  • Code C1—General partner's taxable income (loss) from other rental activities.

  • Code C2—General partner's net capital gain (loss) from other rental activities.

  • Code C3—General partner's 28% rate gain (loss) from other rental activities.

  • Code C4—General partner's general credits from other rental activities.

  • Code C5—General partner's alternative minimum tax adjustment from other rental activities.

  • Code D—Limited partner's 28% rate gain (loss) from passive activities.

  • Code E—Limited partner's 28% rate gain (loss) from other activities.

  • Code F—Guaranteed payments.

  • Code G—Income from discharge of indebtedness.

  • Code H—Tax-exempt interest income.

  • Code I—Limited partner's rehabilitation credit from rental real estate activities.

  • Code J1—Net earnings (loss) from self-employment.

  • Code J2—Gross nonfarm income.

  • Code K1—Name of foreign country or U.S. possession.

  • Code K2—Gross income from all sources.

  • Code K3—Gross income sourced at partner level.

  • Code K4(a)—Passive category foreign source income.

  • Code K4(b)—General category foreign source income.

  • Code K4(c)—Other category foreign source income.

  • Code K5—Interest expense allocated and apportioned at the partner level.

  • Code K6—Other expenses allocated and apportioned at the partner level.

  • Code K7(a)—Deductions allocated and apportioned at partnership level to passive category foreign source income.

  • Code K7(b)—Deductions allocated and apportioned at partnership level to general category foreign source income.

  • Code K7(c)—Deductions allocated and apportioned at partnership level to the other category of foreign source income.

  • Code K8(a)—Total foreign taxes paid.

  • Code K8(b)—Total foreign taxes accrued.

  • Code K9—Reduction in taxes available for credit.

  • Code L—Oil and gas activities.

  • Code M1—Other tax-exempt income.

  • Code M2—Nondeductible expenses.

  • Code M3—Unrelated business taxable income.

  • Code M4—Health insurance.

  • Code M5—Distributions of money (cash and marketable securities).

  • Code M6—Distributions of property other than money.

  • Code M7—Gain eligible for section 1202 exclusion.

  • Code M8—Gain eligible for section 1045 rollover–stock replaced.

  • Code M9—Gain eligible for section 1045 rollover–stock not replaced.

  • Code N—Unrecaptured section 1250 gain.

  • Code O1—Foreign trading gross receipts.

  • Code O2—Extraterritorial income exclusion.

  • Code P—Inversion gain.

  • Code Q—Commercial revitalization deduction.

  • Code R1—Corporate partner's interest income.

  • Code R2—Corporate partner's interest expense.

  • Code S1—Domestic production activities information.

  • Code S2—Qualified production activities income.

  • Code S3—Employer's W-2 wages.

  • Code T—Section 409A nonqualified deferred compensation.

  • Code U—Net investment income.

  • Code V—Other information.

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. Report all amounts for limited liability company 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 files Schedule M-3, the amount on line 1 must equal the amount in column (d) of line 26, Part II of Schedule M-3.

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 and LLC members 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

The balance sheets should agree with the partnership's books and records. Attach a statement explaining any differences.

Partnerships reporting to the Interstate Commerce Commission (ICC) or to any national, state, municipal, or other public officer can 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-B 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 United States 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 the same as the 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 (Form 1065-B) 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 21 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 to partners 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 M-3 (Form 1065), earlier. See the Instructions for Schedule M-3 for more information.

Line 2

Report on this line income included on Schedule K, lines 1c, 1d, 2, 3, 4a, 4b, and 8 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 7.

Line 4b. Travel and Entertainment

Include on this line the following.

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

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

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

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

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

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

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

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

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

  • Nondeductible club dues. See Code Sec. 274(a)(3).

  • Other travel and entertainment expenses not allowed as a deduction.

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 partnership may use tax-basis amount or apply the rules in Regulations section 1.704-1(b)(2)(iv) to determine the partners' capital accounts in Schedule M-2. 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 partners' capital accounts for purposes of Schedule K-1.

Line 6. Distributions

Line 6a. Cash.   Enter on line 6a 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 on line 6b 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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