Schedule K-1 - Partner's Share of Income, Credits, Deductions, etc.

Memo of Major Changes to the 2008 Instructions for Schedule K-1 (Form 1065),
Partner’s Share of Income, Deductions, Credits, etc.

Throughout this document, we have updated at year and line references as appropriate.
Page 1. We kept the section heading for “What’s New”, but removed the previous year’s
content, as it is no longer new. Although we have updated these instructions as much as
possible to conform to the recent tax law changes, some issues are still unresolved at this
time. When these issues are resolved, we will thoroughly update the “What’s New”
section.
Page 2. Under “Elections”, we removed the paragraph pertaining to a partnership
changing its tax year and the partner electing to report his or her share of the income
attributable to the change ratably over 4 tax years. The 4 year rule applied only to tax
years ending before June 1, 2008, so tax year 2007 (whether calendar or fiscal year) was
the last year of the income inclusion (RP 2003-79).
Page 5. Under the heading “Modified adjusted gross income limitation” (which appears
on page 4), we deleted, from the bulleted list, the bullet point “The tuition and fees
deduction”. This was done to conform to IRC 222(e).
Under “Part II. Information About the Partner”, we added instructions for Item J
Percentage Interest in Partnership Profit, Loss, and Capital” (LMSB recommendation).
Page 8. Under “Box 12. Section 179 Deduction”, we deleted the phrase “New York
Liberty Zone” per IRC 1400L(f).
Under “Code C. Noncash contributions (50%)”, we deleted the paragraph on food
inventory contributions. Per IRC 170(e)(3)(C), this expired on 12/31/2007.
Page 9. Under “Code R. Reforestation expense deduction”, we deleted the paragraph
pertaining to an increased deduction for timber property located in the GO Zones. Per
IRC 1400N(i), this provision had a termination date of 01/01/2008.
Under “Code V. Other deductions”, in the second bullet point, we added the phrase “and
endangered species recovery expenditures” per PL 110-234, sec. 15303.
Page 10. In the last bullet point under “Code V. Other deductions”, we added the phrase
“for productions beginning before January 1, 2009. Per IRC 181(f), the deduction does
not apply to qualified film and television productions that begin after December 31, 2008.
Under “Code G”, we have revised the title and text to reflect the renaming and redesign
of Form 6478, Alcohol and Cellulosic Biofuel Fuels Credit.

Under “Code L. Credit for increasing research activities”, we have revised the text to
refer only to line 1c of Form 3800. In 2008, this credit can only be taken if it comes from
a pass-through entity (IRC 41(f)).
Page 11. Under “Code P. Other Credits, we have deleted the following credits, as they
have expired.
Indian employment credit (IRC 45A).
Qualified railroad track maintenance credit (IRC 45G).
Energy efficient appliance credit (IRC 45M).
Also, we have added credits enacted in 2008.
Agricultural chemicals security credit (Form 8931) (IRC 45O).
Credit for employer differential wage payments (Form 8932) (IRC 45P).
Under “Box 19. Distributions” we have made several changes. Under code A and code B,
we have deleted the paragraph pertaining to section 737. On Schedule K-1 (Form 1065),
under box 19, code C has been added to report distributions of section 737 property.
Therefore, we have added instructions for code C, which include how to compute and
report the gain from a section 737 distribution (LMSB recommendation).
Page 13. On Sch K-1 (F 1065), code W has been redesignated “Precontribution gain
(loss)”. Accordingly, we have updated the instructions for code W to detail the
circumstances in which the partnership will use box 20, code W, to report the
contributing partner’s built-in gain or loss (LMSB recommendation).
With the redesignation of code W, code X has been added and is now used to report
“Other information”. To the list of other information, we have added (as item 7)
instructions for certain partners in farm partnerships that receive conservation reserve
program payments that are not subject to self-employment tax. (PL 110-234 sec. 15301).

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Page 1 of 14 Partner’s Instructions for Schedule K-1 (Form 1065)

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2008

Department of the Treasury
Internal Revenue Service

Partner’s Instructions for
Schedule K-1 (Form 1065)
Partner’s Share of Income, Deductions, Credits, etc.
(For Partner’s Use Only)
Section references are to the Internal
Revenue Code unless otherwise noted.

General Instructions
What’s New for 2008
Purpose of Schedule K-1
The partnership uses Schedule K-1 to report
your share of the partnership’s income,
deductions, credits, etc. Keep it for your
records. Do not file it with your tax return.
The partnership has filed a copy with the
IRS.
Although the partnership generally is not
subject to income tax, you are liable for tax
on your share of the partnership income,
whether or not distributed. Include your
share on your tax return if a return is
required. Use these instructions to help you
report the items shown on Schedule K-1 on
your tax return.
The amount of loss and deduction that
you may claim on your tax return may be
less than the amount reported on Schedule
K-1. It is the partner’s responsibility to
consider and apply any applicable
limitations. See Limitations on Losses,
Deductions, and Credits beginning on page
2 for more information.

Inconsistent Treatment of
Items
Generally, you must report partnership items
shown on your Schedule K-1 (and any
attached schedules) the same way that the
partnership treated the items on its return.
This rule does not apply if your partnership
is within the “small partnership exception”
and does not elect to have the tax treatment
of partnership items determined at the
partnership level.
If the treatment on your original or
amended return is inconsistent with the
partnership’s treatment, or if the partnership
was required to but has not filed a return,
you must file Form 8082, Notice of
Inconsistent Treatment or Administrative
Adjustment Request (AAR), with your
original or amended return to identify and
explain any inconsistency (or to note that a
partnership return has not been filed).
If you are required to file Form 8082 but
fail to do so, you may be subject to the
accuracy-related penalty. This penalty is in
addition to any tax that results from making
your amount or treatment of the item
consistent with that shown on the

partnership’s return. Any deficiency that
results from making the amounts consistent
may be assessed immediately.

Errors
If you believe the partnership has made an
error on your Schedule K-1, notify the
partnership and ask for a corrected
Schedule K-1. Do not change any items on
your copy of Schedule K-1. Be sure that the
partnership sends a copy of the corrected
Schedule K-1 to the IRS. If you are a partner
in a partnership that does not meet the small
partnership exception and you report any
partnership item on your return in a manner
different from the way the partnership
reported it, you must file Form 8082.

Sale or Exchange of
Partnership Interest
Generally, a partner who sells or exchanges
a partnership interest in a section 751(a)
exchange must notify the partnership, in
writing, within 30 days of the exchange (or, if
earlier, by January 15 of the calendar year
following the calendar year in which the
exchange occurred). A “section 751(a)
exchange” is any sale or exchange of a
partnership interest in which any money or
other property received by the partner in
exchange for that partner’s interest is
attributable to unrealized receivables (as
defined in section 751(c)) or inventory items
(as defined in section 751(d)).
The written notice to the partnership
must include the names and addresses of
both parties to the exchange, the identifying
numbers of the transferor and (if known) of
the transferee, and the exchange date.
An exception to this rule is made for
sales or exchanges of publicly traded
partnership interests for which a broker is
required to file Form 1099-B, Proceeds
From Broker and Barter Exchange
Transactions.
If a partner is required to notify the
partnership of a section 751(a) exchange
but fails to do so, a $50 penalty may be
imposed for each such failure. However, no
penalty will be imposed if the partner can
show that the failure was due to reasonable
cause and not willful neglect.

Nominee Reporting
Any person who holds, directly or indirectly,
an interest in a partnership as a nominee for
another person must furnish a written
statement to the partnership by the last day
of the month following the end of the
Cat. No. 11396N

partnership’s tax year. This statement must
include the name, address, and identifying
number of the nominee and such other
person, description of the partnership
interest held as nominee for that person,
and other information required by
Temporary Regulations section
1.6031(c)-1T. A nominee that fails to furnish
this statement must furnish to the person for
whom the nominee holds the partnership
interest a copy of Schedule K-1 and related
information within 30 days of receiving it
from the partnership.
A nominee who fails to furnish when due
all the information required by Temporary
Regulations section 1.6031(c)-1T, or who
furnishes incorrect information, is subject to
a $50 penalty for each statement for which a
failure occurs. The maximum penalty is
$100,000 for all such failures during a
calendar year. If the nominee intentionally
disregards the requirement to report correct
information, each $50 penalty increases to
$100 or, if greater, 10% of the aggregate
amount of items required to be reported,
and the $100,000 maximum does not apply.

International Boycotts
Every partnership that had operations in, or
related to, a boycotting country, company, or
a national of a country must file Form 5713,
International Boycott Report.
If the partnership cooperated with an
international boycott, it must give you a copy
of its Form 5713. You must file your own
Form 5713 to report the partnership’s
activities and any other boycott operations
that you may have. You may lose certain tax
benefits if the partnership participated in, or
cooperated with, an international boycott.
See Form 5713 and its instructions for more
information.

Definitions
General Partner
A general partner is a partner who is
personally liable for partnership debts.

Limited Partner
A limited partner is a partner in a partnership
formed under a state limited partnership law,
whose personal liability for partnership debts
is limited to the amount of money or other
property that the partner contributed or is
required to contribute to the partnership.
Some members of other entities, such as
domestic or foreign business trusts or
limited liability companies that are classified
as partnerships, may be treated as limited

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partners for certain purposes. See, for
example, Temporary Regulations section
1.469-5T(e)(3), which treats all members
with limited liability as limited partners for
purposes of section 469(h)(2).

Nonrecourse Loans
Nonrecourse loans are those liabilities of the
partnership for which no partner bears the
economic risk of loss.

Elections
Generally, the partnership decides how to
figure taxable income from its operations.
However, certain elections are made by you
separately on your income tax return and
not by the partnership. These elections are
made under the following code sections:
• Section 59(e) (deduction of certain
qualified expenditures ratably over the
period of time specified in that section). For
more information, see the instructions for
code I in box 13.
• Section 108(b)(5) (income from the
discharge of indebtedness).
• Section 263A(d) (preproductive
expenses). See the instructions for code O
in box 13.
• Section 617 (deduction and recapture of
certain mining exploration expenditures).
• Section 901 (foreign tax credit).

Additional Information
For more information on the treatment of
partnership income, deductions, credits,
etc., see Pub. 535, Business Expenses.
To get forms and publications, see the
instructions for your tax return or visit the
IRS website at www.irs.gov.

Limitations on Losses,
Deductions, and Credits
There are three separate potential
limitations on the amount of partnership
losses that you can deduct on your return.
These limitations and the order in which you
must apply them are as follows: the basis
rules, the at-risk limitations, and the passive
activity limitations. Each of these limitations
is discussed separately below.
Other limitations may apply to specific
deductions (for example, the section 179
expense deduction). Generally, specific
limitations apply before the basis, at-risk,
and passive loss limitations.

Basis Rules
Generally, you may not claim your share of
a partnership loss (including a capital loss)
to the extent that it is greater than the
adjusted basis of your partnership interest at
the end of the partnership’s tax year. Any
losses and deductions not allowed this year
because of the basis limit can be carried
forward indefinitely and deducted in a later
year subject to the basis limit for that year.
The partnership is not responsible for
keeping the information needed to figure the
basis of your partnership interest. Although
the partnership does provide an analysis of
the changes to your capital account in item
L of Schedule K-1, that information is based
on the partnership’s books and records and
cannot be used to figure your basis.
You can figure the adjusted basis of your
partnership interest by adding items that

increase your basis and then subtracting
items that decrease your basis.
Use the worksheet below to figure the
basis of your interest in the partnership.
For more details on the basis rules, see
Pub. 541.

