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Instructions for Form 1065
Department of the Treasury
Internal Revenue Service
U.S. Return of Partnership Income
What’s New
Section references are to the Internal
Revenue Code unless otherwise noted.
Contents
What’s New . . . . . . . . . . . . . . . .
Contacting Your Taxpayer
Advocate . . . . . . . . . . . . . . . .
How To Get Forms and
Publications . . . . . . . . . . . . . .
General Instructions . . . . . . . . .
Purpose of Form . . . . . . . . . . .
Definitions . . . . . . . . . . . . . . . .
Who Must File . . . . . . . . . . . . .
Termination of the Partnership . .
Electronic Filing . . . . . . . . . . . .
When To File . . . . . . . . . . . . .
Who Must Sign . . . . . . . . . . . .
Where To File . . . . . . . . . . . . .
Penalties . . . . . . . . . . . . . . . .
Accounting Methods . . . . . . . . .
Accounting Periods . . . . . . . . .
Rounding Off to Whole Dollars .
Recordkeeping . . . . . . . . . . . .
Amended Return . . . . . . . . . . .
Other Forms, Returns, And
Statements That May Be
Required . . . . . . . . . . . . . . . .
Assembling the Return . . . . . . .
Elections Made by the
Partnership . . . . . . . . . . . . . .
Elections Made by Each Partner
Partner’s Dealings With
Partnership . . . . . . . . . . . . . .
Contributions to the Partnership .
Dispositions of Contributed
Property . . . . . . . . . . . . . . . .
Recognition of Precontribution
Gain on Certain Partnership
Distributions . . . . . . . . . . . . .
Unrealized Receivables and
Inventory Items . . . . . . . . . . .
Passive Activity Limitations . . . .
Extraterritorial Income Exclusion
Specific Instructions . . . . . . . . .
Trade or Business Income and
Deductions . . . . . . . . . . . . . .
Schedule A. Cost of Goods Sold
Schedule B. Other Information . .
Designation of Tax Matters
Partner . . . . . . . . . . . . . . . . .
Schedules K and K-1. Partners’
Distributive Share Items . . . . .
Analysis of Net Income (Loss) . .
Schedule L. Balance Sheets . . .
Schedule M-1. Reconciliation of
Income (Loss) per Books With
Income (Loss) per Return . . . .
Schedule M-2. Analysis of
Partners’ Capital Accounts . . .
Paperwork Reduction Act Notice . .
Codes for Principal Business
Activity and Principal Product or
Service . . . . . . . . . . . . . . . . . .
Index . . . . . . . . . . . . . . . . . . . . .
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1. Special rule for 2010 start-up costs.
For tax years beginning in 2010, a
partnership can elect to deduct up to
$10,000 of start-up costs. See section
195(b)(3). Also see Business start-up and
organizational costs on page 16.
2. The following credits are new for
2010. For details, see the various credit
forms and instructions.
• New Hire Retention Credit (Form
5884-B).
• Credit for Small Employer Health
Insurance Premiums (Form 8941).
• Qualifying therapeutic discovery
project credit (Form 8942).
For the latest information, see
www.irs.gov/formspubs.
Photographs of Missing
Children
The Internal Revenue Service is a proud
partner with the National Center for Missing
and Exploited Children. Photographs of
missing children selected by the Center may
appear in instructions on pages that would
otherwise be blank. You can help bring
these children home by looking at the
photographs and calling 1-800-THE-LOST
(1-800-843-5678) if you recognize a child.
Contacting Your Taxpayer
Advocate
The Taxpayer Advocate Service (TAS) is an
independent organization within the IRS
whose employees assist taxpayers who are
experiencing economic harm, who are
seeking help in resolving tax problems that
have not been resolved through normal
channels, or who believe that an IRS system
or procedure is not working as it should. The
service is free, confidential, tailored to meet
your needs, and is available for businesses
as well as individuals.
The partnership can contact the TAS by
calling the TAS toll-free line at
1-877-777-4778 or TTY/TDD
1-800-829-4059 to see if it is eligible for
assistance. The partnership can also call or
write its local taxpayer advocate, whose
phone number and address are listed in the
local telephone directory and in Pub. 1546,
Taxpayer Advocate Service — Your Voice at
the IRS. The partnership can file Form 911,
Request for Taxpayer Advocate Service
Assistance (and Application for Taxpayer
Assistance Order), or ask an IRS employee
to complete it on its behalf.
For more information, go to
http://www.irs.gov/advocate/index.html.
Cat. No. 11392V
How To Get Forms and
Publications
Internet. You can access the IRS website
24 hours a day, 7 days a week, at IRS.gov
to:
• Download forms, instructions, and
publications;
• Order IRS products online;
• Research your tax questions online;
• Search publications online by topic or
keyword;
• View Internal Revenue Bulletins (IRBs)
published in the last few years; and
• Sign up to receive local and national tax
news by email.
DVD of tax products. You can order Pub.
1796, IRS Tax Products DVD, and obtain:
• Current-year forms, instructions, and
publications;
• Prior-year forms, instructions, and
publications;
• Tax Map: an electronic research tool and
finding aid;
• Tax Law frequently asked questions;
• Tax Topics from the IRS telephone
response system;
• Internal Revenue Code — Title 26;
• Fill-in, print, and save features for most
tax forms;
• Internal Revenue Bulletins; and
• Toll-free and email technical support.
The DVD is released twice during the
year. The first release will ship the beginning
of January 2011. The final release will ship
the beginning of March 2011.
Buy the DVD from National Technical
Information Service (NTIS) at
http://www.irs.gov/formspubs/article/
0,,id=108660,00.html for $30 (no handling
fee) or call 1-877-233-6767 toll free to buy
the DVD for $30 (plus a $6 handling fee).
By phone and in person. You can order
forms and publications by calling
1-800-TAX-FORM (1-800-829-3676). You
can also get most forms and publications at
your local IRS office.
General Instructions
Purpose of Form
Form 1065 is an information return used to
report the income, gains, losses,
deductions, credits, etc., from the operation
of a partnership. A partnership does not pay
tax on its income but “passes through” any
profits or losses to its partners. Partners
must include partnership items on their tax
returns.
Definitions
Partnership
A partnership is the relationship between
two or more persons who join to carry on a
trade or business, with each person
contributing money, property, labor, or skill
and each expecting to share in the profits
and losses of the business whether or not a
formal partnership agreement is made.
The term “partnership” includes a limited
partnership, syndicate, group, pool, joint
venture, or other unincorporated
organization, through or by which any
business, financial operation, or venture is
carried on, that is not, within the meaning of
the regulations under section 7701, a
corporation, trust, estate, or sole
proprietorship.
A joint undertaking merely to share
expenses is not a partnership. Mere
co-ownership of property that is maintained
and leased or rented is not a partnership.
However, if the co-owners provide services
to the tenants, a partnership exists.
Husband-wife business. Generally, if you
and your spouse jointly own and operate an
unincorporated business and share in the
profits and losses, you are partners in a
partnership and you must file Form 1065.
Exception — Qualified joint venture. If
you and your spouse materially participate
as the only members of a jointly owned and
operated business, and you file a joint return
for the tax year, you can make an election to
be treated as a qualified joint venture
instead of a partnership. By making the
election, you will not be required to file Form
1065 for any year the election is in effect
and will instead report the income and
deductions directly on your joint return.
A qualified joint venture conducts a trade
or business where: the only members of the
joint venture are a husband and wife who
file a joint return; both spouses materially
participate in the trade or business, as mere
joint ownership of property is not enough;
both spouses elect not be treated as a
partnership; and the business is co-owned
by both spouses and is not held in the name
of a state law entity such as a partnership or
limited liability company.
Note. Mere joint ownership of property that
is not a trade or business does not qualify
for the election.
To make this election, you must divide all
items of income, gain, loss, deduction, and
credit between you and your spouse in
accordance with your respective interests in
the venture. Each of you must file a
separate Schedule C, C-EZ, or F. On each
line of your separate Schedule C, C-EZ, or
F, you must enter your share of the
applicable income, deduction, or loss. Each
of you also must file a separate Schedule
SE to pay self-employment tax.
If you and your spouse make the election
for your rental real estate business, you
each must report your share of income and
deductions on Schedule C or C-EZ instead
of Schedule E. Although rental real estate
income generally is not included in net
earnings from self-employment, you and
your spouse each must take into account
your share of the income and deductions
from the rental real estate business in
figuring your net earnings from
self-employment on Schedule SE.
To make the qualified joint venture
election for 2010, jointly file the 2010 Form
1040, with the required schedules. This
generally does not increase the total tax on
the return, but it does give each spouse
credit for social security earnings on which
retirement benefits are based, provided
neither spouse exceeds the social security
tax limitation.
Once made, the election cannot be
revoked without IRS consent. If you and
your spouse filed a Form 1065 for the year
prior to the election, you do not need to
amend that return or file a final Form 1065
for the year the election takes effect.
However, the partnership terminates at the
end of the tax year immediately preceding
the year the election takes effect.
For more information on qualified joint
ventures, go to IRS.gov. Enter ‘‘QJV
election’’ in the search box and select
‘‘Benefits of Qualified Joint Ventures for
Family Businesses.’’
Foreign Partnership
A foreign partnership is a partnership that is
not created or organized in the United
States or under the law of the United States
or of any state. See Notice 2010-41 for
information on when a domestic partnership
will be classified as foreign.
General Partner
A general partner is a partner who is
personally liable for partnership debts.
General Partnership
A general partnership is composed only of
general partners.
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
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).
Limited Partnership
A limited partnership is formed under a state
limited partnership law and composed of at
least one general partner and one or more
limited partners.
Limited Liability Partnership
A limited liability partnership (LLP) is formed
under a state limited liability partnership law.
Generally, a partner in an LLP is not
personally liable for the debts of the LLP or
any other partner, nor is a partner liable for
the acts or omissions of any other partner,
solely by reason of being a partner.
partnership, none of the members of an LLC
are personally liable for its debts. An LLC
may be classified for federal income tax
purposes as a partnership, a corporation, or
an entity disregarded as an entity separate
from its owner by applying the rules in
Regulations section 301.7701-3. See Form
8832, Entity Classification Election, for more
details.
Note. A domestic LLC with at least two
members that does not file Form 8832 is
classified as a partnership for federal
income tax purposes.
Nonrecourse Loans
Nonrecourse loans are those liabilities of the
partnership for which no partner bears the
economic risk of loss.
Who Must File
Domestic Partnerships
Except as provided below, every domestic
partnership must file Form 1065, unless it
neither receives income nor incurs any
expenditures treated as deductions or
credits for federal income tax purposes.
Entities formed as LLCs that are
classified as partnerships for federal income
tax purposes must file Form 1065.
A religious or apostolic organization
exempt from income tax under section
501(d) must file Form 1065 to report its
taxable income, which must be allocated to
its members as a dividend, whether
distributed or not. Such an organization
must figure its taxable income on an
attachment to Form 1065 in the same
manner as a corporation. The organization
may use Form 1120, U.S. Corporation
Income Tax Return, for this purpose. Enter
the organization’s taxable income, if any, on
line 6a of Schedule K and each member’s
pro rata share in box 6a of Schedule K-1.
Net operating losses are not deductible by
the members but may be carried back or
forward by the organization under the rules
of section 172. The religious or apostolic
organization also must make its annual
information return available for public
inspection. For this purpose, “annual
information return” includes an exact copy of
Form 1065 and all accompanying schedules
and attachments, except Schedules K-1. For
more details, see Regulations section
301.6104(d)-1.
A qualifying syndicate, pool, joint
venture, or similar organization may elect
under section 761(a) not to be treated as a
partnership for federal income tax purposes
and will not be required to file Form 1065
except for the year of election. For details,
see section 761(a) and Regulations section
1.761-2.
An electing large partnership (as defined
in section 775) must file Form 1065-B, U.S.
Return of Income for Electing Large
Partnerships.
Limited Liability Company
Real estate mortgage investment
conduits (REMICs) must file Form 1066,
U.S. Real Estate Mortgage Investment
Conduit (REMIC) Income Tax Return.
A limited liability company (LLC) is an entity
formed under state law by filing articles of
organization as an LLC. Unlike a
Certain publicly traded partnerships
treated as corporations under section 7704
must file Form 1120.
-2-
Instructions for Form 1065
Foreign Partnerships
Generally, a foreign partnership that has
gross income effectively connected with the
conduct of a trade or business within the
United States or has gross income derived
from sources in the United States must file
Form 1065, even if its principal place of
business is outside the United States or all
its members are foreign persons. A foreign
partnership required to file a return generally
must report all of its foreign and U.S. source
income.
A foreign partnership with U.S. source
income is not required to file Form 1065 if it
qualifies for either of the following two
exceptions.
Exception for foreign partnerships with
U.S. partners. A return is not required if:
• The partnership had no effectively
connected income (ECI) during its tax year,
• The partnership had U.S. source income
of $20,000 or less during its tax year,
• Less than 1% of any partnership item of
income, gain, loss, deduction, or credit was
allocable in the aggregate to direct U.S.
partners at any time during its tax year, and
• The partnership is not a withholding
foreign partnership as defined in
Regulations section 1.1441-5(c)(2)(i).
Exception for foreign partnerships with
no U.S. partners. A return is not required
if:
• The partnership had no ECI during its tax
year,
• The partnership had no U.S. partners at
any time during its tax year,
• All required Forms 1042 and 1042-S were
filed by the partnership or another
withholding agent as required by
Regulations section 1.1461-1(b) and (c),
• The tax liability of each partner for
amounts reportable under Regulations
sections 1.1461-1(b) and (c) has been fully
satisfied by the withholding of tax at the
source, and
• The partnership is not a withholding
foreign partnership as defined in
Regulations section 1.1441-5(c)(2)(i).
A foreign partnership filing Form 1065
solely to make an election (such as an
election to amortize organization expenses)
need only provide its name, address, and
employer identification number (EIN) on
page one of the form and attach a statement
citing “Regulations section
1.6031(a)-1(b)(5)” and identifying the
election being made. A foreign partnership
filing Form 1065 solely to make an election
must obtain an EIN if it does not already
have one.
Termination of the
Partnership
A partnership terminates when:
1. All its operations are discontinued
and no part of any business, financial
operation, or venture is continued by any of
its partners in a partnership or
2. At least 50% of the total interest in
partnership capital and profits is sold or
exchanged within a 12-month period,
including a sale or exchange to another
partner. See Regulations section
1.708-1(b)(1) and (2) for more details.
The partnership’s tax year ends on the
date of termination. For purposes of 1
Instructions for Form 1065
above, the date of termination is the date
the partnership winds up its affairs. For
purposes of 2 above, the date of termination
is the date the partnership interest is sold or
exchanged that, of itself or together with
other sales or exchanges in the preceding
12 months, transfers an interest of 50% or
more in both partnership capital and profits.
Special rules apply in the case of a
merger, consolidation, or division of a
partnership. See Regulations sections
1.708-1(c) and (d) for details.
Electronic Filing
Certain partnerships with more than 100
partners are required to file Form 1065,
Schedules K-1, and related forms and
schedules electronically. Other partnerships
generally have the option to file
electronically.
The option to file electronically does not
apply to certain returns, including:
• Bankruptcy returns,
• Returns with precomputed penalty and
interest, and
• Returns with reasonable cause for failing
to file timely.
For more details on electronic filing
using the Modernized e-file system, see:
• Pub. 3112, IRS e-file Application and
Participation;
• Pub. 4163, Modernized e-File (MeF)
Information for Authorized IRS e-file
Providers for Business Returns;
• Pub. 4164, Modernized e-File (MeF)
Guide for Software Developers And
Transmitters;
• Pub. 4505, Modernized e-File Test
Package for Forms 1065/1065-B;
• Form 8453-PE, U.S. Partnership
Declaration for an IRS e-file Return; and
• Form 8879-PE, IRS e-file Signature
Authorization for Form 1065.
For More Information on Filing
Electronically
• Call the Electronic Filing Section at the
Ogden Service Center at 1-866-255-0654 or
• Visit www.irs.gov/efile.
Electronic Filing Waiver
The IRS may waive the electronic filing rules
if the partnership demonstrates that a
hardship would result if it were required to
file its return electronically. A partnership
interested in requesting a waiver of the
mandatory electronic filing requirement must
file a written request, and request one in the
manner prescribed by the Ogden
Submission Processing Center (OSPC).
All written requests for waivers should be
mailed to: Internal Revenue Service, Ogden
Submission Processing Center, Mail Stop
1057, Ogden, UT 84201, Attn: Form 1065
e-file Waiver Request.
Waiver requests can also be faxed to
1-877-477-0575.
Contact OSPC at 1-866-255-0654 for
questions regarding the waiver procedures
or process.
When To File
Generally, a domestic partnership must file
Form 1065 by the 15th day of the 4th month
following the date its tax year ended as
shown at the top of Form 1065.
-3-
For partnerships that keep their records
and books of account outside the United
States and Puerto Rico, an extension of
time to file and pay is granted to the 15th
day of the 6th month following the close of
the tax year. Do not file Form 7004,
Application for Automatic Extension of Time
To File Certain Business Income Tax,
Information, and Other Returns, if the
partnership is taking this 2-month extension
of time to file and pay. Attach a statement to
the partnership’s tax return stating that the
partnership qualifies for the extension of
time to file and pay. If the partnership is
unable to file its return within the 2-month
period, use Form 7004 to request an
additional 3-month extension.
If the due date falls on a Saturday,
Sunday, or legal holiday, file by the next day
that is not a Saturday, Sunday, or legal
holiday.
Private Delivery Services
Partnerships can use certain private delivery
services designated by the IRS to meet the
“timely mailing as timely filing/paying” rule
for Form 1065. These private delivery
services include only the following.
• DHL Express (DHL): DHL Same Day
Service.
• Federal Express (FedEx): FedEx Priority
Overnight, FedEx Standard Overnight,
FedEx 2Day, FedEx International Priority,
and FedEx International First.
• United Parcel Service (UPS): UPS Next
Day Air, UPS Next Day Air Saver, UPS 2nd
Day Air, UPS 2nd Day Air A.M., UPS
Worldwide Express Plus, and UPS
Worldwide Express.
The private delivery service can tell you
how to get written proof of the mailing date.
Private delivery services cannot
deliver items to P.O. boxes. You
CAUTION
must use the U.S. Postal Service to
mail any item to an IRS P.O. box address.
!
Extension of Time To File
File Form 7004 to request a 5-month
extension of time to file. File Form 7004 by
the regular due date of the partnership
return. Form 7004 can be electronically
filed.This extension runs concurrently with
the 2 month extension granted to
partnerships that keep their record and
books of account outside the United States
and Puerto Rico.
Period Covered
Form 1065 is an information return for
calendar year 2010 and fiscal years that
begin in 2010 and end in 2011. For a fiscal
year or a short tax year, fill in the tax year
space at the top of Form 1065 and each
Schedule K-1.
if:
The 2010 Form 1065 may also be used
1. The partnership has a tax year of less
than 12 months that begins and ends in
2011 and
2. The 2011 Form 1065 is not available
by the time the partnership is required to file
its return.
However, the partnership must show its
2011 tax year on the 2010 Form 1065 and
incorporate any tax law changes that are
effective for tax years beginning after 2010.
Who Must Sign
mechanical device, or computer software
program.
General Partner or LLC Member
Manager
Paid Preparer Authorization
Form 1065 is not considered to be a return
unless it is signed. One general partner or
LLC member manager must sign the return.
When a return is made for a partnership by
a receiver, trustee or assignee, the fiduciary
must sign the return, instead of the general
partner or LLC member manager. Returns
and forms signed by a receiver or trustee in
bankruptcy on behalf of a partnership must
be accompanied by a copy of the order or
instructions of the court authorizing signing
of the return or form.
Paid Preparer’s Information
If a partner or an employee of the
partnership completes Form 1065, the paid
preparer’s space should remain blank. In
addition, anyone who prepares Form 1065
but does not charge the partnership should
not complete this section.
Generally, anyone who is paid to prepare
the partnership return must do the following.
• Sign the return in the space provided for
the preparer’s signature.
• Fill in the other blanks in the “Paid
Preparer Use Only” area of the return. A
paid preparer cannot use a social security
number in the “Paid Preparer Use Only”
box. The paid preparer must use a preparer
tax identification number (PTIN).
• Give the partnership a copy of the return
in addition to the copy to be filed with the
IRS.
Note. A paid preparer may sign original or
amended returns by rubber stamp,
If the partnership wants to allow the paid
preparer to discuss its 2010 Form 1065 with
the IRS, check the “Yes” box in the
signature area of the return. The
authorization applies only to the individual
whose signature appears in the “Paid
Preparer Use Only” section of its return. It
does not apply to the firm, if any, shown in
the section.
If the “Yes” box is checked, the
partnership is authorizing the IRS to call the
paid preparer to answer any questions that
may arise during the processing of its return.
The partnership is also authorizing the paid
preparer to:
• Give the IRS any information that is
missing from its return,
• Call the IRS for information about the
processing of its return, and
• Respond to certain IRS notices about
math errors and return preparation.