At-Risk Limitations
Generally, if you have (a) a loss or other
deduction from any activity carried on as a
trade or business or for the production of
income by the partnership and (b) amounts
in the activity for which you are not at risk,
you will have to complete Form 6198,
At-Risk Limitations, to figure your allowable
loss.
The at-risk rules generally limit the
amount of loss and other deductions that
you can claim to the amount you could
actually lose in the activity. These losses
and deductions include a loss on the
disposition of assets and the section 179
expense deduction. However, if you
acquired your partnership interest before
1987, the at-risk rules do not apply to losses
Worksheet for Adjusting the Basis of a Partner’s
Interest in the Partnership

from an activity of holding real property
placed in service before 1987 by the
partnership. The activity of holding mineral
property does not qualify for this exception.
The partnership should identify on an
attachment to Schedule K-1 the amount of
any losses that are not subject to the at-risk
limitations.
Generally, you are not at risk for amounts
such as the following:
• Nonrecourse loans used to finance the
activity, to acquire property used in the
activity, or to acquire your interest in the
activity, that are not secured by your own
property (other than the property used in the
activity). See the instructions for item K on
page 5 for the exception for qualified
nonrecourse financing secured by real
property.
• Cash, property, or borrowed amounts
used in the activity (or contributed to the
activity, or used to acquire your interest in
the activity) that are protected against loss
by a guarantee, stop-loss agreement, or
other similar arrangement (excluding

Keep for Your Records

1. Your adjusted basis at the end of the prior year. Do not enter less than
zero. Enter -0- if this is your first tax year . . . . . . . . . . . . . . . . . . . .

1.

Increases:
2. Money and your adjusted basis in property contributed to the
partnership less the associated liabilities (but not less than zero) . . . . .

2.

3. Your increased share of or assumption of partnership liabilities
(Subtract your share of liabilities shown in Item K of your 2007
Schedule K-1 from your share of liabilities shown in Item K of your 2008
Schedule K-1 and add the amount of any partnership liabilities you
assumed during the tax year) . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3.

4. Your share of the partnership’s income or gain (including tax-exempt
income) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4.

5. Any gain recognized this year on contributions of property. Do not
include gain from transfer of liabilities . . . . . . . . . . . . . . . . . . . . . . .

5.

6. Your share of the excess of the deductions for depletion (other than oil
and gas depletion) over the basis of the property subject to depletion . .

6.

Decreases:
7. Withdrawals and distributions of money and the adjusted basis of
property distributed to you from the partnership. Do not include the
amount of property distributions included in the partner’s income
(taxable income) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

7.

Caution: A distribution may be taxable if the amount exceeds your
adjusted basis of your partnership interest immediately before the
distribution.
8. Your share of the partnership’s nondeductible expenses that are not
capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

8.

9. Your share of the partnership’s losses and deductions (including capital
losses). However, include your share of the partnership’s section 179
expense deduction for this year even if you cannot deduct all of it
because of limitations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

9.

10. The amount of your deduction for depletion of any partnership oil and
gas property, not to exceed your allocable share of the adjusted basis
of that property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

10.

11. Your adjusted basis in the partnership at end of this tax year. (Add lines
1 through 6 and subtract lines 7 through 10 from the total. If zero or
less, enter -0-.) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

11.

Caution: The deduction for your share of the partnership’s losses and
deductions is limited to your adjusted basis in your partnership interest.
If you entered zero on line 11 and the amount figured for line 11 was
less than zero, a portion of your share of the partnership losses and
deductions may not be deductible. (See Basis Rules above for more
information.)

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casualty insurance and insurance against
tort liability).
• Amounts borrowed for use in the activity
from a person who has an interest in the
activity, other than as a creditor, or who is
related, under section 465(b)(3), to a person
(other than you) having such an interest.
You should get a separate statement of
income, expenses, etc., for each activity
from the partnership.

Passive Activity Limitations
Section 469 provides rules that limit the
deduction of certain losses and credits.
These rules apply to partners who:
• Are individuals, estates, trusts, closely
held corporations, or personal service
corporations and
• Have a passive activity loss or credit for
the tax year.
Generally, passive activities include:
1. Trade or business activities in which
you did not materially participate and
2. Activities that meet the definition of
rental activities under Temporary
Regulations section 1.469-1T(e)(3) and
Regulations section 1.469-1(e)(3).
Passive activities do not include:
1. Trade or business activities in which
you materially participated.
2. Rental real estate activities in which
you materially participated if you were a real
estate professional for the tax year. You
were a real estate professional only if you
met both of the following conditions:
a. More than half of the personal
services you performed in trades or
businesses were performed in real property
trades or businesses in which you materially
participated and
b. You performed more than 750 hours
of services in real property trades or
businesses in which you materially
participated.
Note. For a closely held C corporation
(defined in section 465(a)(1)(B)), the above
conditions are treated as met if more than
50% of the corporation’s gross receipts were
from real property trades or businesses in
which the corporation materially
participated.
For purposes of this rule, each interest in
rental real estate is a separate activity,
unless you elect to treat all interests in rental
real estate as one activity. For details on
making this election, see the Instructions for
Schedule E (Form 1040).
If you are married filing jointly, either you
or your spouse must separately meet both
of the above conditions, without taking into
account services performed by the other
spouse.
A real property trade or business is any
real property development, redevelopment,
construction, reconstruction, acquisition,
conversion, rental, operation, management,
leasing, or brokerage trade or business.
Services you performed as an employee are
not treated as performed in a real property
trade or business unless you owned more
than 5% of the stock (or more than 5% of
the capital or profits interest) in the
employer.
3. Working interests in oil or gas wells if
you were a general partner.

4. The rental of a dwelling unit any
partner used for personal purposes during
the year for more than the greater of 14
days or 10% of the number of days that the
residence was rented at fair rental value.
5. Activities of trading personal property
for the account of owners of interests in the
activities.
If you are an individual, an estate, or a
trust, and you have a passive activity loss or
credit, use Form 8582, Passive Activity Loss
Limitations, to figure your allowable passive
losses and Form 8582-CR, Passive Activity
Credit Limitations, to figure your allowable
passive credits. For a corporation, use Form
8810, Corporate Passive Activity Loss and
Credit Limitations. See the instructions for
these forms for more information.
If the partnership had more than one
activity, it will attach a statement to your
Schedule K-1 that identifies each activity
(trade or business activity, rental real estate
activity, rental activity other than rental real
estate, etc.) and specifies the income (loss),
deductions, and credits from each activity.
Material participation. You must
determine if you materially participated (a) in
each trade or business activity held through
the partnership and (b) if you were a real
estate professional (defined above), in each
rental real estate activity held through the
partnership. All determinations of material
participation are made based on your
participation during the partnership’s tax
year.
Material participation standards for
partners who are individuals are listed
below. Special rules apply to certain retired
or disabled farmers and to the surviving
spouses of farmers. See the Instructions for
Form 8582 for details.
Corporations should refer to the
Instructions for Form 8810 for the material
participation standards that apply to them.
Individuals (other than limited
partners). If you are an individual (either a
general partner or a limited partner who
owned a general partnership interest at all
times during the tax year), you materially
participated in an activity only if one or more
of the following apply:
1. You participated in the activity for
more than 500 hours during the tax year.
2. Your participation in the activity for
the tax year constituted substantially all the
participation in the activity of all individuals
(including individuals who are not owners of
interests in the activity).
3. You participated in the activity for
more than 100 hours during the tax year,
and your participation in the activity for the
tax year was not less than the participation
in the activity of any other individual
(including individuals who were not owners
of interests in the activity) for the tax year.
4. The activity was a significant
participation activity for the tax year, and
you participated in all significant
participation activities (including activities
outside the partnership) during the year for
more than 500 hours. A significant
participation activity is any trade or business
activity in which you participated for more
than 100 hours during the year and in which
you did not materially participate under any
of the material participation tests (other than
this test 4).

Partner’s Instructions for Schedule K-1 (Form 1065)

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5. You materially participated in the
activity for any 5 tax years (whether or not
consecutive) during the 10 tax years that
immediately precede the tax year.
6. The activity was a personal service
activity and you materially participated in the
activity for any 3 tax years (whether or not
consecutive) preceding the tax year. A
personal service activity involves the
performance of personal services in the
fields of health, law, engineering,
architecture, accounting, actuarial science,
performing arts, consulting, or any other
trade or business in which capital is not a
material income-producing factor.
7. Based on all the facts and
circumstances, you participated in the
activity on a regular, continuous, and
substantial basis during the tax year.
Limited partners. If you are a limited
partner, you do not materially participate in
an activity unless you meet one of the tests
in paragraphs 1, 5, or 6 above.
Work counted toward material
participation. Generally, any work that you
or your spouse does in connection with an
activity held through a partnership (where
you own your partnership interest at the time
the work is done) is counted toward material
participation. However, work in connection
with the activity is not counted toward
material participation if either of the following
applies.
1. The work is not the type of work that
owners of the activity would usually do and
one of the principal purposes of the work
that you or your spouse does is to avoid the
passive loss or credit limitations.
2. You do the work in your capacity as
an investor and you are not directly involved
in the day-to-day operations of the activity.
Examples of work done as an investor that
would not count toward material
participation include:
a. Studying and reviewing financial
statements or reports on operations of the
activity.
b. Preparing or compiling summaries or
analyses of the finances or operations of the
activity for your own use.
c. Monitoring the finances or operations
of the activity in a nonmanagerial capacity.
Effect of determination. Income (loss),
deductions, and credits from an activity are
nonpassive if you determine that:
• You materially participated in a trade or
business activity of the partnership or
• You were a real estate professional
(defined on page 3) in a rental real estate
activity of the partnership.
If you determine that you did not
materially participate in a trade or business
activity of the partnership or if you have
income (loss), deductions, or credits from a
rental activity of the partnership (other than
a rental real estate activity in which you
materially participated as a real estate
professional), the amounts from that activity
are passive. Report passive income
(losses), deductions, and credits as follows:
1. If you have an overall gain (the
excess of income over deductions and
losses, including any prior year unallowed
loss) from a passive activity, report the
income, deductions, and losses from the
activity as indicated in these instructions.

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2. If you have an overall loss (the
excess of deductions and losses, including
any prior year unallowed loss, over income)
or credits from a passive activity, report the
income, deductions, losses, and credits from
all passive activities using the Instructions
for Form 8582 or Form 8582-CR (or Form
8810), to see if your deductions, losses, and
credits are limited under the passive activity
rules.
Publicly traded partnerships. The
passive activity limitations are applied
separately for items (other than the
low-income housing credit and the
rehabilitation credit) from each publicly
traded partnership (PTP). Thus, a net
passive loss from a PTP may not be
deducted from other passive income.
Instead, a passive loss from a PTP is
suspended and carried forward to be
applied against passive income from the
same PTP in later years. If the partner’s
entire interest in the PTP is completely
disposed of, any unused losses are allowed
in full in the year of disposition.
If you have an overall gain from a PTP,
the net gain is nonpassive income. In
addition, the nonpassive income is included
in investment income to figure your
investment interest expense deduction.
Do not report passive income, gains, or
losses from a PTP on Form 8582. Instead,
use the following rules to figure and report
on the proper form or schedule your income,
gains, and losses from passive activities that
you held through each PTP you owned
during the tax year.
1. Combine any current year income,
gains and losses, and any prior year
unallowed losses to see if you have an
overall gain or loss from the PTP. Include
only the same types of income and losses
you would include in your net income or loss
from a non-PTP passive activity. See Pub.
925, Passive Activity and At-Risk Rules, for
more details.
2. If you have an overall gain, the net
gain portion (total gain minus total losses) is
nonpassive income. On the form or
schedule you normally use, report the net
gain portion as nonpassive income and the
remaining income and the total losses as
passive income and loss. To the left of the
entry space, enter “From PTP.” It is
important to identify the nonpassive income
because the nonpassive portion is included
in modified adjusted gross income for
purposes of figuring on Form 8582 the
“special allowance” for active participation in
a non-PTP rental real estate activity. In
addition, the nonpassive income is included
in investment income when figuring your
investment interest expense deduction on
Form 4952.
Example. If you have Schedule E (Form
1040) income of $8,000, and a Form 4797
prior year unallowed loss of $3,500 from the
passive activities of a particular PTP, you
have a $4,500 overall gain ($8,000 −
$3,500). On Schedule E (Form 1040), line
28, report the $4,500 net gain as
nonpassive income in column (j). In column
(g), report the remaining Schedule E (Form
1040) gain of $3,500 ($8,000 − $4,500). On
the appropriate line of Form 4797, report the
prior year unallowed loss of $3,500. Be sure

to enter “From PTP” to the left of each entry
space.
3. If you have an overall loss (but did not
dispose of your entire interest in the PTP to
an unrelated person in a fully taxable
transaction during the year), the losses are
allowed to the extent of the income, and the
excess loss is carried forward to use in a
future year when you have income to offset
it. Report as a passive loss on the schedule
or form you normally use the portion of the
loss equal to the income. Report the income
as passive income on the form or schedule
you normally use.
Example. You have a Schedule E (Form
1040) loss of $12,000 (current year losses
plus prior year unallowed losses) and a
Form 4797 gain of $7,200. Report the
$7,200 gain on the appropriate line of Form
4797. On Schedule E (Form 1040), line 28,
report $7,200 of the losses as a passive loss
in column (f). Carry forward to 2008 the
unallowed loss of $4,800 ($12,000 −
$7,200).
If you have unallowed losses from more
than one activity of the PTP or from the
same activity of the PTP that must be
reported on different forms, you must
allocate the unallowed losses on a pro rata
basis to figure the amount allowed from
each activity or on each form.
To allocate and keep a record of the

TIP unallowed losses, use Worksheets 5,
6, and 7 of Form 8582. List each
activity of the PTP in Worksheet 5. Enter the
overall loss from each activity in column (a).
Complete column (b) of Worksheet 5
according to its instructions. Multiply the
total unallowed loss from the PTP by each
ratio in column (b) and enter the result in
column (c) of Worksheet 5. Then, complete
Worksheet 6 if all the loss from the same
activity is to be reported on one form or
schedule. Use Worksheet 7 instead of
Worksheet 6 if you have more than one loss
to be reported on different forms or
schedules for the same activity. Enter the
net loss plus any prior year unallowed
losses in column (a) of Worksheet 6 (or
Worksheet 7 if applicable). The losses in
column (c) of Worksheet 6 (column (e) of
Worksheet 7) are the allowed losses to
report on the forms or schedules. Report
both these losses and any income from the
PTP on the forms and schedules you
normally use.
4. If you have an overall loss and you
disposed of your entire interest in the PTP to
an unrelated person in a fully taxable
transaction during the year, your losses
(including prior year unallowed losses)
allocable to the activity for the year are not
limited by the passive loss rules. A fully
taxable transaction is one in which you
recognize all your realized gain or loss.
Report the income and losses on the forms
and schedules you normally use.
Note. For rules on the disposition of an
entire interest reported using the installment
method, see the Instructions for Form 8582.
Special allowance for a rental real estate
activity. If you actively participated in a
rental real estate activity, you may be able
to deduct up to $25,000 of the loss from the
activity from nonpassive income. This
“special allowance” is an exception to the
general rule disallowing losses in excess of

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income from passive activities. The special
allowance is not available if you were
married, file a separate return for the year,
and did not live apart from your spouse at all
times during the year.
Only individuals and qualifying estates
can actively participate in a rental real estate
activity. Estates (other than qualifying
estates), trusts, and corporations cannot
actively participate. Limited partners cannot
actively participate unless future regulations
provide an exception.
You are not considered to actively
participate in a rental real estate activity if at
any time during the tax year your interest
(including your spouse’s interest) in the
activity was less than 10% (by value) of all
interests in the activity.
Active participation is a less stringent
requirement than material participation. You
may be treated as actively participating if
you participated, for example, in making
management decisions or arranging for
others to provide services (such as repairs)
in a significant and bona fide sense.
Management decisions that can count as
active participation include approving new
tenants, deciding rental terms, approving
capital or repair expenditures, and other
similar decisions.
An estate is a qualifying estate if the
decedent would have satisfied the active
participation requirement for the activity for
the tax year the decedent died. A qualifying
estate is treated as actively participating for
tax years ending less than 2 years after the
date of the decedent’s death.
Modified adjusted gross income
limitation. The maximum special
allowance that single individuals and
married individuals filing a joint return can
qualify for is $25,000. The maximum is
$12,500 for married individuals who file
separate returns and who lived apart at all
times during the year. The maximum special
allowance for which an estate can qualify is
$25,000 reduced by the special allowance
for which the surviving spouse qualifies.
If your modified adjusted gross income
(defined below) is $100,000 or less ($50,000
or less if married filing separately), your loss
is deductible up to the amount of the
maximum special allowance referred to in
the preceding paragraph. If your modified
adjusted gross income is more than
$100,000 (more than $50,000 if married
filing separately), the special allowance is
limited to 50% of the difference between
$150,000 ($75,000 if married filing
separately) and your modified adjusted
gross income. When modified adjusted
gross income is $150,000 or more ($75,000
or more if married filing separately), there is
no special allowance.
Modified adjusted gross income is your
adjusted gross income figured without taking
into account:
• Any passive activity loss.
• Any rental real estate loss allowed under
section 469(c)(7) to real estate professionals
(as defined on page 3).
• Any overall loss from a publicly-traded
partnership.
• Any taxable social security or equivalent
railroad retirement benefits.

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• Any deductible contributions to an IRA or

certain other qualified retirement plans
under section 219.
• The domestic production activities
deduction.
• The student loan interest deduction.
• The deduction for one-half of
self-employment taxes.
• The exclusion from income of interest
from Series EE or I U.S. Savings Bonds
used to pay higher education expenses.
• The exclusion of amounts received under
an employer’s adoption assistance program.
Commercial revitalization deduction.
The special $25,000 allowance for the
commercial revitalization deduction from
rental real estate activities is not subject to
the active participation rules or modified
adjusted gross income limits discussed
above. See the instructions for box 13, code
P, for more information.
Special rules for certain other activities.
If you have net income (loss), deductions, or
credits from any activity to which special
rules apply, the partnership will identify the
activity and all amounts relating to it on
Schedule K-1 or on an attachment.
If you have net income subject to
recharacterization under Temporary
Regulations section 1.469-2T(f) and
Regulations section 1.469-2(f), report such
amounts according to the Instructions for
Form 8582 (or Form 8810).
If you have net income (loss),
deductions, or credits from any of the
following activities, treat such amounts as
nonpassive and report them as indicated in
these instructions:
1. Working interests in oil and gas wells
if you are a general partner.
2. The rental of a dwelling unit any
partner used for personal purposes during
the year for more than the greater of 14
days or 10% of the number of days that the
residence was rented at fair rental value.
3. Trading personal property for the
account of owners of interests in the activity.
Self-charged interest. The partnership will
report any “self-charged” interest income or
expense that resulted from loans between
you and the partnership (or between the
partnership and another partnership or S
corporation if both entities have the same
owners with the same proportional
ownership interest in each entity). If there
was more than one activity, the partnership
will provide a statement allocating the
interest income or expense with respect to
each activity. The self-charged interest rules
do not apply to your partnership interest if
the partnership made an election under
Regulations section 1.469-7(g) to avoid the
application of these rules. See the
Instructions for Form 8582 for more
information.

Specific Instructions
Part I. Information About
the Partnership
Item D
If the box in item D is checked, you are a
partner in a publicly traded partnership and

must follow the rules discussed on page 4
under Publicly traded partnerships.

Part II. Information About
the Partner
Item J Percentage Interest in
Partnership Profit, Loss, and
Capital
These instructions are for the
purpose of assisting the partnership
CAUTION return preparer in completing Item J
of Schedule K-1. They should not be relied
upon for other purposes unless specifically
stated. They are not intended to be a
substitute for the Code or regulations, or to
change their meaning.
Report in Part II, Item J, the partner’s
share of the partnership’s profit, loss, and
capital as of the beginning and end of the
partnership’s tax year, as determined under
the partnership agreement. The partner’s
share of each category must be expressed
as a percentage. The total percentage
interest in each category must total 100%
for all partners.
If the partnership agreement does not
express the partners’ share of profit, loss,
and capital as fixed percentages, the
partnership may use a reasonable method
in arriving at each percentage for purposes
of completing the items required by Item J,
as long as such method is consistent with
the partnership agreement and is applied
consistently from year to year. Maintain
records to support the share of profits, share
of losses, and share of capital reported for
each partner.

!

Item K
Item K should show your share of the
partnership’s nonrecourse liabilities,
partnership-level qualified nonrecourse
financing, and other recourse liabilities as of
the end of the partnership’s tax year. If you
terminated your interest in the partnership
during the tax year, item K should show the
share that existed immediately before the
total disposition. A partner’s “recourse
liability” is any partnership liability for which
a partner is personally liable.
Use the total of the three amounts for
computing the adjusted basis of your
partnership interest.
Generally, you may use only the
amounts shown next to “Qualified
nonrecourse financing” and “Recourse” to
figure your amount at risk. Do not include
any amounts that are not at risk if such
amounts are included in either of these
categories.
If your partnership is engaged in two or
more different types of activities subject to
the at-risk provisions, or a combination of
at-risk activities and any other activity, the
partnership should give you a statement
showing your share of nonrecourse
liabilities, partnership-level qualified
nonrecourse financing, and other recourse
liabilities for each activity.
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.

Partner’s Instructions for Schedule K-1 (Form 1065)

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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 borrowed from a “qualified”
person.
Qualified persons include any persons
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 Pub. 925 for more information on
qualified nonrecourse financing.
Both the partnership and you must meet
the qualified nonrecourse rules on this debt
before you can include the amount shown
next to “Qualified nonrecourse financing” in
your at-risk computation.
See Limitations on Losses, Deductions,
and Credits beginning on page 2 for more
information on the at-risk limitations.

Part III. Partner’s Share of
Current Year Income,
Deductions, Credits, and
Other Items
The amounts shown in boxes 1 through 20
reflect your share of income, loss,
deductions, credits, etc., from partnership
business or rental activities without
reference to limitations on losses or
adjustments that may be required of you
because of:
1. The adjusted basis of your
partnership interest,
2. The amount for which you are at risk,
3. The passive activity limitations, or
4. Any other limitations that must be
taken into account at the shareholder level
in figuring taxable income (for example, the
section 179 expense limitation).
For information on these provisions, see
Limitations on Losses, Deductions, and
Credits beginning on page 2.
If you are an individual and the passive
activity rules do not apply to the amounts
shown on your Schedule K-1, take the
amounts shown and enter them on the lines
on your tax return as indicated in the
summarized reporting information shown on
page 2 of the Schedule K-1. If the passive
activity rules do apply, report the amounts
shown as indicated in these instructions.
If you are not an individual, report the
amounts in each box as instructed on your
tax return.
The line numbers in the summarized
reporting information on page 2 of Schedule
K-1 are references to forms in use for
calendar year 2008. If you file your tax
return on a calendar year basis, but your
partnership files a return for a fiscal year,
enter the amounts on your tax return for the
year in which the partnership’s fiscal year

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ends. For example, if the partnership’s tax
year ends in February 2009, report the
amounts on your 2009 tax return.
If you have losses, deductions, or credits
from a prior year that were not deductible or
usable because of certain limitations, such
as the basis rules or the at-risk limitations,
take them into account in determining your
net income, loss, or credits for this year.
However, except for passive activity losses
and credits, do not combine the prior-year
amounts with any amounts shown on this
Schedule K-1 to get a net figure to report on
any supporting schedules, statements, or
forms attached to your return. Instead,
report the amounts on the attached
schedule, statement, or form on a
year-by-year basis.
If the partnership reports a section 743(b)
adjustment to partnership items, report
these adjustments as separate items on
Form 1040 in accordance with the reporting
instructions for the partnership item being
adjusted. A section 743(b) adjustment
increases or decreases your distributive
share of income, deduction, gain, or loss for
a partnership item. For example, if the
partnership reports a section 743(b)
adjustment to depreciation for property used
in its trade or business, report the
adjustment on line 28 of Schedule E (Form
1040) in accordance with the instructions for
Box 1 of Schedule K-1.
If you have amounts other than
those shown on Schedule K-1 to
CAUTION report on Schedule E (Form 1040),
enter each item separately on line 28 of
Schedule E (Form 1040).