The partnership is not authorizing the
paid preparer to bind the partnership to
anything or otherwise represent the
partnership before the IRS. If the
partnership wants to expand the paid
preparer’s authorization, see Pub. 947,
Practice Before the IRS and Power of
Attorney.
The authorization cannot be revoked.
However, the authorization will automatically
end no later than the due date (excluding
extensions) for filing the 2011 return.
Where To File
File Form 1065 at the applicable IRS address listed below. If Schedule M-3 is filed, Form 1065
must be filed at the Ogden Internal Revenue Service Center as shown below.
If the partnership’s principal And the total assets at the
business, office, or agency end of the tax year (Form
is located in:
1065, page 1, item F) are:
Connecticut, Delaware, District
of Columbia, Georgia, Illinois,
Indiana, Kentucky, Maine,
Maryland, Massachusetts,
Michigan, New Hampshire,
New Jersey, New York, North
Carolina, Ohio, Pennsylvania,
Rhode Island, South Carolina,
Tennessee, Vermont, Virginia,
West Virginia, Wisconsin
Use the following address:
Less than $10 million and
Schedule M-3 is not filed
Department of the Treasury
Internal Revenue Service Center
Cincinnati, OH 45999-0011
$10 million or more or
less than $10 million and
Schedule M-3 is filed
Department of the Treasury
Internal Revenue Service Center
Ogden, UT 84201-0011
Alabama, Alaska, Arizona,
Arkansas, California, Colorado,
Florida, Hawaii, Idaho, Iowa,
Kansas, Louisiana, Minnesota,
Mississippi, Missouri, Montana,
Nebraska, Nevada, New
Mexico, North Dakota,
Oklahoma, Oregon, South
Dakota, Texas, Utah,
Washington, Wyoming
Any amount
Department of the Treasury
Internal Revenue Service Center
Ogden, UT 84201-0011
A foreign country or U.S.
possession
Any amount
Internal Revenue Service Center
P.O. Box 409101
Ogden, UT 84409
Penalties
Late Filing of Return
A penalty is assessed against the
partnership if it is required to file a
partnership return and it (a) fails to file the
return by the due date, including extensions
or (b) files a return that fails to show all the
information required, unless such failure is
due to reasonable cause. If the failure is due
to reasonable cause, attach an explanation
to the partnership return. The penalty is
$195 for each month or part of a month (for
a maximum of 12 months) the failure
continues, multiplied by the total number of
persons who were partners in the
partnership during any part of the
partnership’s tax year for which the return is
due.
Failure To Furnish Information
Timely
For each failure to furnish Schedule K-1 to a
partner when due and each failure to include
on Schedule K-1 all the information required
to be shown (or the inclusion of incorrect
information), a $100 penalty may be
imposed with respect to each Schedule K-1
for which a failure occurs. The maximum
penalty is $1.5 million for all such failures
during a calendar year. If the requirement to
report correct information is intentionally
disregarded, each $100 penalty is increased
to $250 or, if greater, 10% of the aggregate
amount of items required to be reported,
and the $1.5 million maximum does not
apply.
Trust Fund Recovery Penalty
This penalty may apply if certain excise,
income, social security, and Medicare taxes
that must be collected or withheld are not
collected or withheld, or these taxes are not
paid. These taxes are generally reported on:
• Form 720, Quarterly Federal Excise Tax
Return;
• Form 941, Employer’s QUARTERLY
Federal Tax Return;
• Form 943, Employer’s Annual Federal
Tax Return for Agricultural Employees; or
• Form 945, Annual Return of Withheld
Federal Income Tax.
The trust fund recovery penalty may be
imposed on all persons who are determined
by the IRS to have been responsible for
collecting, accounting for, and paying over
these taxes, and who acted willfully in not
doing so. The penalty is equal to the unpaid
trust fund tax. See the Instructions for Form
720; Pub. 15, (Circular E), Employer’s Tax
Guide; or Pub. 51, (Circular A), Agricultural
Employer’s Tax Guide, for more details,
including the definition of a responsible
person.
Accounting Methods
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An accounting method is a set of rules used
to determine when and how income and
expenditures are reported. Figure ordinary
business income using the method of
accounting regularly used in keeping the
partnership’s books and records. In all
cases, the method used must clearly reflect
income.
Generally, permissible methods include:
• Cash,
• Accrual, or
Instructions for Form 1065
• Any other method authorized by the
Internal Revenue Code.
Generally, a partnership may not use the
cash method of accounting if (a) it has at
least one corporate partner, average annual
gross receipts of more than $5 million, and it
is not a farming business or (b) it is a tax
shelter (as defined in section 448(d)(3)).
See section 448 for details.
Accrual method. If inventories are
required, an accrual method of accounting
must be used for sales and purchases of
merchandise. However, qualifying taxpayers
and eligible businesses of qualifying small
business taxpayers are excepted from using
an accrual method and may account for
inventoriable items as materials and
supplies that are not incidental. For more
details, see Schedule A. Cost of Goods
Sold, on page 19.
Under the accrual method, an amount is
includible in income when:
1. All the events have occurred that fix
the right to receive the income, which is the
earliest of the date:
• Payment is earned through the
required performance,
• Payment is due to the taxpayer, or
• Payment is received by the taxpayer
and
2. The amount can be determined with
reasonable accuracy.
See Regulations section 1.451-1(a) for
details.
Generally, an accrual basis taxpayer can
deduct accrued expenses in the tax year in
which:
• All events that determine the liability have
occurred,
• The amount of the liability can be figured
with reasonable accuracy, and
• Economic performance takes place with
respect to the expense.
For property and service liabilities, for
example, economic performance occurs as
the property or service is provided. There
are special economic performance rules for
certain items, including recurring expenses.
See section 461(h) and the related
regulations for the rules for determining
when economic performance takes place.
Nonaccrual-experience method. Accrual
method partnerships are not required to
accrue certain amounts to be received from
the performance of services that, on the
basis of their experience, will not be
collected, if:
• The services are in the fields of health,
law, engineering, architecture, accounting,
actuarial science, performing arts, or
consulting or
• The partnership’s average annual gross
receipts for the 3 prior tax years does not
exceed $5 million.
This provision does not apply to any
amount if interest is required to be paid on
the amount or if there is any penalty for
failure to timely pay the amount. For
information, see section 448(d)(5) and
Regulations section 1.448-2. For reporting
requirements, see the instructions for line 1a
on page 15.
Percentage of completion method.
Long-term contracts (except for certain real
property construction contracts) must
generally be accounted for using the
percentage of completion method described
Instructions for Form 1065
in section 460. See section 460 and the
underlying regulations for rules on long-term
contracts.
Mark-to-market accounting method.
Dealers in securities must use the
mark-to-market accounting method
described in section 475. Under this
method, any security that is inventory to the
dealer must be included in inventory at its
fair market value (FMV). Any security that is
not inventory and that is held at the close of
the tax year is treated as sold at its FMV on
the last business day of the tax year, and
any gain or loss must be taken into account
in determining gross income. The gain or
loss taken into account is generally treated
as ordinary gain or loss. For details,
including exceptions, see section 475, the
related regulations, and Rev. Rul. 97-39,
1997-39 I.R.B. 4.
Dealers in commodities and traders in
securities and commodities can elect to use
the mark-to-market accounting method. To
make the election, the partnership must file
a statement describing the election, the first
tax year the election is to be effective, and,
in the case of an election for traders in
securities or commodities, the trade or
business for which the election is made.
Except for new taxpayers, the statement
must be filed by the due date (not including
extensions) of the income tax return for the
tax year immediately preceding the election
year and attached to that return, or, if
applicable, to a request for an extension of
time to file that return. For more details, see
Rev. Proc. 99-17, 1999-7 I.R.B. 52, and
sections 475(e) and (f).
Change in accounting method.
Generally, the partnership must get IRS
consent to change its method of accounting
used to report income (for income as a
whole or for any material item). To do so, it
must file Form 3115, Application for Change
in Accounting Method. See Form 3115.
Section 481(a) adjustment. The
partnership may have to make an
adjustment to prevent amounts of income or
expenses from being duplicated. This is
called a section 481(a) adjustment. The
section 481(a) adjustment period is
generally 1 year for a net negative
adjustment and 4 years for a net positive
adjustment. However, a partnership may
elect to use a 1-year adjustment period for
positive adjustments if the net section
481(a) adjustment for the accounting
method change is less than $25,000. The
partnership must complete the appropriate
lines of Form 3115 to make the election.
Include any net positive section 481(a)
adjustment on page 1 of Form 1065, line 7.
If the net section 481(a) adjustment is
negative, report it on page 1, line 20.
Note. If the partnership is filing an
application for a change in accounting
method filed on or after January 10, 2011,
for a year of change ending on or after April
30, 2010, see Rev. Proc. 2011-14, 2011-4
I.R.B. 330.
Accounting Periods
A partnership is generally required to have
one of the following tax years.
1. The tax year of a majority of its
partners (majority tax year).
2. If there is no majority tax year, then
the tax year common to all of the
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partnership’s principal partners (partners
with an interest of 5% or more in the
partnership profits or capital).
3. If there is neither a majority tax year
nor a tax year common to all principal
partners, then the tax year that results in the
least aggregate deferral of income.
Note. In determining the tax year of a
partnership under 1, 2, or 3 above, the tax
years of certain tax-exempt and foreign
partners are disregarded. See Regulations
section 1.706-1(b) for more details.
4. Some other tax year, if:
• The partnership can establish that
there is a business purpose for the tax year;
or
• The partnership elects under section
444 to have a tax year other than a required
tax year by filing Form 8716, Election To
Have a Tax Year Other Than a Required
Tax Year. For a partnership to have this
election in effect, it must make the payments
required by section 7519 and file Form
8752, Required Payment or Refund Under
Section 7519.
A section 444 election ends if a
partnership changes its accounting period to
its required tax year or some other permitted
year or it is penalized for willfully failing to
comply with the requirements of section
7519. If the termination results in a short tax
year, type or legibly print at the top of the
first page of Form 1065 for the short tax
year, “SECTION 444 ELECTION
TERMINATED”; or
• The partnership elects to use a 52-53
week tax year that ends with reference to
either its required tax year or a tax year
elected under section 444.
Change of tax year. To change its tax
year or to adopt or retain a tax year other
than its required tax year, the partnership
must file Form 1128, Application To Adopt,
Change, or Retain a Tax Year, unless the
partnership is making an election under
section 444.
Note. The tax year of a common trust fund
must be the calendar year.
Rounding Off to Whole
Dollars
The partnership can round off cents to
whole dollars on its return and schedules. If
the partnership does round to whole dollars,
it must round all amounts. To round, drop
amounts under 50 cents and increase
amounts from 50 to 99 cents to the next
dollar. For example, $1.39 becomes $1 and
$2.50 becomes $3.
If two or more amounts must be added to
figure the amount to enter on a line, include
cents when adding the amounts and round
off only the total.
Recordkeeping
The partnership must keep its records as
long as they may be needed for the
administration of any provision of the
Internal Revenue Code. If the consolidated
audit procedures of sections 6221 through
6234 apply, the partnership usually must
keep records that support an item of
income, deduction, or credit on the
partnership return for 3 years from the date
the return is due or is filed, whichever is
later. If the consolidated audit procedures do
not apply, these records usually must be
kept for 3 years from the date each partner’s
return is due or is filed, whichever is later. It
must also keep records that verify the
partnership’s basis in property for as long as
they are needed to figure the basis of the
original or replacement property.
The partnership should also keep copies
of all returns it has filed. They help in
preparing future returns and in making
computations when filing an amended
return.
Amended Return
box G(5) on page 1. Attach a statement that
identifies the line number of each amended
item, the corrected amount or treatment of
the item, and an explanation of the reasons
for each change. If the income, deductions,
credits, or other information provided to any
partner on Schedule K-1 is incorrect, file an
amended Schedule K-1 (Form 1065) for that
partner with the amended Form 1065. Also
give a copy of the amended Schedule K-1 to
that partner. Check the “Amended K-1” box
at the top of the Schedule K-1 to indicate
that it is an amended Schedule K-1.
Exception. If the partnership is filing an
amended partnership return and the
partnership is subject to the consolidated
audit proceedings of sections 6221 through
6234, the tax matters partner must file Form
8082, Notice of Inconsistent Treatment or
Administrative Adjustment Request (AAR).
A change to the partnership’s federal
return may affect its state return. This
includes changes made as a result of an
IRS examination. For more information,
contact the state tax agency for the state in
which the partnership return was filed.
To correct an error on a Form 1065 already
filed, file an amended Form 1065 and check
Other Forms, Returns, And Statements That May Be Required
Form, Return or Statement
Use this to —
W-2 and W-3 — Wage and Tax Statement; and Transmittal of
Wage and Tax Statements
Report wages, tips, other compensation, and withheld income, social security and Medicare
taxes for employees.
720 — Quarterly Federal Excise Tax Return
Report and pay environmental excise taxes, communications and air transportation taxes,
fuel taxes, manufacturers taxes, ship passenger tax, and certain other excise taxes. Also
see Trust Fund Recovery Penalty on page 4.
940 — Employer’s Annual Federal Unemployment (FUTA) Tax Report and pay FUTA tax.
Return
941 — Employer’s QUARTERLY Federal Tax Return
Report quarterly income tax withheld on wages and employer and employee social security
and Medicare taxes. Also see Trust Fund Recovery Penalty on page 4.
943 — Employer’s Annual Federal Tax Return for Agricultural
Employees
Report income tax withheld and employer and employee social security and Medicare taxes
on farmworkers. Also see Trust Fund Recovery Penalty on page 4.
945 — Annual Return of Withheld Federal Income Tax
Report income tax withheld from nonpayroll payments, including pensions, annuities,
individual retirement accounts (IRAs), gambling winnings, and backup withholding. Also see
Trust Fund Recovery Penalty on page 4.
1042 and 1042-S — Annual Withholding Tax Return for U.S.
Report and send withheld tax on payments or distributions made to nonresident alien
Source Income of Foreign Persons; and Foreign Person’s U.S. individuals, foreign partnerships, or foreign corporations to the extent these payments or
Source Income Subject to Withholding
distributions constitute gross income from sources within the United States that is not
effectively connected with a U.S. trade or business. A domestic partnership must also
withhold tax on a foreign partner’s distributive share of such income, including amounts that
are not actually distributed. Withholding on amounts not previously distributed to a foreign
partner must be made and paid over by the earlier of:
• The date on which Schedule K-1 is sent to that partner or
• The 15th day of the 3rd month after the end of the partnership’s tax year.
For more details, see sections 1441 and 1442 and Pub. 515, Withholding of Tax on
Nonresident Aliens and Foreign Entities.
1042-T — Annual Summary and Transmittal of Forms 1042-S
Transmit paper Forms 1042-S to the IRS.
1096 — Annual Summary and Transmittal of U.S. Information
Returns
Transmit paper Forms 1099, 1098, 3921, 3922, 5498, and W-2G to the IRS.
1097-BTC — Bond Tax Credit
Report tax credits to bond holders and tax credits passed to another person.
1098 — Mortgage Interest Statement
Report the receipt from any individual of $600 or more of mortgage interest (including certain
points) in the course of the partnership’s trade or business.
1099-A, B, C, INT, K, LTC, MISC, OID, R, S, and SA
Report the following:
• Acquisitions or abandonments of secured property;
Important. Every partnership must file Forms 1099-MISC if, in
• Proceeds from broker and barter exchange transactions;
the course of its trade or business, it makes payments of rents,
• Cancellation of debts;
commissions, or other fixed or determinable income (see
section 6041) totaling $600 or more to any one person during • Interest payments;
the calendar year.
• Merchant card and third-party network payments;
• Payments of long-term care and accelerated death benefits;
• Miscellaneous income payments;
• Original issue discount;
• Distributions from pensions, annuities, retirement or profit-sharing plans, IRAs, insurance
contracts, etc.;
• Proceeds from real estate transactions; and
• Distributions from an HSA, Archer MSA, or Medicare Advantage MSA.
Also use these returns to report amounts received as a nominee for another person. For
more details, see the General Instructions for Certain Information Returns (1098, 1099,
3921, 3922, 5498, and W-2G).
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Instructions for Form 1065
Form, Return or Statement
Use this to —
5471 — Information Return of U.S. Persons With Respect To
Certain Foreign Corporations
A partnership may have to file Form 5471 if it:
• Controls a foreign corporation; or
• Acquires, disposes of, or owns 10% or more in value of the outstanding stock of a foreign
corporation; or
• Owns stock in a corporation that is a controlled foreign corporation for an uninterrupted
period of 30 days or more during any tax year of the foreign corporation, and it owned that
stock on the last day of that year.
5713 — International Boycott Report
Report operations in, or related to, a “boycotting” country, company, or national of a country
and to figure the loss of certain tax benefits. The partnership must give each partner a copy
of the Form 5713 filed by the partnership if there has been participation in, or cooperation
with, an international boycott.
8275 — Disclosure Statement
Disclose items or positions, except those contrary to a regulation, that are not otherwise
adequately disclosed on a tax return. The disclosure is made to avoid the parts of the
accuracy-related penalty imposed for disregard of rules or substantial understatement of tax.
Also use Form 8275 for disclosures relating to preparer penalties for understatements due to
unrealistic positions or disregard of rules.
8275-R — Regulation Disclosure Statement
Disclose any item on a tax return for which a position has been taken that is contrary to
Treasury regulations.
8288 and 8288-A — U.S. Withholding Tax Return for
Dispositions by Foreign Persons of U.S. Real Property
Interests; and Statement of Withholding on Dispositions by
Foreign Persons of U.S. Real Property Interests
Report and send withheld tax on the sale of U.S. real property by a foreign person. See
section 1445 and the related regulations for additional information.
8300 — Report of Cash Payments Over $10,000 Received in a Report the receipt of more than $10,000 in cash or foreign currency in one transaction or a
Trade or Business
series of related transactions.
8308 — Report of a Sale or Exchange of Certain Partnership
Interests
Report the sale or exchange by a partner of all or part of a partnership interest where any
money or other property received in exchange for the interest is attributable to unrealized
receivables or inventory items.
8594 — Asset Acquisition Statement Under Section 1060
Report a sale of assets if goodwill or going concern value attaches, or could attach, to such
assets. Both the seller and buyer of a group of assets that makes up a trade or business
must use this form.
8697 — Interest Computation Under the Look-Back Method for Figure the interest due or to be refunded under the look-back method of section 460(b)(2) on
Completed Long-Term Contracts
certain long-term contracts that are accounted for under either the percentage of
completion-capitalized cost method or the percentage of completion method. Partnerships
that are not closely held use this form. Closely held partnerships should see the instructions
on page 37 for line 20c, Look-back interest — completed long-term contracts (code J), for
details on the Form 8697 information they must provide to their partners.
8804, 8805, and 8813 — Annual Return for Partnership
Withholding Tax (Section 1446); Foreign Partner’s Information
Statement of Section 1446 Withholding Tax; and Partnership
Withholding Tax Payment Voucher (Section 1446)
Figure and report the withholding tax on the distributive shares of any effectively connected
gross income for foreign partners. This is done on Forms 8804 and 8805. Use Form 8813 to
send installment payments of withheld tax based on effectively connected taxable income
allocable to foreign partners.
Exception. Publicly traded partnerships do not file these forms. They must instead withhold
tax on distributions to foreign partners and report and send payments using Forms 1042 and
1042-S. See Regulations sections 1.1446-4 for more information.
8832 — Entity Classification Election
See Entity Classification Election, later.
8865 — Return of U.S. Persons With Respect to Certain
Foreign Partnerships
Report an interest in a foreign partnership. A domestic partnership may have to file Form
8865 if it:
1. Controlled a foreign partnership (that is, it owned more than 50% direct or indirect
interest in the partnership).
2. Owned at least a 10% direct or indirect interest in a foreign partnership while U.S.
persons controlled that partnership.
3. Had an acquisition, disposition, or change in proportional interest of a foreign
partnership that:
a. Increased its direct interest to at least 10% or reduced its direct interest of at least
10% to less than 10% or
b. Changed its direct interest by at least a 10% interest.
4. Contributed property to a foreign partnership in exchange for a partnership interest if:
a. Immediately after the contribution, the partnership directly or indirectly owned at least
a 10% interest in the foreign partnership or
b. The FMV of the property the partnership contributed to the foreign partnership in
exchange for a partnership interest exceeds $100,000, when added to other contributions of
property made to the foreign partnership (by the partnership or a related person) during the
preceding 12-month period.
Also, the domestic partnership may have to file Form 8865 to report certain dispositions by
a foreign partnership of property it previously contributed to that partnership if it was a
partner at the time of the disposition. For more details, including penalties for failing to file
Form 8865, see Form 8865 and its separate instructions.