!

Codes. In box 11 and boxes 13 through
20, the partnership will identify each item by
entering a code in the column to the left of
the dollar amount entry space. These codes
are identified on page 2 of Schedule K-1
and in these instructions.
Attached statements. The partnership will
enter an asterisk (*) after the code, if any, in
the column to the left of the dollar amount
entry space for each item for which it has
attached a statement providing additional
information. For those informational items
that cannot be reported as a single dollar
amount, the partnership will enter an
asterisk in the left column and enter “STMT”
in the dollar amount entry space to indicate
the information is provided on an attached
statement.

Income (Loss)
Box 1. Ordinary Business
Income (Loss)
The amount reported for box 1 is your share
of the ordinary income (loss) from the trade
or business activities of the partnership.
Generally, where you report this amount on
Form 1040 depends on whether the amount
is from an activity that is a passive activity to
you. If you are an individual partner filing
your 2008 Form 1040, find your situation
below and report your box 1 income (loss)
as instructed, after applying the basis and
at-risk limitations on losses. If the
partnership had more than one trade or
business activity, it will attach a statement

that will identify the amount of income or
loss from each activity.
1. Report box 1 income (loss) from
partnership trade or business activities in
which you materially participated on
Schedule E (Form 1040), line 28, column (h)
or (j).
2. Report box 1 income (loss) from
partnership trade or business activities in
which you did not materially participate, as
follows:
a. If income is reported in box 1, report
the income on Schedule E (Form 1040), line
28, column (g). However, if the box in item D
is checked, report the income following the
rules for Publicly traded partnerships on
page 4.
b. If a loss is reported in box 1, follow
the Instructions for Form 8582 to figure how
much of the loss can be reported on
Schedule E (Form 1040), line 28, column (f).
However, if the box in item D is checked,
report the loss following the rules for
Publicly traded partnerships on page 4.

Box 2. Net Rental Real Estate
Income (Loss)
Generally, the income (loss) reported in box
2 is a passive activity amount for all
partners. However, the income (loss) in box
2 is not from a passive activity if you were a
real estate professional (defined on page 3)
and you materially participated in the
activity. If the partnership had more than
one real estate rental activity, it will attach a
statement that will identify the amount of
income or loss from each activity.
If you are filing a 2008 Form 1040, use
the following instructions to determine where
to enter a box 2 amount:
1. If you have a loss from a passive
activity in box 2 and you meet all of the
following conditions, enter the loss on
Schedule E (Form 1040), line 28, column (f).
a. You actively participated in the
partnership rental real estate activities. See
Special allowance for a rental real estate
activity on page 4.
b. Rental real estate activities with
active participation were your only passive
activities.
c. You have no prior year unallowed
losses from these activities.
d. Your total loss from the rental real
estate activities was not more than $25,000
(not more than $12,500 if married filing
separately and you lived apart from your
spouse all year).
e. If you are a married person filing
separately, you lived apart from your spouse
all year.
f. You have no current or prior year
unallowed credits from a passive activity.
g. Your modified adjusted gross income
was not more than $100,000 (not more than
$50,000 if married filing separately and you
lived apart from your spouse all year).
h. Your interest in the rental real estate
activity was not held as a limited partner.
2. If you have a loss from a passive
activity in box 2 and you do not meet all the
conditions in 1 above, report the loss
following the Instructions for Form 8582 to
figure how much of the loss you can report
on Schedule E (Form 1040), line 28, column
(f). However, if the box in item D is checked,

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report the loss following the rules for
Publicly traded partnerships on page 4.
3. If you were a real estate professional
and you materially participated in the
activity, report box 2 income (loss) on
Schedule E (Form 1040), line 28, column (h)
or (j).
4. If you have income from a passive
activity in box 2, enter the income on
Schedule E (Form 1040), line 28, column
(g). However, if the box in item D is
checked, report the income following the
rules for Publicly traded partnerships on
page 4.

Box 3. Other Net Rental Income
(Loss)
The amount in box 3 is a passive activity
amount for all partners. If the partnership
had more than one rental activity, it will
attach a statement that will identify the
amount of income or loss from each activity.
Report the income or loss as follows.
1. If box 3 is a loss, follow the
Instructions for Form 8582 to figure how
much of the loss can be reported on
Schedule E (Form 1040), line 28, column (f).
However, if the box in item D is checked,
report the loss following the rules for
Publicly traded partnerships on page 4.
2. If income is reported on box 3, report
the income on Schedule E (Form 1040), line
28, column (g). However, if the box in item D
is checked, report the income following the
rules for Publicly traded partnerships on
page 4.

Box 4. Guaranteed Payments
Generally, amounts on this line are not
passive income, and you should report them
on Schedule E (Form 1040), line 28, column
(j) (for example, guaranteed payments for
personal services).

Portfolio Income
Portfolio income or loss (shown in boxes 5
through 9b and in box 11, code A) is not
subject to the passive activity limitations.
Portfolio income includes income (not
derived in the ordinary course of a trade or
business) from interest, ordinary dividends,
annuities, or royalties and gain or loss on
the sale of property that produces such
income or is held for investment.

Box 5. Interest Income
Report interest income on line 8a of Form
1040.

Box 6a. Ordinary Dividends
Report ordinary dividends on line 9a of Form
1040.

Box 6b. Qualified Dividends
Report any qualified dividends on line 9b of
Form 1040.
Note. Qualified dividends are excluded
from investment income, but you may elect
to include part or all of these amounts in
investment income. See the instructions for
line 4g of Form 4952, Investment Interest
Expense Deduction, for important
information on making this election.

Box 7. Royalties
Report royalties on Schedule E (Form
1040), Part I, line 4.

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Box 8. Net Short-Term Capital
Gain (Loss)
Report the net short-term capital gain (loss)
on Schedule D (Form 1040), line 5, column
(f).

Box 9a. Net Long-Term Capital
Gain (Loss)
Report the net long-term capital gain (loss)
on Schedule D (Form 1040), line 12, column
(f).

Box 9b. Collectibles (28%) Gain
(Loss)
Include your share of any collectibles gain or
loss on line 4 of the 28% Rate Gain
Worksheet in the instructions for Schedule D
(Form 1040), line 18.

Box 9c. Unrecaptured Section
1250 Gain
There are three types of unrecaptured
section 1250 gain. Report your share of this
unrecaptured gain on the Unrecaptured
Section 1250 Gain Worksheet in the
instructions for Schedule D (Form 1040) as
follows.
• Report unrecaptured section 1250 gain
from the sale or exchange of the
partnership’s business assets on line 5.
• Report unrecaptured section 1250 gain
from the sale or exchange of an interest in a
partnership on line 10.
• Report unrecaptured section 1250 gain
from an estate, trust, regulated investment
company (RIC), or real estate investment
trust (REIT) on line 11.
If the partnership reports only
unrecaptured section 1250 gain from the
sale or exchange of its business assets, it
will enter a dollar amount in box 9c. If it
reports the other two types of unrecaptured
gain, it will provide an attached statement
that shows the amount for each type of
unrecaptured section 1250 gain.

Box 10. Net Section 1231 Gain
(Loss)
The amount in box 10 is generally passive if
it is from a:
• Rental activity or
• Trade or business activity in which you
did not materially participate.
However, an amount from a rental real
estate activity is not from a passive activity if
you were a real estate professional (defined
on page 3) and you materially participated in
the activity.
If the amount is either (a) a loss that is
not from a passive activity or (b) a gain,
report it on line 2, column (g), of Form 4797,
Sales of Business Property. Do not
complete columns (b) through (f) on line 2 of
Form 4797. Instead, enter “From Schedule
K-1 (Form 1065)” across these columns.
If the amount is a loss from a passive
activity, see Passive Loss Limitations in the
Instructions for Form 4797. You will need to
report the loss following the Instructions for
Form 8582 to figure how much of the loss is
allowed on Form 4797. However, if the box
in item D is checked, report the loss
following the rules for Publicly traded
partnerships on page 4. If the partnership
had net section 1231 gain (loss) from more
than one activity, it will attach a statement

that will identify the amount of section 1231
gain (loss) from each activity.

Box 11. Other Income (Loss)
Code A. Other portfolio income (loss).
The partnership will report portfolio income
other than interest, ordinary dividend,
royalty, and capital gain (loss) income. It will
attach a statement to tell you what kind of
portfolio income is reported.
If the partnership has a residual interest
in a real estate mortgage investment conduit
(REMIC), it will report on the statement your
share of REMIC taxable income (net loss)
that you report on Schedule E (Form 1040),
line 38, column (d). The statement will also
report your share of any “excess inclusion”
that you report on Schedule E (Form 1040),
line 38, column (c), and your share of
section 212 expenses that you report on
Schedule E (Form 1040), line 38, column
(e). If you itemize your deductions on
Schedule A (Form 1040), you may also
deduct these section 212 expenses as a
miscellaneous deduction subject to the 2%
limit on Schedule A (Form 1040), line 23.
Code B. Involuntary conversions. This is
your net gain (loss) from involuntary
conversions due to casualty or theft. The
partnership will give you a schedule that
shows the amounts to be entered on Form
4684, Casualties and Thefts, line 34,
columns (b)(i), (b)(ii), and (c).
If there was a gain (loss) from a casualty
or theft to property not used in a trade or
business or for income-producing purposes,
the partnership will provide you with the
information you need to complete Form
4684.
Code C. Section 1256 contracts &
straddles. The partnership will report any
net gain or loss from section 1256 contracts.
Report this amount on Form 6781, Gains
and Losses From Section 1256 Contracts
and Straddles.
Code D. Mining exploration costs
recapture. The partnership will give you a
schedule that shows the information needed
to recapture certain mining exploration costs
(section 617). See Pub. 535 for more
information.
Code E. Cancellation of debt. Generally,
this amount is included in your gross income
(Form 1040, line 21). Under section
108(b)(5), you may elect to apply any
portion of this cancellation of debt to the
reduction of the basis of depreciable
property. See Form 982 for more details.
Code F. Other income (loss). Amounts
with code F are other items of income, gain,
or loss not included in boxes 1 through 10 or
reported in box 11 using codes A through E.
The partnership should give you a
description and the amount of your share for
each of these items.
Report loss items that are passive
activity amounts to you following the
Instructions for Form 8582. However, if the
box in item D is checked, report the loss
following the rules for Publicly traded
partnerships on page 4.
Code F items may include the following:
• Partnership gains from the disposition of
farm recapture property (see the instructions
for line 27 of Form 4797) and other items to
which section 1252 applies.