Instructions for Form 1065
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Form, Return or Statement
Use this to —
8866 — Interest Computation Under the Look-Back Method for Figure the interest due or to be refunded under the look-back method of section 167(g)(2) for
Property Depreciated Under the Income Forecast Method
certain property placed in service after September 13, 1995, depreciated under the income
forecast method. Partnerships that are not closely held use this form. Closely held
partnerships should see the instructions on page 37 for line 20c, Look-back
interest — income forecast method (code K), for details on the Form 8866 information they
must provide to their partners.
8876 — Excise Tax on Structured Settlement Factoring
Transactions
Report and pay the 40% excise tax imposed under section 5891.
8886 — Reportable Transaction Disclosure Statement
Disclose information for each reportable transaction in which the partnership participated.
Form 8886 must be filed for each tax year the partnership participated in the reportable
transaction. The partnership may have to pay a penalty if it’s required to file Form 8886 and
does not do so. The following are reportable transactions.
1. Any listed transaction, which is a transaction that is the same as or substantially
similar to one of the types of transactions that the IRS has determined to be a tax avoidance
transaction and identified by notice, regulation, or other published guidance as a listed
transaction.
2. Any transaction offered under conditions of confidentiality for which the partnership
(or a related party) paid an adviser a fee of at least $50,000 ($250,000 for partnerships if all
partners are corporations).
3. Certain transactions for which the partnership (or a related party) has contractual
protection against disallowance of the tax benefits.
4. Certain transactions resulting in a loss of at least $2 million in any single year or $4
million in any combination of years.
5. Any transaction identified by the IRS by notice, regulation, or other published
guidance as a “transaction of interest.” See Notice 2009-55, 2009-31 I.R.B. 170.
See Regulations section 1.6011-4, the Instructions for Form 8886, and the instructions on
page 39 for line 20c, Other information (code Y), for more information.
8918 — Material Advisor Disclosure Statement
Material advisors who provide material aid, assistance, or advice with respect to any
reportable transaction must file Form 8918 to disclose reportable transactions in accordance
with Regulations section 301.6111-3. Form 8918 replaces Form 8264, which was previously
used to disclose this information.
8925 — Report of Employer-Owned Life Insurance Contracts
Report the number of employees covered by employer-owned life insurance contracts and
the total amount of employer-owned life insurance.
-8-
Instructions for Form 1065
Assembling the Return
When submitting Form 1065, organize the
pages of the return in the following order:
• Pages 1-5,
• Schedule F (if required),
• Form 8825 (if required),
• Any other schedules in alphabetical order,
and
• Any other forms in numerical order.
Complete every applicable entry space
on Form 1065 and Schedule K-1. Do not
enter “See attached” instead of completing
the entry spaces. Penalties may be
assessed if the partnership files an
incomplete return. If you need more space
on the forms or schedules, attach separate
sheets and place them at the end of the
return using the same size and format as on
the printed forms. Show the totals on the
printed forms. Also be sure to put the
partnership’s name and EIN on each
supporting statement or attachment.
Entity Classification
Election
Use Form 8832, Entity Classification
Election, to make a change in classification.
Except for certain business entities always
classified as a corporation, a business entity
with at least two members may choose to be
classified either as a partnership or an
association taxable as a corporation. A
domestic eligible entity with at least two
members that does not file Form 8832 is
classified under the default rules as a
partnership. However, a foreign eligible
entity with at least two members is classified
under the default rules as a partnership only
if the entity does not provide limited liability
to at least one member. File Form 8832 only
if the entity does not want to be classified
under these default rules or if it wants to
change its classification.
!
CAUTION
Attach a copy of Form 8832 to the
partnership’s federal tax return for
the tax year of the election.
Elections Made by the
Partnership
Generally, the partnership decides how to
figure taxable income from its operations.
For example, it chooses the accounting
method and depreciation methods it will use.
The partnership also makes elections under
the following sections:
1. Section 179 (election to expense
certain property).
2. Section 614 (definition of
property — mines, wells, and other natural
deposits). This election must be made
before the partners figure their individual
depletion allowances under section
613A(c)(7)(D).
3. Section 1033 (involuntary
conversions).
4. Section 754 (manner of electing
optional adjustment to basis of partnership
property).
Under section 754, a partnership may
elect to adjust the basis of partnership
property when property is distributed or
when a partnership interest is transferred. If
the election is made with respect to a
transfer of a partnership interest (section
743(b)) and the assets of the partnership
constitute a trade or business for purposes
Instructions for Form 1065
of section 1060(c), then the value of any
goodwill transferred must be determined in
the manner provided in Regulations section
1.1060-1. Once an election is made under
section 754, it applies both to all
distributions and to all transfers made during
the tax year and in all subsequent tax years
unless the election is revoked. See
Regulations section 1.754-1(c).
This election must be made in a
statement that is filed with the partnership’s
timely filed return (including any extension)
for the tax year during which the distribution
or transfer occurs. The statement must
include:
• The name and address of the
partnership,
• A declaration that the partnership
elects under section 754 to apply the
provisions of section 734(b) and section
743(b), and
• The signature of a partner authorized
to sign the partnership return.
The partnership can get an automatic
12-month extension to make the section 754
election provided corrective action is taken
within 12 months of the original deadline for
making the election. For details, see
Regulations section 301.9100-2.
See section 754 and the related
regulations for more information.
If there is a distribution of property
consisting of an interest in another
partnership, see section 734(b).
The partnership is required to attach a
statement for any section 743(b) basis
adjustments. See below for details.
5. Section 743(e) (electing investment
partnership).
6. Section 108(i) (deferral of income
from cancellation of debt). For more
information, see Election to defer income
from cancelled debt on page 15.
Effect of Section 743(b) Basis
Adjustment on Partnership
Items
If the basis of partnership property has been
adjusted for a transferee partner under
section 743(b), the partnership must adjust
the transferee’s distributive share of the
items of partnership income, deduction,
gain, or loss in accordance with Regulations
section 1.743-1(j)(3) and (4). These
adjustments (other than adjustments to
depletable oil and gas property allocable to
the partner under section 613A(c)(7)(D))
must be reported on Schedule K and the
transferee partner’s Schedule K-1. Report
the adjustments on an attached statement to
Schedule K-1 using the codes for Other
Income or Other Deductions. Identify the
partnership item being adjusted and the
amount of the adjustment. If the adjustments
are to partnership items from more than one
trade or business, report the adjustments
separately for each activity. Section 743(b)
adjustments do not affect the transferee’s
capital account.
Elections Made by Each
Partner
Elections under the following sections are
made by each partner separately on the
partner’s tax return.
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1. Section 59(e) (election to deduct
ratably certain qualified expenditures such
as intangible drilling costs, mining
exploration expenses, or research and
experimental expenditures).
2. Section 108 (income from discharge
of indebtedness). This does not include the
section 108(i) election.
3. Section 617 (deduction and recapture
of certain mining exploration expenditures
paid or incurred).
4. Section 901 (foreign tax credit).
Partner’s Dealings With
Partnership
If a partner engages in a transaction with his
or her partnership, other than in his or her
capacity as a partner, the partner is treated
as not being a member of the partnership for
that transaction. Special rules apply to sales
or exchanges of property between
partnerships and certain persons, as
explained in Pub. 541, Partnerships.
Contributions to the
Partnership
Generally, no gain (loss) is recognized to
the partnership or any of the partners when
property is contributed to the partnership in
exchange for an interest in the partnership.
This rule does not apply to any gain realized
on a transfer of property to a partnership
that would be treated as an investment
company (within the meaning of section
351) if the partnership were incorporated. If,
as a result of a transfer of property to a
partnership, there is a direct or indirect
transfer of money or other property to the
transferring partner, the partner may have to
recognize gain on the exchange.
The basis to the partnership of property
contributed by a partner is the adjusted
basis in the hands of the partner at the time
it was contributed, plus any gain recognized
(under section 721(b)) by the partner at that
time. See section 723 for more information.
Dispositions of
Contributed Property
Generally, if the partnership disposes of
property contributed to the partnership by a
partner, income, gain, loss, and deductions
from that property must be allocated among
the partners to take into account the
difference between the property’s basis and
its FMV at the time of the contribution.
However, if the adjusted basis of the
contributed property exceeds its fair market
value at the time of the contribution, the
built-in loss can only be taken into account
by the contributing partner. For all other
partners, the basis of the property in the
hands of the partnership is treated as equal
to its fair market value at the time of the
contribution (see section 704(c)(1)(C)).
For property contributed to the
partnership, the contributing partner must
recognize gain or loss on a distribution of
the property to another partner within 7
years of being contributed. The gain or loss
is equal to the amount that the contributing
partner should have recognized if the
property had been sold for its FMV when
distributed, because of the difference
between the property’s basis and its FMV at
the time of contribution.
See section 704(c) for details and other
rules on dispositions of contributed property.
See section 724 for the character of any
gain or loss recognized on the disposition of
unrealized receivables, inventory items, or
capital loss property contributed to the
partnership by a partner.
Recognition of
Precontribution Gain on
Certain Partnership
Distributions
A partner who contributes appreciated
property to the partnership must include in
income any precontribution gain to the
extent the FMV of other property (other than
money) distributed to the partner by the
partnership exceeds the adjusted basis of
his or her partnership interest just before the
distribution. Precontribution gain is the net
gain, if any, that would have been
recognized under section 704(c)(1)(B) if the
partnership had distributed to another
partner all the property that had been
contributed to the partnership by the
distributee partner within 7 years of the
distribution and that was held by the
partnership just before the distribution.
Appropriate basis adjustments are to be
made to the adjusted basis of the distributee
partner’s interest in the partnership and the
partnership’s basis in the contributed
property to reflect the gain recognized by
the partner.
For more details and exceptions, see
Pub. 541.
Unrealized Receivables
and Inventory Items
Generally, if a partner sells or exchanges a
partnership interest where unrealized
receivables or inventory items are involved,
the transferor partner must notify the
partnership, in writing, within 30 days of the
exchange. The partnership must then file
Form 8308, Report of a Sale or Exchange of
Certain Partnership Interests.
If a partnership distributes unrealized
receivables or substantially appreciated
inventory items in exchange for all or part of
a partner’s interest in other partnership
property (including money), treat the
transaction as a sale or exchange between
the partner and the partnership. Treat the
partnership gain (loss) as ordinary business
income (loss). The income (loss) is specially
allocated only to partners other than the
distributee partner.
If a partnership gives other property
(including money) for all or part of that
partner’s interest in the partnership’s
unrealized receivables or substantially
appreciated inventory items, treat the
transaction as a sale or exchange of the
property.
See Rev. Rul. 84-102, 1984-2 C.B. 119,
for information on the tax consequences that
result when a new partner joins a
partnership that has liabilities and unrealized
receivables. Also see Pub. 541 for more
information on unrealized receivables and
inventory items.