Partner’s Instructions for Schedule K-1 (Form 1065)

-7-

• Income from recoveries of tax benefit

items. A tax benefit item is an amount you
deducted in a prior tax year that reduced
your income tax. Report this amount on line
21 of Form 1040 to the extent it reduced
your tax.
• Gambling gains and losses.
1. If the partnership was not engaged in
the trade or business of gambling, (a) report
gambling winnings on Form 1040, line 21
and (b) deduct gambling losses to the extent
of winnings on Schedule A (Form 1040), line
28.
2. If the partnership was engaged in the
trade or business of gambling, (a) report
gambling winnings on line 28 of Schedule E
(Form 1040) and (b) deduct gambling losses
(to the extent of winnings) on line 28 of
Schedule E (Form 1040), column (h).
• Gain (loss) from the disposition of an
interest in oil, gas, geothermal, or other
mineral properties. The partnership will
attach a statement that provides a
description of the property, your share of the
amount realized from the disposition, your
share of the partnership’s adjusted basis in
the property (for other than oil or gas
properties), and your share of the total
intangible drilling costs, development costs,
and mining exploration costs (section 59(e)
expenditures) passed through for the
property. You must figure your gain or loss
from the disposition by increasing your
share of the adjusted basis by the amount of
intangible drilling costs, development costs,
or mine exploration costs for the property
that you capitalized (that is, costs that you
did not elect to deduct under section 59(e)).
Report a loss in Part I of Form 4797. Report
a gain in Part III of Form 4797 in accordance
with the instructions for line 28. See
Regulations section 1.1254-5 for more
information.
• Any income, gain, or loss to the
partnership under section 751(b) (certain
distributions treated as sales or exchanges).
Report this amount on Form 4797, line 10.
• Specially allocated ordinary gain (loss).
Report this amount on Form 4797, line 10.
• Net short-term capital gain (loss) and net
long-term capital gain (loss) from Schedule
D (Form 1065) that is not portfolio income.
An example is gain or loss from the
disposition of nondepreciable personal
property used in a trade or business activity
of the partnership. Report total net
short-term gain (loss) on Schedule D (Form
1040), line 5, column (f). Report the total net
long-term gain (loss) on Schedule D (Form
1040), line 12, column (f).
• 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 partnership should also give
you (a) the name of the corporation that
issued the QSB stock, (b) your distributive
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. Corporate partners are not eligible for
the section 1202 exclusion. The following
additional limitations apply at the partner
level:
1. You must have held an interest in the
partnership when the partnership acquired
the QSB stock and at all times thereafter

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until the partnership disposed of the QSB
stock.
2. Your distributive share of the eligible
section 1202 gain cannot exceed the
amount that would have been allocated to
you based on your interest in the
partnership at the time the QSB stock was
acquired.
See the Instructions for Schedule D
(Form 1040) for details on how to report the
gain and the amount of the allowable
exclusion.
• Gain eligible for section 1045 rollover.

exceed the amount that would have been
allocated to you based on your interest in
the partnership at the time the QSB stock
was acquired, and
3. You must purchase other QSB stock
(as defined in the Instructions for Schedule
D (Form 1040)) during the 60-day period
that began on the date the QSB stock was
sold by the partnership.
See the Instructions for Schedule D
(Form 1040) for details on how to report the
gain and the amount of the allowable
postponed gain.

Replacement stock purchased by the
partnership. The partnership should give
you (a) the name of the corporation that
issued the qualified small business (QSB)
stock, (b) your share of the partnership’s
adjusted basis and sales price of the QSB
stock, (c) the dates the QSB stock was
bought and sold, (d) your distributive share
of gain from the sale of the QSB stock, and
(e) your distributive share of the gain that
was deferred by the partnership under
section 1045. Corporate partners are not
eligible for the section 1045 rollover. To
qualify for the section 1045 rollover:
1. You must have held an interest in the
partnership during the entire period in which
the partnership held the QSB stock (more
than 6 months prior to the sale), and
2. Your distributive share of the gain
eligible for the section 1045 rollover cannot
exceed the amount that would have been
allocated to you based on your interest in
the partnership at the time the QSB stock
was acquired.
See the Instructions for Schedule D
(Form 1040) for details on how to report the
gain and the amount of the allowable
postponed gain.

Making the section 1045 election.
You make a section 1045 election on a
timely filed return for the tax year during
which the partnership tax year ends. Attach
to your Schedule D (Form 1040) a
statement that includes the following
information for each amount of gain that you
do not recognize under section 1045:
• The name of the corporation that issued
the QSB stock.
• The name and EIN of the selling
partnership.
• The dates the QSB stock was purchased
and sold.
• The amount of gain that is not recognized
under section 1045.
• If a partner purchases QSB stock, the
name of the corporation that issued the
replacement QSB stock, the date the stock
was purchased, and the cost of the stock.
• If a partner treats the partner’s interest in
QSB stock that is purchased by a
purchasing partnership as the partner’s
replacement QSB stock, the name and EIN
of the purchasing partnership, the name of
the corporation that issued the QSB stock,
the partner’s share of the cost of the QSB
stock that was purchased by the
partnership, the computation of the partner’s
adjustment to basis with respect to that QSB
stock, and the date the stock was purchased
by the partnership.

Opting out of partnership election. You
can opt out of the partnership’s section 1045
election and either (1) recognize the gain or
(2) elect to purchase different replacement
QSB stock, either directly or through
ownership of a partnership that acquired
replacement QSB stock. You satisfy the
requirement to purchase replacement QSB
stock if you own an interest in a partnership
that purchases QSB stock during the 60-day
period. You also must notify the partnership,
in writing, if you opt out of the partnership’s
section 1045 election. If you recognize gain,
you must notify the partnership, in writing, of
the amount of the gain that you are
recognizing.
Replacement stock not purchased by the
partnership. The partnership should give
you (a) the name of the corporation that
issued the qualified small business (QSB)
stock, (b) your 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) your distributive
share of gain from the sale of the QSB
stock. Corporate partners are not eligible for
the section 1045 rollover. To qualify for the
section 1045 rollover:
1. You must have held an interest in the
partnership during the entire period in which
the partnership held the QSB stock (more
than 6 months prior to the sale),
2. Your distributive share of the gain
eligible for the section 1045 rollover cannot

Distribution of replacement qualified
small business (QSB) stock to a partner
that reduces another partner’s interest in
replacement QSB stock. You must
recognize gain upon a distribution of
replacement QSB stock to another partner
that reduces your share of the replacement
QSB stock held by a partnership. The
amount of gain that you must recognize is
based on the amount of gain that you would
recognize upon a sale of the distributed
replacement QSB for its fair market value on
the date of the distribution, but not to exceed
the amount you previously deferred under
section 1045 with respect to the distributed
replacement QSB stock. If the partnership
distributed your share of replacement QSB
stock to another partner, the partnership
should give you (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) your share of
the partnership’s adjusted basis and fair
market value of the replacement QSB stock
on such date.
For more information see Regulations
section 1.1045-1.

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Deductions
Box 12. Section 179 Deduction
Use this amount, along with the total cost of
section 179 property placed in service
during the year from other sources, to
complete Part I of Form 4562, Depreciation
and Amortization. The partnership will report
on an attached statement your allowable
share of the cost of any qualified enterprise
zone, renewal community, or section 179
Gulf Opportunity Zone property it placed in
service during the tax year. Report the
amount from line 12 of Form 4562 allocable
to a passive activity from the partnership
using the Instructions for Form 8582. If the
amount is not a passive activity deduction,
report it on Schedule E (Form 1040), line 28,
column (i). However, if the box in item D is
checked, report this amount following the
rules for Publicly traded partnerships on
page 4.

Box 13. Other Deductions
Contributions. Codes A through F. The
partnership will give you a schedule that
shows the amount of contributions subject to
the 100%, 50%, 30%, and 20% adjusted
gross income limitations. For more details,
see Pub. 526, Charitable Contributions, and
the instructions for Schedule A (Form 1040).
If your contributions are subject to more
than one of the AGI limitations, see
Worksheet 2. Applying the Deduction Limits
in Pub. 526.
Charitable contribution deductions are
not taken into account in figuring your
passive activity loss for the year. Do not
enter them on Form 8582.
Code A. Cash contributions (50%). Enter
this amount subject to the 50% AGI
limitation on line 16 of Schedule A (Form
1040).
Code B. Cash contributions (30%).
Report this amount, subject to the 30% AGI
limitation, on line 16 of Schedule A (Form
1040).
Code C. Noncash contributions (50%). If
property other than cash is contributed and
if the claimed deduction for one item or
group of similar items of property exceeds
$5,000, the partnership must give you a
copy of Form 8283, Noncash Charitable
Contributions, to attach to your tax return.
Do not deduct the amount shown on this
form. It is the partnership’s contribution.
Instead, deduct the amount identified by
code C, box 13, subject to the 50% AGI
limitation, on line 17 of Schedule A (Form
1040).
If the partnership provides you with
information that the contribution was
property other than cash and does not give
you a Form 8283, see the Instructions for
Form 8283 for filing requirements. Do not
file Form 8283 unless the total claimed
deduction for all contributed items of
property exceeds $500.
Qualified conservation contributions
of property used in agriculture or
livestock production. The partnership will
report on an attached statement your
distributive share of qualified conservation
contributions of property used in agriculture
or livestock production. This contribution is

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not included in the amount reported in box
13 using code C. If you are a farmer or
rancher, you qualify for a 100% AGI
limitation for this contribution. Otherwise,
your deduction for this contribution is subject
to a 50% AGI limitation. Report this
deduction on line 17 of Schedule A (Form
1040). See Pub. 526 for more information
on qualified conservation contributions.
Code D. Noncash contributions (30%).
Report this amount, subject to the 30% AGI
limitation, on line 17 of Schedule A (Form
1040).
Code E. Capital gain property to a 50%
organization (30%). Report this amount,
subject to the 30% AGI limitation, on line 17
of Schedule A (Form 1040). See Special
30% Limit for Capital Gain Property in Pub.
526.
Code F. Capital gain property (20%).
Report this amount, subject to the 20% AGI
limitation, on line 17 of Schedule A (Form
1040).
Code G. Investment interest expense.
Enter this amount on Form 4952, line 1. If
the partnership has investment income or
other investment expense, it will report your
share of these items in box 20 using codes
A and B. Include investment income and
expenses from other sources to figure how
much of your total investment interest is
deductible. You will also need this
information to figure your investment interest
expense deduction.
If the partnership paid or accrued interest
on debts properly allocable to investment
property, the amount of interest you are
allowed to deduct may be limited.
For more information on the special
provisions that apply to investment interest
expense, see Form 4952 and Pub. 550.
Code H. Deductions — royalty income.
Enter deductions allocable to royalties on
Schedule E (Form 1040), line 18. For this
type of expense, enter “From Schedule K-1
(Form 1065).”
These deductions are not taken into
account in figuring your passive activity loss
for the year. Do not enter them on Form
8582.
Code I. Section 59(e)(2) expenditures.
On an attached statement, the partnership
will show the type and the amount of
qualified expenditures for which you may
make a section 59(e) election. The
statement will also identify the property for
which the expenditures were paid or
incurred. If there is more than one type of
expenditure, the amount of each type will
also be listed.
If you deduct these expenditures in full in
the current year, they are treated as
adjustments or tax preference items for
purposes of alternative minimum tax.
However, you may elect to amortize these
expenditures over the number of years in
the applicable period rather than deduct the
full amount in the current year. If you make
this election, these items are not treated as
adjustments or tax preference items.
Under this election, you may deduct
circulation expenditures ratably over a
3-year period. Research and experimental
expenditures and mining exploration and
development costs may be amortized over a
10-year period. Intangible drilling and

development costs may be amortized over a
60-month period. The amortization period
begins with the month in which such costs
were paid or incurred.
Make the election on Form 4562. If you
make the election, report the current year
amortization of section 59(e) expenditures
from Part VI of Form 4562 on line 28 of
Schedule E (Form 1040). If you do not make
the election, report the section 59(e)(2)
expenditures on line 28 of Schedule E
(Form 1040) and figure the resulting
adjustment or tax preference item (see Form
6251, Alternative Minimum Tax —
Individuals). Whether you deduct the
expenditures or elect to amortize them,
report the amount on a separate line in
column (h) of line 28 if you materially
participated in the partnership activity. If you
did not materially participate, follow the
Instructions for Form 8582 to figure how
much of the deduction can be reported in
column (f).
Code J. Deductions — portfolio (2%
floor). Amounts entered with code J are
deductions that are clearly and directly
allocable to portfolio income (other than
investment interest expense and section
212 expenses from a REMIC). Generally,
you should enter these amounts on
Schedule A (Form 1040), line 23. See the
instructions for Schedule A (Form 1040),
lines 23 and 28, for more information.
These deductions are not taken into
account in figuring your passive activity loss
for the year. Do not enter them on Form
8582.
Code K. Deductions — portfolio (other).
Generally, you should enter these amounts
on Schedule A (Form 1040), line 28. See
the instructions for Schedule A, lines 23 and
28, for more information. These deductions
are not taken into account in figuring your
passive activity loss for the year. Do not
enter them on Form 8582.
Code L. Amounts paid for medical
insurance. Any amounts paid during the
tax year for insurance that constitutes
medical care for you, your spouse, and your
dependents. On line 29 of Form 1040, you
may be allowed to deduct such amounts,
even if you do not itemize deductions. If you
do itemize deductions, enter on line 1 of
Schedule A (Form 1040) any amounts not
deducted on line 29 of Form 1040.
Code M. Educational assistance benefits.
Deduct your educational assistance benefits
on a separate line of Schedule E (Form
1040), line 28, up to the $5,250 limitation. If
your benefits exceed $5,250, you may be
able to use the excess amount on Form
8863 to figure the education credits.
Code N. Dependent care benefits. The
partnership will report the dependent care
benefits you received. You must use Form
2441, line 14, to figure the amount, if any, of
the benefits you may exclude from your
income.
Code O. Preproductive period expenses.
You may be eligible to elect to deduct these
expenses currently or capitalize them under
section 263A. See Pub. 225, Farmer’s Tax
Guide, and Regulations section 1.263A-4.
Code P. Commercial revitalization
deduction from rental real estate
activities. Follow the Instructions for Form
8582 to figure how much of the deduction

Partner’s Instructions for Schedule K-1 (Form 1065)

-9-

can be reported on Schedule E (Form
1040), line 28, column (f).
Code Q. Pensions and IRAs. Payments
made on your behalf to an IRA, qualified
plan, simplified employee pension (SEP), or
a SIMPLE IRA plan. See Form 1040
instructions for line 32 to figure your IRA
deduction. Enter payments made to a
qualified plan, SEP, or SIMPLE IRA plan on
Form 1040, line 28. If the payments to a
qualified plan were to a defined benefit plan,
the partnership should give you a statement
showing the amount of the benefit accrued
for the current tax year.
Code R. Reforestation expense
deduction. The partnership will provide a
statement that describes the qualified timber
property for these reforestation expenses.
Generally, the expense deduction is limited
to $10,000 ($5,000 if married filing
separately) for each qualified timber
property, including your distributive share of
the partnership’s expense and any
reforestation expenses you separately paid
or incurred during the tax year.
If you did not materially participate in the
activity, use Form 8582 to determine how
much of these expenses can be reported on
Schedule E (Form 1040), line 28. If you
materially participated in the reforestation
activity, report the deduction on line 28,
column (h), of Schedule E (Form 1040).
Code S. Domestic production activities
information. The partnership will provide
you with a statement with information that
you must use to figure the domestic
production activities deduction. Use Form
8903, Domestic Production Activities
Deduction, to figure this deduction. See the
Instructions for Form 8903 for more details.
Code T. Qualified production activities
income (QPAI). Report the QPAI reported
to you by the partnership (in box 13 of
Schedule K-1) on line 7 of Form 8903.
Code U. Employer’s Form W-2 wages.
Report the portion of Form W-2 wages
reported to you by the partnership (in box 13
of Schedule K-1) on line 15 of Form 8903.
Code V. Other deductions. Amounts with
this code may include:
• Itemized deductions (Form 1040 filers
enter on Schedule A (Form 1040)).
• Soil and water conservation expenditures
and endangered species recovery
expenditures. See section 175 for limitations
on the amount you are allowed to deduct.
• Expenditures for the removal of
architectural and transportation barriers to
the elderly and disabled that the partnership
elected to treat as a current expense. The
deductions are limited by section 190(c) to
$15,000 per year from all sources.
• Interest expense allocated to
debt-financed distributions. The manner in
which you report such interest expense
depends on your use of the distributed debt
proceeds. If the proceeds were used in a
trade or business activity, report the interest
on line 28 of Schedule E (Form 1040). In
column (a) enter the name of the
partnership and “interest expense.” If you
materially participated in the trade or
business activity, enter the amount of
interest expense in column (h). If you did not
materially participate in the activity, follow
the instructions for Form 8582 to figure the
amount of interest expense you can report

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in column (f). See page 3 for a definition of
material participation. If the proceeds were
used in an investment activity, enter the
interest on Form 4952. If the proceeds are
used for personal purposes, the interest is
generally not deductible.
• Interest paid or accrued on debt properly
allocable to your share of a working interest
in any oil or gas property (if your liability is
not limited). If you did not materially
participate in the oil or gas activity, this
interest is investment interest reportable as
described on page 9; otherwise, it is trade or
business interest. If you did not materially
participate in the oil or gas activity, this
interest is investment interest expense and
should be reported on Form 4952. If you
materially participated in the activity, report
the interest on line 28 of Schedule E (Form
1040). On a separate line, enter “interest
expense” and the name of the partnership in
column (a) and the amount in column (h).
• Contributions to a capital construction
fund (CCF). The deduction for a CCF
investment is not taken on Schedule E
(Form 1040). Instead, you subtract the
deduction from the amount that would
normally be entered as taxable income on
line 43 (Form 1040). In the margin to the left
of line 43, enter ‘‘CCF’’ and the amount of
the deduction.
• Penalty on early withdrawal of savings.
Report this amount on Form 1040, line 30.
• Film and television production expenses
for productions beginning before January 1,
2009. The partnership will provide a
statement that describes the film or
television production generating these
expenses. Generally, if the aggregate cost
of the production exceeds $15 million, you
are not entitled to the deduction. For a
television series, each episode of the series
is treated as a separate production and only
the first 44 episodes of a series are taken
into account for the deduction. The limitation
is $20 million for productions in certain
areas (see section 181 for details). If you did
not materially participate in the activity, use
Form 8582 to determine the amount that
can be reported on Schedule E (Form
1040), line 28, column (f). If you materially
participated in the production activity, report
the deduction on Schedule E (Form 1040),
line 28, column (h).
The partnership will give you a
description and the amount of your share for
each of these items.

Box 14. Self-Employment
Earnings (Loss)
If you and your spouse are both partners,
each of you must complete and file your
own Schedule SE (Form 1040),
Self-Employment Tax, to report your
partnership net earnings (loss) from
self-employment.
Code A. Net earnings (loss) from
self-employment. If you are a general
partner, reduce this amount before entering
it on Schedule SE (Form 1040) by any
section 179 expense deduction claimed,
unreimbursed partnership expenses
claimed, and depletion claimed on oil and
gas properties. Do not reduce net earnings
from self-employment by any separately

stated deduction for health insurance
expenses.
If the amount on this line is a loss, enter
only the deductible amount on Schedule SE
(Form 1040). See Limitations on Losses,
Deductions, and Credits beginning on page
2.
If your partnership is an options dealer or
a commodities dealer, see section 1402(i).
If your partnership is an investment club,
see Rev. Rul. 75-525, 1975-2 C.B. 350.
Code B. Gross farming or fishing
income. If you are an individual partner,
enter the amount from this line, as an item
of information, on Schedule E (Form 1040),
line 42. Also use this amount to figure net
earnings from self-employment under the
farm optional method on Schedule SE
(Form 1040), Section B, Part II.
Code C. Gross non-farm income. If you
are an individual partner, use this amount to
figure net earnings from self-employment
under the nonfarm optional method on
Schedule SE (Form 1040), Section B, Part
II.

Box 15. Credits
If you have credits that are passive activity
credits to you, you must complete Form
8582-CR (or Form 8810 for corporations) in
addition to the credit forms identified below.
See Passive Activity Limitations on page 3
and the Instructions for Form 8582-CR (or
Form 8810) for more information.
In general, partners whose only

TIP source for credits listed on Form
3800 are from pass-through entities
are not required to complete the source
credit form or attach it to Form 3800.
Instead, you can report this credit directly on
Form 3800. However, there are two
exceptions. When applicable, all partners
must complete and attach the following
credit forms to Form 3800.
• Form 3468, Investment Credit (line 1a of
Form 3800).
• Form 8864, Biodiesel and Renewable
Diesel Fuels Credit (line 1m of Form 3800).
Codes A and B. Low-income housing
credit. The partnership will report your
share of the low-income housing credit
using code A if section 42(j)(5) applies. If
section 42(j)(5) does not apply, your share
of the credit will be reported using code B.
Any allowable low-income housing credit
(reported as code A or code B) is entered on
line 4 of Form 8586, Low-Income Housing
Credit, or line 1d of Form 3800 (see TIP
above).
Keep a separate record of the amount of
low-income housing credit from each of
these sources so that you can correctly
figure any recapture of low-income housing
credit that may result from the disposition of
all or part of your partnership interest. For
more information on recapture, see the
instructions for Form 8611, Recapture of
Low-Income Housing Credit.
Code C. Qualified rehabilitation
expenditures (rental real estate). The
partnership will report your share of the
qualified rehabilitation expenditures and
other information you need to complete
Form 3468 related to rental real estate
activities using code C. Your share of

-10-

qualified rehabilitation expenditures from
property not related to rental real estate
activities will be reported in box 20 using
code D. See Form 3468 for details. If the
partnership is reporting expenditures from
more than one activity, the attached
statement will separately identify the amount
of expenditures from each activity.
Combine the expenditures (for Form
3468 reporting) from box 15, code C and
box 20, code D. The expenditures related to
rental real estate activities (box 15, code C)
are reported on Schedule K-1 separately
from other qualified rehabilitation
expenditures (box 20, code D) because they
are subject to different passive activity
limitation rules. See the Instructions for
Form 8582-CR for details.
Code D. Other rental real estate credits.
The partnership will identify the type of
credit and any other information you need to
figure these credits from rental real estate
activities (other than the low-income housing
credit and qualified rehabilitation
expenditures). These credits may be limited
by the passive activity limitations. If the
credits are from more than one activity, the
partnership will identify the amount of credits
from each activity on an attached statement.
See Passive Activity Limitations on page 3
and Form 8582-CR for details.
Code E. Other rental credits. The
partnership will identify the type of credit and
any other information you need to figure
these rental credits. These credits may be
limited by the passive activity limitations. If
the credits are from more than one activity,
the partnership will identify the amount of
credits from each activity on an attached
statement. See Passive Activity Limitations
on page 3 and Form 8582-CR for details.
Code F. Undistributed capital gains
credit. Code F represents taxes paid on
undistributed capital gains by a regulated
investment company or real estate
investment trust. Form 1040 filers enter your
share of these taxes on line 68 of Form
1040, check box “a” for Form 2439, and
enter the words “Form 1065.”
Code G. Alcohol and cellulosic biofuel
fuels credit. If this credit includes the small
ethanol producer credit, the partnership will
provide additional information on an
attached statement. If no statement is
attached, report this amount on line 13of
Form 6478, Alcohol and Cellulosic Biofuel
Fuels Credit. If a statement is attached, see
the instructions for Form 6478, line 13.
Code H. Work opportunity credit. Report
this amount on line 3 of Form 5884, Work
Opportunity Credit.
Code I. Welfare-to-work credit. Report
this amount on line 3 of Form 8861,
Welfare-to-Work Credit, or line 1b of Form
3800 (see TIP above).
Code J. Disabled access credit. Report
this amount on line 7 of Form 8826,
Disabled Access Credit, or line 1e of Form
3800 (see TIP above).
Code K. Empowerment zone and renewal
community employment credit. Report
this amount on line 3 of Form 8844,
Empowerment Zone and Renewal
Community Employment Credit.
Code L. Credit for increasing research
activities. Report this amount on line 1c of
Form 3800.