Passive Activity
Limitations
In general, section 469 limits the amount of
losses, deductions, and credits that partners
can claim from “passive activities.” The
passive activity limitations do not apply to
the partnership. Instead, they apply to each
partner’s share of any income or loss and
credit attributable to a passive activity.
Because the treatment of each partner’s
share of partnership income or loss and
credit depends on the nature of the activity
that generated it, the partnership must
report income or loss and credits separately
for each activity.
The following instructions and the
instructions for Schedules K and K-1 (pages
23 – 39) explain the applicable passive
activity limitation rules and specify the type
of information the partnership must provide
to its partners for each activity. If the
partnership had more than one activity, it
must report information for each activity on
an attachment to Schedules K and K-1.
Generally, passive activities include (a)
activities that involve the conduct of a trade
or business if the partner does not materially
participate in the activity and (b) all rental
activities (defined on page 11) regardless of
the partner’s participation. For exceptions,
see Activities That Are Not Passive
Activities below. The level of each partner’s
participation in an activity must be
determined by the partner.
The passive activity rules provide that
losses and credits from passive activities
can generally be applied only against
income and tax from passive activities.
Thus, passive losses and credits cannot be
applied against income from salaries,
wages, professional fees, or a business in
which the partner materially participates;
against “portfolio income” (defined on page
11); or against the tax related to any of
these types of income.
Special provisions apply to certain
activities. First, the passive activity
limitations must be applied separately with
respect to a net loss from passive activities
held through a publicly traded partnership.
Second, special rules require that net
income from certain activities that would
otherwise be treated as passive income
must be recharacterized as nonpassive
income for purposes of the passive activity
limitations.
To allow each partner to correctly apply
the passive activity limitations, the
partnership must report income or loss and
credits separately for each of the following:
• Trade or business activities,
• Rental real estate activities,
• Rental activities other than real estate,
and
• Portfolio income.
Activities That Are Not Passive
Activities
The following are not passive activities.
1. Trade or business activities in which
the partner materially participated for the tax
year.
2. Any rental real estate activity in which
the partner materially participated if the
partner met both of the following conditions
for the tax year.
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a. More than half of the personal
services the partner performed in trades or
businesses were performed in real property
trades or businesses in which he or she
materially participated.
b. The partner performed more than 750
hours of services in real property trades or
businesses in which he or she materially
participated.
Note. For a partner that is a closely held C
corporation (defined in section 465(a)(1)(B)),
the above conditions are treated as met if
more than 50% of the corporation’s gross
receipts are from real property trades or
businesses in which the corporation
materially participated.
For purposes of this rule, each interest in
rental real estate is a separate activity,
unless the partner elects to treat all interests
in rental real estate as one activity.
If the partner is married filing jointly,
either the partner or his or her spouse must
separately meet both of the above
conditions, without taking into account
services performed by the other spouse.
A real property trade or business is any
real property development, redevelopment,
construction, reconstruction, acquisition,
conversion, rental, operation, management,
leasing, or brokerage trade or business.
Services the partner performed as an
employee are not treated as performed in a
real property trade or business unless he or
she owned more than 5% of the stock (or
more than 5% of the capital or profits
interest) in the employer.
3. An interest in an oil or gas well drilled
or operated under a working interest if at
any time during the tax year the partner held
the working interest directly or through an
entity that did not limit the partner’s liability
(for example, an interest as a general
partner). This exception applies regardless
of whether the partner materially
participated for the tax year.
4. The rental of a dwelling unit used by a
partner 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. An activity of trading personal
property for the account of owners of
interests in the activity. For purposes of this
rule, personal property means property that
is actively traded, such as stocks, bonds,
and other securities. See Temporary
Regulations section 1.469-1T(e)(6).
Trade or Business Activities
A trade or business activity is an activity
(other than a rental activity or an activity
treated as incidental to an activity of holding
property for investment) that:
1. Involves the conduct of a trade or
business (within the meaning of section
162),
2. Is conducted in anticipation of starting
a trade or business, or
3. Involves research or experimental
expenditures deductible under section 174
(or that would be if you chose to deduct
rather than capitalize them).
If the partner does not materially
participate in the activity, a trade or business
activity held through a partnership is
generally a passive activity of the partner.
Instructions for Form 1065
Each partner must determine if the
partner materially participated in an activity.
As a result, while the partnership’s ordinary
business income (loss) is reported on page
1 of Form 1065, the specific income and
deductions from each separate trade or
business activity must be reported on
attachments to Form 1065. Similarly, while
each partner’s allocable share of the
partnership’s ordinary business income
(loss) is reported in box 1 of Schedule K-1,
each partner’s allocable share of the income
and deductions from each trade or business
activity must be reported on attachments to
each Schedule K-1. See Passive Activity
Reporting Requirements on page 13 for
more information.
Rental Activities
Generally, except as noted below, if the
gross income from an activity consists of
amounts paid principally for the use of real
or personal tangible property held by the
partnership, the activity is a rental activity.
There are several exceptions to this
general rule. Under these exceptions, an
activity involving the use of real or personal
tangible property is not a rental activity if any
of the following apply.
• The average period of customer use
(defined below) for such property is 7 days
or less.
• The average period of customer use for
such property is 30 days or less and
significant personal services (defined below)
are provided by or on behalf of the
partnership.
• Extraordinary personal services (defined
below) are provided by or on behalf of the
partnership.
• The rental of such property is treated as
incidental to a nonrental activity of the
partnership under Temporary Regulations
section 1.469-1T(e)(3)(vi) and Regulations
section 1.469-1(e)(3)(vi)(D).
• The partnership customarily makes the
property available during defined business
hours for nonexclusive use by various
customers.
• The partnership provides property for use
in a nonrental activity of a partnership or
joint venture in its capacity as an owner of
an interest in such partnership or joint
venture. Whether the partnership provides
property used in an activity of another
partnership or of a joint venture in the
partnership’s capacity as an owner of an
interest in the partnership or joint venture is
determined on the basis of all the facts and
circumstances.
In addition, a guaranteed payment
described in section 707(c) is never income
from a rental activity.
Average period of customer use. Figure
the average period of customer use for a
class of property by dividing the total
number of days in all rental periods by the
number of rentals during the tax year. If the
activity involves renting more than one class
of property, multiply the average period of
customer use of each class by the ratio of
the gross rental income from that class to
the activity’s total gross rental income. The
activity’s average period of customer use
equals the sum of these class-by-class
average periods weighted by gross income.
See Regulations section 1.469-1(e)(3)(iii).
Significant personal services. Personal
services include only services performed by
Instructions for Form 1065
individuals. To determine if personal
services are significant personal services,
consider all the relevant facts and
circumstances. Relevant facts and
circumstances include:
• How often the services are provided,
• The type and amount of labor required to
perform the services, and
• The value of the services in relation to the
amount charged for use of the property.
The following services are not
considered in determining whether personal
services are significant.
• Services necessary to permit the lawful
use of the rental property.
• Services performed in connection with
improvements or repairs to the rental
property that extend the useful life of the
property substantially beyond the average
rental period.
• Services provided in connection with the
use of any improved real property that are
similar to those commonly provided in
connection with long-term rentals of
high-grade commercial or residential
property. Examples include cleaning and
maintenance of common areas, routine
repairs, trash collection, elevator service,
and security at entrances.
Extraordinary personal services.
Services provided in connection with making
rental property available for customer use
are extraordinary personal services only if
the services are performed by individuals
and the customers’ use of the rental
property is incidental to their receipt of the
services.
For example, a patient’s use of a hospital
room generally is incidental to the care
received from the hospital’s medical staff.
Similarly, a student’s use of a dormitory
room in a boarding school is incidental to
the personal services provided by the
school’s teaching staff.
Rental activity incidental to a nonrental
activity. An activity is not a rental activity if
the rental of the property is incidental to a
nonrental activity, such as the activity of
holding property for investment, a trade or
business activity, or the activity of dealing in
property.
Rental of property is incidental to an
activity of holding property for investment if
both of the following apply.
• The main purpose for holding the property
is to realize a gain from the appreciation of
the property.
• The gross rental income from such
property for the tax year is less than 2% of
the smaller of the property’s unadjusted
basis or its fair market value.
Rental of property is incidental to a trade
or business activity if all of the following
apply.
• The partnership owns an interest in the
trade or business at all times during the
year.
• The rental property was mainly used in
the trade or business activity during the tax
year or during at least 2 of the 5 preceding
tax years.
• The gross rental income from the property
for the tax year is less than 2% of the
smaller of the property’s unadjusted basis or
its fair market value.
The sale or exchange of property that is
also rented during the tax year (in which the
gain or loss is recognized) is treated as
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incidental to the activity of dealing in
property if, at the time of the sale or
exchange, the property was held primarily
for sale to customers in the ordinary course
of the partnership’s trade or business.
See Temporary Regulations section
1.469-1T(e)(3) and Regulations section
1.469-1(e)(3) for more information on the
definition of rental activities for purposes of
the passive activity limitations.
Reporting of rental activities. In reporting
the partnership’s income or losses and
credits from rental activities, the partnership
must separately report rental real estate
activities and rental activities other than
rental real estate activities.
Partners who actively participate in a
rental real estate activity may be able to
deduct part or all of their rental real estate
losses (and the deduction equivalent of
rental real estate credits) against income (or
tax) from nonpassive activities. The
combined amount of rental real estate
losses and the deduction equivalent of
rental real estate credits from all sources
(including rental real estate activities not
held through the partnership) that may be
claimed is limited to $25,000. This $25,000
amount is generally reduced for high-income
partners.
Report rental real estate activity income
(loss) on Form 8825, Rental Real Estate
Income and Expenses of a Partnership or
an S Corporation, and line 2 of Schedule K
and box 2 of Schedule K-1, rather than on
page 1 of Form 1065. Report credits related
to rental real estate activities on lines 15c
and 15d of Schedule K (box 15, codes E
and F, of Schedule K-1) and low-income
housing credits on lines 15a and 15b of
Schedule K (box 15, codes A – D of
Schedule K-1).
See the instructions on page 25 for Line
3. Other Net Rental Income (Loss) for
reporting other net rental income (loss) other
than rental real estate.
Portfolio Income
Generally, portfolio income includes all
gross income, other than income derived in
the ordinary course of a trade or business,
that is attributable to interest; dividends;
royalties; income from a real estate
investment trust, a regulated investment
company, a real estate mortgage investment
conduit, a common trust fund, a controlled
foreign corporation, a qualified electing fund,
or a cooperative; income from the
disposition of property that produces income
of a type defined as portfolio income; and
income from the disposition of property held
for investment. See Self-Charged Interest,
below, for an exception.