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Code M. New markets credit. Report this
amount on line 2 of Form 8874, New
Markets Credit, or line 1i of Form 3800 (see
TIP above).
Code N. Credit for employer social
security and Medicare taxes. Report this
amount on line 5 of Form 8846, Credit for
Employer Social Security and Medicare
Taxes Paid on Certain Employee Tips.
Code O. Backup withholding. Credit for
backup withholding on dividends, interest
income, and other types of income. Include
the amount the partnership reports to you in
the total you enter on Form 1040, line 62.
Code P. Other credits. On an attachment
to Schedule K-1, the partnership will identify
the type of credit and any other information
you need to figure credits other than those
reported with codes A through O. Most
credits identified by code P will be reported
on Form 3800 (see TIP above).
Credits that may be reported with code P
include the following:
• Nonconventional source fuel credit (Form
8907).
• Unused investment credit from
cooperatives (Form 3468, line 5).
• Renewable electricity, refined coal, and
Indian coal production credit. The
partnership will provide a statement showing
separately the amount of credit from section
A and section B of Form 8835.
• Orphan drug credit (Form 8820).
• Credit for contributions to selected
community development corporations (Form
8847).
• Credit for small employer pension plan
startup costs (Form 8881).
• Credit for employer-provided childcare
facilities and services (Form 8882).
• Biodiesel and renewable diesel fuels
credit. If this credit includes the small
agri-biodiesel producer credit, the
partnership will provide additional
information on an attached statement. If no
statement is attached, report this amount on
line 9 of Form 8864. If a statement is
attached, see the instructions for Form
8864, line 9.
• Low sulfur diesel fuel production credit
(Form 8896).
• General credits from an electing large
partnership. Report these credits on Form
3800, line 1w.
• Distilled spirits credit (Form 8906).
• Energy efficient home credit (Form 8908).
• Alternative motor vehicle credit (Form
8910).
• Alternative fuel vehicle refueling property
credit (Form 8911).
• Clean renewable energy bond credit.
Report this amount on Form 8912.
• Gulf tax credit bond credit. Report this
amount on Form 8912.
• Mine rescue team training credit (Form
8923).
• Agricultural chemicals security credit
(Form 8931).
• Credit for employer differential wage
payments (Form 8932).

Box 16. Foreign
Transactions
Codes A through N. Use the information
reported as codes A through N, code Q, and
attached schedules to figure your foreign tax

credit. For more information, see Form
1116, Foreign Tax Credit, and its
instructions; Form 1118, Foreign Tax
Credit — Corporations, and its instructions;
and Pub. 514, Foreign Tax Credit for
Individuals.
Codes O and P. Extraterritorial income
exclusion.
1. Partnership did not claim the
exclusion. If the partnership reports your
distributive share of foreign trading gross
receipts (code O) and the extraterritorial
income exclusion (code P), the partnership
was not entitled to claim the exclusion
because it did not meet the foreign
economic process requirements. You may
still qualify for your distributive share of this
exclusion if the partnership’s foreign trading
gross receipts for the tax year were $5
million or less. To qualify for this exclusion,
your foreign trading gross receipts from all
sources for the tax year also must have
been $5 million or less. If you qualify for the
exclusion, report the exclusion amount in
accordance with the instructions for Income
(Loss) on page 6 for box 1, 2, or 3,
whichever applies. See Form 8873,
Extraterritorial Income Exclusion, for more
information.
2. Partnership claimed the exclusion. If
the partnership reports your distributive
share of foreign trading gross receipts but
not the amount of the extraterritorial income
exclusion, the partnership met the foreign
economic process requirements and
claimed the exclusion when figuring your
distributive share of partnership income.
You also may need to know the amount of
your distributive share of foreign trading
gross receipts from this partnership to
determine if you met the $5 million or less
exception discussed above for purposes of
qualifying for an extraterritorial income
exclusion from other sources.
Note. Upon request, the partnership should
furnish you a copy of the partnership’s Form
8873 if there is a reduction for international
boycott operations, illegal bribes, kickbacks,
etc.
Code Q. Other foreign transactions. On
an attachment to Schedule K-1, the
partnership will report any other information
on foreign transactions that you may need
using code Q.

Code C. This amount is your share of the
partnership’s depletion adjustment. If you
are an individual partner, report this amount
on line 9 of Form 6251.
Codes D and E. Oil, gas, & geothermal
properties — gross income and
deductions. The amounts reported on
these lines include only the gross income
(code D) from, and deductions (code E)
allocable to, oil, gas, and geothermal
properties that are included in box 1 of
Schedule K-1. The partnership should have
attached a schedule that shows any income
from or deductions allocable to such
properties that are included in boxes 2
through 13, 18, and 20 of Schedule K-1.
Use the amounts reported and the amounts
on the attached schedule to help you figure
the net amount to enter on line 25 of Form
6251.
Code F. Other AMT items. Enter the
information on the statement attached by
the partnership on the applicable lines of
Form 6251, Form 4626, or Schedule I (Form
1041).

Box 18. Tax-Exempt
Income and Nondeductible
Expenses
Code A. Tax-exempt interest income.
You must report on your return, as an item
of information, your share of the tax-exempt
interest received or accrued by the
partnership during the year. Individual
partners must include this amount on Form
1040, line 8b. Increase the adjusted basis of
your interest in the partnership by this
amount.
Code B. Other tax-exempt income.
Increase the adjusted basis of your interest
in the partnership by the amount shown, but
do not include it in income on your tax
return.
Code C. Nondeductible expenses. The
nondeductible expenses paid or incurred by
the partnership are not deductible on your
tax return. Decrease the adjusted basis of
your interest in the partnership by this
amount.

Box 19. Distributions
Box 17. Alternative
Minimum Tax (AMT) Items
Use the information reported in box 17 (as
well as your adjustments and tax preference
items from other sources) to prepare your
Form 6251, Alternative Minimum Tax —
Individuals; Form 4626, Alternative Minimum
Tax — Corporations; or Schedule I (Form
1041), Alternative Minimum Tax (AMT).
Note. A partner that is a corporation
subject to alternative minimum tax must
notify the partnership of its status.
Code A. This amount is your share of the
partnership’s post-1986 depreciation
adjustment. If you are an individual partner,
report this amount on line 17 of Form 6251.
Code B. This amount is your share of the
partnership’s adjusted gain or loss. If you
are an individual partner, report this amount
on line 16 of Form 6251.

Partner’s Instructions for Schedule K-1 (Form 1065)

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Code A. Cash and marketable securities.
Code A shows the distributions the
partnership made to you of cash and certain
marketable securities. The marketable
securities are included at their fair market
value (FMV) on the date of distribution
(minus your share of the partnership’s gain
on the securities distributed to you). If the
amount shown as code A exceeds the
adjusted basis of your partnership interest
immediately before the distribution, the
excess is treated as gain from the sale or
exchange of your partnership interest.
Generally, this gain is treated as gain from
the sale of a capital asset and should be
reported on the Schedule D for your return.
However, if you receive cash or property in
exchange for any part of a partnership
interest, the amount of the distribution
attributable to your share of the
partnership’s unrealized receivable or
inventory items results in ordinary income

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(see Regulations section 1.751-1(a) and
Sale or Exchange of Partnership Interest on
page 1). For details, see Pub. 541.
The partnership will separately identify
both of the following.
• The FMV of the marketable securities
when distributed (minus your share of the
gain on the securities distributed to you).
• The partnership’s adjusted basis of those
securities immediately before the
distribution.
Decrease the adjusted basis of your
interest in the partnership (but not below
zero) by the amount of cash distributed to
you and the partnership’s adjusted basis of
the distributed securities. Advances or
drawings of money or property against your
distributive share are treated as current
distributions made on the last day of the
partnership’s tax year.
Your basis in the distributed marketable
securities (other than in liquidation of your
interest) is the smaller of:
• The partnership’s adjusted basis in the
securities immediately before the distribution
increased by any gain recognized on the
distribution of the securities or
• The adjusted basis of your partnership
interest reduced by any cash distributed in
the same transaction and increased by any
gain recognized on the distribution of the
securities.
If you received the securities in
liquidation of your partnership interest, your
basis in the marketable securities is equal to
the adjusted basis of your partnership
interest reduced by any cash distributed in
the same transaction and increased by any
gain recognized on the distribution of the
securities.
Code B. Other property. Code B shows
the partnership’s adjusted basis of property
other than money immediately before the
property was distributed to you. In addition,
the partnership should report the adjusted
basis and FMV of each property distributed.
Decrease the adjusted basis of your interest
in the partnership by the amount of your
basis in the distributed property. Your basis
in the distributed property (other than in
liquidation of your interest) is the smaller of:
• The partnership’s adjusted basis
immediately before the distribution or
• The adjusted basis of your partnership
interest reduced by any cash distributed in
the same transaction.
If you received the property in liquidation
of your interest, your basis in the distributed
property is equal to the adjusted basis of
your partnership interest reduced by any
cash distributed in the same transaction.
If you receive cash or property in
exchange for any part of a partnership
interest, the amount of the distribution
attributable to your share of the
partnership’s unrealized receivable or
inventory items results in ordinary income
(see Regulations section 1.751-1(a) and
Sale or Exchange of Partnership Interest on
page 1).
Code C. Section 737 property. If a
partner contributed section 704(c) built-in
gain property within the last 7 years and the
partnership made a distribution of property
to that partner other than the previously
contributed built-in gain property, the partner
may be required to recognize gain. The gain

recognized will equal the lesser of the
excess distribution or the distributee
partner’s net precontribution gain.
When this occurs, the partnership will
use code C to report to the partner the
amount of the distribution. In an attachment
to Schedule K-1, the partnership will also
report the distribution that requires the
recognition of pre-contribution gain under
section 737, the fair market value (FMV) of
the distributed property (other than money),
and the amount of the partner’s net
precontribution gain.
Using the applicable information from
the attachment, complete the worksheet
below to compute your section 737 gain.

are subject to different passive activity
limitation rules. See the Instructions for
Form 8582-CR for details.
Code E. Basis of energy property. If the
partnership provides an attached statement
for code E, report the information shown on
the attached statement on Form 3468, lines
2a-2d, 2f, or 2g, as applicable.
Codes F and G. Recapture of low-income
housing credit. A section 42(j)(5)
partnership will report recapture of a
low-income housing credit with code F. All
other partnerships will report recapture of a
low-income housing credit with code G.
Keep a separate record of recapture from
each of these sources so that you will be
able to correctly figure any recapture of
low-income housing credit that may result
Computation of Section 737 Gain
from the disposition of all or part of your
1. Enter the FVM of the distributed
property . . . . . . . . . . . . . . . . . . $_______ partnership interest. For more information,
see Form 8611.
2. Enter your adjusted basis in the
Code H. Recapture of investment credit.
partnership at the time of the
distribution . . . . . . . . . . . . . . . . _______ A partnership will provide any information
3. Subtract line 2
you need to figure your recapture tax on
from line 1 . . . . . . . . . . . . . . . . _______ Form 4255, Recapture of Investment Credit.
4. Enter your net
See the Form 3468 on which you took the
precontribution gain . . . . . . . . . . _______ original credit for other information you need
to complete Form 4255.
5. Enter the smaller of the amount on
line 3 or line 4 . . . . . . . . . . . . . . _______
You may also need Form 4255 if you
disposed of more than one-third of your
interest in a partnership.
The type of gain (section 1231 gain,
Code I. Recapture of other credits. On
capital gain) generated is determined by the
an attachment to Schedule K-1, the
type of gain you would have recognized if
partnership will report any information you
you sold the property rather than
need to figure the recapture of the new
contributing it to the partnership.
markets credit (see Form 8874); qualified
Accordingly, report the amount from line 5
electric vehicle credit (see Form 8834);
above on Form 4797 or Schedule D of your
Indian employment credit (see section
tax return.
45A(d)); any credit for employer-provided
childcare facilities and services (see Form
8882); alternative motor vehicle credit (see
section 30B(h)(8)); or alternative fuel vehicle
Box 20. Other Information
refueling property credit (see section
Code A. Investment income. Report this
30C(e)(5)).
amount on line 4a of Form 4952.
Code J. Look-back interest — completed
Code B. Investment expenses. Report
long-term contracts. The partnership will
this amount on line 5 of Form 4952.
report any information you need to figure the
Code C. Fuel tax credit information. The
interest due or to be refunded under the
partnership will report the number of gallons
look-back method of section 460(b)(2) on
of each fuel sold or used during the tax year
certain long-term contracts. Use Form 8697,
for a nontaxable use qualifying for the credit
Interest Computation Under the Look-Back
for taxes paid on fuels, type of use, and the
Method for Completed Long-Term
applicable credit per gallon. Use this
Contracts, to report any such interest.
information to complete Form 4136, Credit
Code K. Look-back interest — income
for Federal Tax Paid on Fuels.
forecast method. The partnership will
Code D. Qualified rehabilitation
report any information you need to figure the
expenditures (other than rental real
interest due or to be refunded under the
estate). The partnership will report your
look-back method of section 167(g)(2) for
share of the qualified rehabilitation
certain property placed in service after
expenditures and other information you
September 13, 1995, and depreciated under
need to complete Form 3468 for property
the income forecast method. Use Form
not related to rental real estate activities in
8866, Interest Computation Under the
box 20 using code D. Your share of qualified Look-Back Method for Property Depreciated
rehabilitation expenditures related to rental
Under the Income Forecast Method, to
real estate activities is reported in box 15
report any such interest.
using code C. See Form 3468 for details. If
Code L. Dispositions of property with
the partnership is reporting expenditures
section 179 deductions. The partnership
from more than one activity, the attached
will report your distributive share of gain or
statement will separately identify the amount loss on the sale, exchange, or other
of expenditures from each activity.
disposition of property for which a section
Combine the expenditures (for Form
179 expense deduction was passed through
3468 reporting) from box 15, code C and
to partners with code L. If the partnership
box 20, code D. The expenditures related to
passed through a section 179 expense
rental real estate activities (box 15, code C)
deduction to its partners for the property,
are reported on Schedule K-1 separately
you must report the gain or loss and any
from other qualified rehabilitation
recapture of the section 179 expense
expenditures (box 20, code D) because they
deduction for the property on your income

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tax return (see the Instructions for Form
4797 for details). The partnership will
provide all the following information.
1. Description of the property.
2. Date the property was acquired and
placed in service.
3. Date of the sale or other disposition of
the property.
4. Your distributive share of the gross
sales price or amount realized.
5. Your distributive share of the cost or
other basis plus the expense of sale.
6. Your distributive share of the
depreciation allowed or allowable.
7. Your distributive share of the section
179 expense deduction (if any) passed
through for the property and the
partnership’s tax year(s) in which the
amount was passed through. To figure the
amount of depreciation allowed or allowable
for Form 4797, line 22, add to the amount
from item 6 above the amount of your
distributive share of the section 179
expense deduction, reduced by any unused
carryover of the deduction for this property.
This amount may be different than the
amount of section 179 expense you
deducted for the property if your interest in
the partnership has changed.
8. If the disposition is due to a casualty
or theft, a statement providing the
information you need to complete Form
4684.
9. If the sale was an installment sale
made during the partnership’s tax year, any
information you need to complete Form
6252, Installment Sale Income. The
partnership also must separately report your
share of all payments received for the
property in the following tax years. See the
instructions for Form 6252 for details.
Code M. Recapture of section 179
deduction. The partnership will report your
distributive share of any recapture of section
179 expense deduction if business use of
any property for which the section 179
expense deduction was passed through to
partners dropped to 50 percent or less. If
business use of the property dropped to 50
percent or less, the partnership must
provide all the following information.
1. Your distributive share of the
depreciation allowed or allowable (not
including the section 179 expense
deduction).
2. Your distributive share of the section
179 expense deduction (if any) passed
through for the property and the
partnership’s tax year(s) in which the
amount was passed through. Reduce this
amount by the portion, if any, of your
unused (carryover) section 179 expense
deduction for this property.
Code N. Interest expense for corporate
partners. The partnership will report each
corporate partner’s distributive share of the
partnership’s interest expense. This amount
is reported elsewhere on Schedule K-1 and
the total amount is reported here for
information only. Your distributive share of
interest income is reported in box 5 and your
share of the partnership’s liabilities is
reported in Part II, Item K. A corporate
partner’s distributive share of interest
income, interest expense, and partnership
liabilities are treated as income, expense,
and liabilities of the corporation for purposes

of the limitation on the deduction for interest
under section 163(j).
Code O. Section 453(l)(3) information.
The partnership will report any information
you need to figure the interest due under
section 453(l)(3) with respect to the
disposition of certain timeshares and
residential lots on the installment method. If
you are an individual, report the interest on
Form 1040, line 61. Enter “453(l)(3)” and the
amount of the interest on the dotted line to
the left of line 61.
Code P. Section 453A(c) information.
The partnership will report any information
you need to figure the interest due under
section 453A(c) with respect to certain
installment sales. If you are an individual,
report the interest on Form 1040, line 61.
Enter “453A(c)” and the amount of the
interest on the dotted line to the left of line
61. See the instructions for Form 6252 for
more information. Also see section 453A(c)
for details on making the computation.
Code Q. Section 1260(b) information.
The partnership will report any information
you need to figure the interest due under
section 1260(b). If the partnership had gain
from certain constructive ownership
transactions, your tax liability must be
increased by the interest charge on any
deferral of gain recognition under section
1260(b). Report the interest on Form 1040,
line 61. Enter “1260(b)” and the amount of
the interest on the dotted line to the left of
line 61. See section 1260(b) for details,
including how to figure the interest.
Code R. Interest allocable to production
expenditures. The partnership will report
any information you need relating to interest
expense that you are required to capitalize
under section 263A for production
expenditures. See Regulations sections
1.263A-8 through 1.263A-15 for more
information.
Code S. CCF nonqualified withdrawals.
The partnership will report your share of
nonqualified withdrawals by the partnership
from a capital construction fund (CCF).
These withdrawals are taxed separately
from your other gross income at the highest
marginal ordinary income or capital gains
tax rate. Attach a statement to your federal
income tax return to show your computation
of both the tax and interest for a
nonqualified withdrawal. Include the tax and
interest on Form 1040, line 61. To the left of
line 61, enter the amount of tax and interest
and “CCF.”
Code T. Information needed to figure
depletion — oil and gas. This is your
share of gross income from the property,
share of production for the tax year, etc.,
needed to figure your depletion deduction
for oil and gas wells. The partnership should
also allocate to you a share of the adjusted
basis of each partnership oil or gas property.
See Pub. 535 for how to figure your
depletion deduction.
Code U. Amortization of reforestation
costs. The partnership will provide a
statement identifying your share of the
amortizable basis of reforestation
expenditures paid or incurred before
October 23, 2004. The partnership will
separately report your share of the
amortizable basis for reforestation
expenditures for 2001 through 2004. Your

Partner’s Instructions for Schedule K-1 (Form 1065)

-13-

amortizable basis of reforestation
expenditures for each tax year from all
properties is limited to $10,000 ($5,000 if
married filing separately), including your
distributive share of the partnership’s
expenditures and any qualified reforestation
expenditures you separately paid or
incurred. To figure your allowable
amortization, see section 194 and Pub. 535.
Follow the Instructions for Form 8582 to
report a deduction allocable to a passive
activity. If you materially participated in the
reforestation activity, report the deduction on
line 28, column (h), of Schedule E (Form
1040).
Code V. Unrelated business taxable
income. The partnership will report any
information you need to figure unrelated
business taxable income under section
512(a)(1) (but excluding any modifications
required by paragraphs (8) through (15) of
section 512(b)) for a partner that is a
tax-exempt organization.
Note. A partner is required to notify the
partnership of its tax-exempt status.
Code W. Precontribution gain (loss). If
the partnership distributed any contributed
property during the partnership’s tax year to
any partner other than the contributing
partner, and the date of the distribution was
within 7 years of the date the property was
contributed to the partnership, the
partnership will use code W to report the
contributing partner’s built-in gain or loss on
the contributing partner’s Schedule K-1.
Based on how the partnership identifies the
character of the gain, report this amount on
Form 4797 or Schedule D of the applicable
tax return.
Code X. Other information. The
partnership will report:
1. Any information a publicly traded
partnership needs to determine whether it
meets the 90% qualifying income test of
section 7704(c)(2).
Note. A partner is required to notify the
partnership of its status as a publicly traded
partnership.
2. Any information you need to complete
a disclosure statement for reportable
transactions in which the partnership
participates. If the partnership participates in
a transaction that must be disclosed on
Form 8886, Reportable Transaction
Disclosure Statement, both you and the
partnership may be required to file Form
8886 for the transaction. The determination
of whether you are required to disclose a
transaction of the partnership is based on
the category(s) under which the transaction
qualifies for disclosure and is determined by
the partnership. You may have to pay a
penalty if you are required to file Form 8886
and fail to do so. See the instructions for
Form 8886 for details.
3. Basis in qualifying advanced coal
project property. The partnership will provide
an attached statement that shows your
distributive share of the partnership’s (a)
basis in certified and qualified investment in
integrated gasification combined cycle
property placed in service during the tax
year, and (b) basis in qualified investment in
other advanced coal project property placed
in service during the tax year. Report these
amounts on lines 3a and 3b of Form 3468,
respectively.

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4. Basis in qualifying gasification
property. Report this amount on Form 3468,
line 4.
5. Interest and additional tax on
compensation deferred under a section
409A nonqualified deferred compensation
plan that does not meet the requirements of
section 409A. See section 409A(a)(1)(B) to
figure the interest and additional tax on this
income. Report this interest and tax on line
61 of Form 1040. This income is included in
the amount in box 4, Guaranteed Payments.
6. Inversion gain. The partnership will
provide a statement showing the amounts of
each type of income or gain that is included
in inversion gain. The partnership has
included inversion gain in income elsewhere

on Schedule K-1. Inversion gain is also
reported under code X because your taxable
income and alternative minimum taxable
income cannot be less than the inversion
gain. Also, your inversion gain (a) is not
taken into account in figuring the amount of
net operating loss (NOL) for the tax year or
the amount of NOL that can be carried over
to each tax year, (b) may limit the amount of
your credits, and (c) is treated as income
from sources within the U.S. for the foreign
tax credit. See section 7874 for details.
7. Conservation reserve program
payments. Individuals who received social
security retirement or disability benefits, and
are partners in farm partnerships that

-14-

receive conservation reserve program
payments, do not pay self-employment tax
on their portion of the payments. The
partnership will report your portion of the
conservation reserve program payments in
box 20 using code X. See Schedule SE
(Form 1040) for information on excluding the
payment from your calculation of
self-employment tax.
8. Any other information you may need
to file your return not shown elsewhere on
Schedule K-1.
The partnership should give you a
description and the amount of your share for
each of these items.

Partner’s Instructions for Schedule K-1 (Form 1065)