Solely for purposes of the preceding
paragraph, gross income derived in the
ordinary course of a trade or business
includes (and portfolio income, therefore,
does not include) the following types of
income.
• Interest income on loans and investments
made in the ordinary course of a trade or
business of lending money.
• Interest on accounts receivable arising
from the performance of services or the sale
of property in the ordinary course of a trade
or business of performing such services or
selling such property, but only if credit is
customarily offered to customers of the
business.
• Income from investments made in the
ordinary course of a trade or business of
furnishing insurance or annuity contracts or
reinsuring risks underwritten by insurance
companies.
• Income or gain derived in the ordinary
course of an activity of trading or dealing in
any property if such activity constitutes a
trade or business (unless the dealer held the
property for investment at any time before
such income or gain is recognized).
• Royalties derived by the taxpayer in the
ordinary course of a trade or business of
licensing intangible property.
• Amounts included in the gross income of
a patron of a cooperative by reason of any
payment or allocation to the patron based
on patronage occurring with respect to a
trade or business of the patron.
• Other income identified by the IRS as
income derived by the taxpayer in the
ordinary course of a trade or business.
See Temporary Regulations section
1.469-2T(c)(3) for more information on
portfolio income.
Report portfolio income and related
deductions on Schedule K rather than on
page 1 of Form 1065.
Self-Charged Interest
Certain self-charged interest income and
deductions may be treated as passive
activity gross income and passive activity
deductions if the loan proceeds are used in
a passive activity. Generally, self-charged
interest income and deductions result from
loans between the partnership and its
partners. It also includes loans between the
partnership and another partnership if each
owner in the borrowing entity has the same
proportional ownership interest in the
lending entity.
The self-charged interest rules do not
apply to a partner’s interest in a partnership
if the partnership makes an election under
Regulations section 1.469-7(g) to avoid the
application of these rules. To make the
election, the partnership must attach to its
original or amended Form 1065, a statement
that includes the name, address, and EIN of
the partnership and a declaration that the
election is being made under Regulations
section 1.469-7(g). The election will apply to
the tax year in which it was made and all
subsequent tax years. Once made, the
election may only be revoked with the
consent of the IRS.
For more details on the self-charged
interest rules, see Regulations section
1.469-7.
Grouping Activities
Generally, one or more trade or business or
rental activities may be treated as a single
activity if the activities make up an
appropriate economic unit for measurement
of gain or loss under the passive activity
rules. Whether activities make up an
appropriate economic unit depends on all
the relevant facts and circumstances. The
factors given the greatest weight in
determining whether activities make up an
appropriate economic unit are:
• Similarities and differences in types of
trades or businesses,
• The extent of common control,
• The extent of common ownership,
• Geographical location, and
• Reliance between or among the activities.
Example. The partnership has a
significant ownership interest in a bakery
and a movie theater in Baltimore and a
bakery and a movie theater in Philadelphia.
Depending on the relevant facts and
circumstances, there may be more than one
reasonable method for grouping the
partnership’s activities. For instance, the
following groupings may or may not be
permissible.
• A single activity.
• A movie theater activity and a bakery
activity.
• A Baltimore activity and a Philadelphia
activity.
• Four separate activities.
Once the partnership chooses a grouping
under these rules, it must continue using
that grouping in later tax years unless a
material change in the facts and
circumstances makes it clearly
inappropriate.
The IRS may regroup the partnership’s
activities if the partnership’s grouping fails to
reflect one or more appropriate economic
units and one of the primary purposes of the
grouping is to avoid the passive activity
limitations.
Limitation on grouping certain activities.
The following activities may not be grouped
together.
1. A rental activity with a trade or
business activity unless the activities being
grouped together make up an appropriate
economic unit and:
a. The rental activity is insubstantial
relative to the trade or business activity or
vice versa or
b. Each owner of the trade or business
activity has the same proportionate
ownership interest in the rental activity. If so,
the portion of the rental activity involving the
rental of property to be used in the trade or
business activity can be grouped with the
trade or business activity.
2. An activity involving the rental of real
property with an activity involving the rental
of personal property (except personal
property provided in connection with the real
property or vice versa).
3. Any activity with another activity in a
different type of business and in which the
partnership holds an interest as a limited
partner or as a limited entrepreneur (as
defined in section 464(e)(2)) if that other
activity engages in holding, producing, or
distributing motion picture films or
videotapes; farming; leasing section 1245
property; or exploring for or exploiting oil
and gas resources or geothermal deposits.
Activities conducted through other
partnerships. Once a partnership
determines its activities under these rules,
the partnership as a partner can use these
rules to group those activities with:
• Each other,
• Activities conducted directly by the
partnership, or
• Activities conducted through other
partnerships.
A partner cannot treat as separate
activities those activities grouped together
by a partnership.
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Recharacterization of Passive
Income
Under Temporary Regulations section
1.469-2T(f) and Regulations section
1.469-2(f), net passive income from certain
passive activities must be treated as
nonpassive income. Net passive income is
the excess of an activity’s passive activity
gross income over its passive activity
deductions (current year deductions and
prior year unallowed losses).
Income from the following six sources is
subject to recharacterization.
Note. Any net passive income
recharacterized as nonpassive income is
treated as investment income for purposes
of figuring investment interest expense
limitations if it is from (a) an activity of
renting substantially nondepreciable
property from an equity-financed lending
activity or (b) an activity related to an
interest in a pass-through entity that
licenses intangible property.
Significant participation passive
activities. A significant participation
passive activity is any trade or business
activity in which the partner participated for
more than 100 hours during the tax year but
did not materially participate. Because each
partner must determine the partner’s level of
participation, the partnership will not be able
to identify significant participation passive
activities.
Certain nondepreciable rental property
activities. Net passive income from a
rental activity is nonpassive income if less
than 30% of the unadjusted basis of the
property used or held for use by customers
in the activity is subject to depreciation
under section 167.
Passive equity-financed lending
activities. If the partnership has net
income from a passive equity-financed
lending activity, the smaller of the net
passive income or the equity-financed
interest income from the activity is
nonpassive income.
Note. The amount of income from the
activities in the three previous paragraphs
that any partner will be required to
recharacterize as nonpassive income may
be limited under Temporary Regulations
section 1.469-2T(f)(8). Because the
partnership will not have information
regarding all of a partner’s activities, it must
identify all partnership activities meeting the
definitions in the previous two paragraphs
as activities that may be subject to
recharacterization.
Rental of property incidental to a
development activity. Net rental activity
income is the excess of passive activity
gross income from renting or disposing of
property over passive activity deductions
(current year deductions and prior year
unallowed losses) that are reasonably
allocable to the rented property. Net rental
activity income is nonpassive income for a
partner if all of the following apply.
• The partnership recognizes gain from the
sale, exchange, or other disposition of the
rental property during the tax year.
• The use of the item of property in the
rental activity started less than 12 months
before the date of disposition. The use of an
item of rental property begins on the first
day that (a) the partnership owns an interest
Instructions for Form 1065
in the property, (b) substantially all of the
property is either rented or held out for rent
and ready to be rented, and (c) no
significant value-enhancing services remain
to be performed.
• The partner materially or significantly
participated for any tax year in an activity
that involved performing services to
enhance the value of the property (or any
other item of property, if the basis of the
property disposed of is determined in whole
or in part by reference to the basis of that
item of property).
Because the partnership cannot
determine a partner’s level of participation,
the partnership must identify net income
from property described on page 11 (without
regard to the partner’s level of participation)
as income that may be subject to
recharacterization.
Rental of property to a nonpassive
activity. If a taxpayer rents property to a
trade or business activity in which the
taxpayer materially participates, the
taxpayer’s net rental activity income from
the property is nonpassive income.
Acquisition of an interest in a
pass-through entity that licenses
intangible property. Generally, net royalty
income from intangible property is
nonpassive income if the taxpayer acquired
an interest in the pass-through entity after
the pass-through entity created the
intangible property or performed substantial
services or incurred substantial costs in
developing or marketing the intangible
property. Net royalty income is the excess of
passive activity gross income from licensing
or transferring any right in intangible
property over passive activity deductions
(current year deductions and prior year
unallowed losses) that are reasonably
allocable to the intangible property.
See Temporary Regulations section
1.469-2T(f)(7)(iii) for exceptions to this rule.
Passive Activity Reporting
Requirements
To allow partners to correctly apply the
passive activity loss and credit limitation
rules, any partnership that carries on more
than one activity must do the following.
1. Provide an attachment for each
activity conducted through the partnership
that identifies the type of activity conducted
(trade or business, rental real estate, rental
activity other than rental real estate, or
investment). See Grouping Activities
discussed earlier on page 12.
2. On the attachment for each activity,
provide a statement, using the same box
numbers as shown on Schedule K-1,
detailing the net income (loss), credits, and
all items required to be separately stated
under section 702(a) from each trade or
business activity, from each rental real
estate activity, from each rental activity other
than a rental real estate activity, and from
investments.
3. Identify the net income (loss) and
credits from each oil or gas well drilled or
operated under a working interest that any
partner (other than a partner whose only
interest in the partnership during the year is
as a limited partner) holds through the
partnership. Further, if any partner had an
interest as a general partner in the
partnership during less than the entire year,
Instructions for Form 1065
the partnership must identify both the
disqualified deductions from each well that
the partner must treat as passive activity
deductions, and the ratable portion of the
gross income from each well that the partner
must treat as passive activity gross income.
4. Identify the net income (loss) and the
partner’s share of partnership interest
expense from each activity of renting a
dwelling unit that any partner uses for
personal purposes during the year for more
than the greater of 14 days or 10% of the
number of days that the residence is rented
at fair rental value.
5. Identify the net income (loss) and the
partner’s share of partnership interest
expense from each activity of trading
personal property conducted through the
partnership.
6. For any gain (loss) from the
disposition of an interest in an activity or of
an interest in property used in an activity
(including dispositions before 1987 from
which gain is being recognized after 1986):
a. Identify the activity in which the
property was used at the time of disposition,
b. If the property was used in more than
one activity during the 12 months preceding
the disposition, identify the activities in
which the property was used and the
adjusted basis allocated to each activity,
and
c. For gains only, if the property was
substantially appreciated at the time of the
disposition and the applicable holding period
specified in Regulations section
1.469-2(c)(2)(iii)(A) was not satisfied,
identify the amount of the nonpassive gain
and indicate whether the gain is investment
income under Regulations section
1.469-2(c)(2)(iii)(F).
7. Specify the amount of gross portfolio
income, the interest expense properly
allocable to portfolio income, and expenses
other than interest expense that are clearly
and directly allocable to portfolio income.
8. Identify separately any of the
following types of payments to partners.
a. Payments to a partner for services
other than in the partner’s capacity as a
partner under section 707(a).
b. Guaranteed payments to a partner for
services under section 707(c).
c. Guaranteed payments for use of
capital.
d. If section 736(a)(2) payments are
made for unrealized receivables or for
goodwill, the amount of the payments and
the activities to which the payments are
attributable.
e. If section 736(b) payments are made,
the amount of the payments and the
activities to which the payments are
attributable.
9. Identify the ratable portion of any
section 481 adjustment (whether a net
positive or a net negative adjustment)
allocable to each partnership activity.
10. Identify the amount of gross income
from each oil or gas property of the
partnership.
11. Identify any gross income from
sources specifically excluded from passive
activity gross income, including:
a. Income from intangible property if the
partner is an individual whose personal
efforts significantly contributed to the
creation of the property;
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b. Income from state, local, or foreign
income tax refunds; and
c. Income from a covenant not to
compete if the partner is an individual who
contributed the covenant to the partnership.
12. Identify any deductions that are not
passive activity deductions.
13. If the partnership makes a full or
partial disposition of its interest in another
entity, identify the gain (loss) allocable to
each activity conducted through the entity,
and the gain allocable to a passive activity
that would have been recharacterized as
nonpassive gain had the partnership
disposed of its interest in property used in
the activity (because the property was
substantially appreciated at the time of the
disposition, and the gain represented more
than 10% of the partner’s total gain from the
disposition).
14. Identify the following items from
activities that may be subject to the
recharacterization rules under Temporary
Regulations section 1.469-2T(f) and
Regulations section 1.469-2(f).
a. Net income from an activity of renting
substantially nondepreciable property.
b. The smaller of equity-financed
interest income or net passive income from
an equity-financed lending activity.
c. Net rental activity income from
property developed (by the partner or the
partnership), rented, and sold within 12
months after the rental of the property
commenced.
d. Net rental activity income from the
rental of property by the partnership to a
trade or business activity in which the
partner had an interest (either directly or
indirectly).
e. Net royalty income from intangible
property if the partner acquired the partner’s
interest in the partnership after the
partnership created the intangible property
or performed substantial services, or
incurred substantial costs in developing or
marketing the intangible property.
15. Identify separately the credits from
each activity conducted by or through the
partnership.
16. Identify the partner’s distributive
share of the partnership’s self-charged
interest income or expense (see
Self-Charged Interest on page 12).
a. Loans between a partner and the
partnership. Identify the lending or
borrowing partner’s share of the
self-charged interest income or expense. If
the partner made the loan to the
partnership, also identify the activity in which
the loan proceeds were used. If the
proceeds were used in more than one
activity, allocate the interest to each activity
based on the amount of the proceeds used
in each activity.
b. Loans between the partnership and
another partnership or an S corporation.
If the partnership’s partners have the same
proportional ownership interest in the
partnership and the other partnership or S
corporation, identify each partner’s share of
the interest income or expense from the
loan. If the partnership was the borrower,
also identify the activity in which the loan
proceeds were used. If the loan proceeds
were used in more than one activity, allocate
the interest to each activity based on the
amount of the proceeds used in each
activity.
Extraterritorial Income
Exclusion
See the Form 8873, Extraterritorial Income
Exclusion, to determine whether the
partnership qualifies for the exclusion and to
figure the amount of the exclusion. If the
partnership’s foreign trading gross receipts
do not exceed $5 million and the partnership
does not meet the foreign economic process
requirements for the exclusion, it must
report certain information to its partners.
See the instructions below on how to report
the exclusion on the partnership’s return and
the information it must report to its partners.
The partnership must report the
extraterritorial income exclusion on its return
as follows.
1. If the partnership met the foreign
economic process requirements explained
in the Instructions for Form 8873, it can
report the exclusion as a nonseparately
stated item on whichever of the following
lines apply to that activity.
• Form 1065, page 1, line 20;
• Form 8825, line 15; or
• Form 1065, Schedule K, line 3b.
In addition, the partnership must report
as an item of information on Schedule K-1,
box 16, using code O, the partner’s
distributive share of foreign trading gross
receipts from Form 8873, line 15.
2. If the foreign trading gross receipts of
the partnership for the tax year are $5
million or less and the partnership did not
meet the foreign economic process
requirements, it cannot report the
extraterritorial income exclusion as a
nonseparately stated item on its return.
Instead, the partnership must report the
following separately stated items to the
partners on Schedule K-1, box 16.
• Foreign trading gross receipts (code
O). Report each partner’s distributive share
of foreign trading gross receipts from line 15
of Form 8873 in box 16 using code O.
• Extraterritorial income exclusion (code
P). Report each partner’s distributive share
of the extraterritorial income exclusion from
Form 8873 in box 16 using code P and
identify on an attached statement the activity
to which the exclusion relates. If the
partnership is required to complete more
than one Form 8873, combine the
exclusions from line 52 and report a single
exclusion amount in box 16.
Note. Upon request of a partner, the
partnership should furnish a copy of the
partnership’s Form 8873 if that partner has a
reduction for international boycott
operations, illegal bribes, kickbacks, etc.
Schedule K. Do not enter separately stated
amounts on the numbered lines on Form
1065, page 1, on Schedule A, on Schedule
D, or on Schedule D-1.
File all five pages of Form 1065.
However, if the answer to question 6 of
Schedule B is “Yes,” Schedules L, M-1, and
M-2 on page 5 are optional. Also attach a
Schedule K-1 to Form 1065 for each
partner.
File only one Form 1065 for each
partnership. Mark “Duplicate Copy” on any
copy you give to a partner.
If a syndicate, pool, joint venture, or
similar group files Form 1065, it must attach
a copy of the agreement and all
amendments to the return, unless a copy
has previously been filed.
Note. A foreign partnership required to file
a return generally must report all of its
foreign and U.S. source income. For rules
regarding whether a foreign partnership
must file Form 1065, see Who Must File on
page 2.
Name and Address
Print or type the legal name of the
partnership, address, and EIN on the
appropriate lines. If the partnership has
changed its name, check box G(3). Include
the suite, room, or other unit number after
the street address. If the Post Office does
not deliver mail to the street address and the
partnership has a P.O. box, show the box
number instead.
If the partnership receives its mail in care
of a third party (such as an accountant or an
attorney), enter on the street address line
“C/O” followed by the third party’s name and
street address or P.O. box.
If the partnership’s address is outside the
United States or its possessions or
territories, enter the information on the line
for “City or town, state, and ZIP code” in the
following order: city, province or state, and
the foreign country. Follow the foreign
country’s practice in placing the postal code
in the address. Do not abbreviate the
country name.
If the partnership has changed its
address since it last filed a return (including
a change to an “in care of” address), check
box G(4) for “Address change.”
Note. If the partnership changes its mailing
address after filing its return, it can notify the
IRS by filing Form 8822, Change of
Address.
Specific Instructions
Items A and C
These instructions follow the line numbers
on the first page of Form 1065. The
accompanying schedules are discussed
separately. Specific instructions for most of
the lines are provided. Lines that are not
discussed are self-explanatory.
Fill in all applicable lines and schedules.
Enter any items specially allocated to the
partners in the appropriate box of the
applicable partner’s Schedule K-1. Enter the
total amount on the appropriate line of
For example, if, as its principal business
activity, the partnership (a) purchases raw
materials, (b) subcontracts out for labor to
make a finished product from the raw
materials, and (c) retains title to the goods,
the partnership is considered to be a
manufacturer and must enter “Manufacturer”
in item A and enter in item C one of the
codes (311110 through 339900) listed under
“Manufacturing” on page 42.
Enter the applicable activity name and the
code number from the list beginning on
page 42.
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Item D. Employer Identification
Number (EIN)
Show the correct EIN in item D on page 1 of
Form 1065. If the partnership does not have
an EIN, it must be applied for:
• Online — Click on the EIN link at
www.irs.gov/businesses/small. The EIN is
issued immediately once the application
information is validated.
• By telephone at 1-800-829-4933 from
7:00 am to 10:00 pm in the partnership’s
local time zone.
• By mailing or faxing Form SS-4,
Application for Employer Identification
Number.
A limited liability company must
determine which type of federal tax entity it
will be (that is, partnership, corporation, or
disregarded entity) before applying for an
EIN (see Form 8832, Entity Classification
Election, for details). If the partnership has
not received its EIN by the time the return is
due, enter “Applied for” and the date you
applied in the space for the EIN. For more
details, see the Instructions for Form SS-4.
Note. The online application process is not
yet available for partnerships with addresses
in foreign countries. If you are located
outside the United States, please call
1-215-516-6999.
Do not request a new EIN for a
partnership that terminated because of a
sale or exchange of at least 50% of the total
interests in partnership capital and profits.
Item F. Total Assets
You are not required to complete item F if
the answer to question 6 of Schedule B is
“Yes.”
If you are required to complete this item,
enter the partnership’s total assets at the
end of the tax year, as determined by the
accounting method regularly used in
keeping the partnership’s books and
records. If there were no assets at the end
of the tax year, enter -0-.
Item G
A technical termination (box G(6)) occurs
when there has been a sale or exchange of
50% or more of the interests in partnership
capital and profits within a 12-month period.
If this Form 1065 is being filed for the tax
period ending on the date a technical
termination has occurred, check box G(2)
and box G(6). See Termination of the
Partnership on page 3.
If this Form 1065 is being filed for the tax
period beginning immediately after a
technical termination has occurred, check
box G(1) and box G(6). A new EIN is not
needed in a technical termination. The new
partnership that is formed will continue to
use the EIN of the terminated partnership.
For information on amended returns, see
page 6.
Item J. Schedule C and
Schedule M-3
A partnership must complete Schedule M-3,
Net Income (Loss) Reconciliation for Certain
Partnerships, instead of Schedule M-1, if
any of the following apply.
1. The amount of total assets at the end
of the tax year is $10 million or more.
2. The amount of adjusted total assets
for the year is $10 million or more. Adjusted
Instructions for Form 1065
total assets is defined in the Instructions for
Schedule M-3.
3. The amount of total receipts (as
defined on page 21, Schedule B, question
6), for the tax year, is $35 million or more.
4. An entity that is a reportable entity
partner with respect to the partnership owns
or is deemed to own, directly or indirectly,
an interest of 50% or more in the
partnership’s capital, profit, or loss, on any
day during the tax year of the partnership.
Reportable entity partner is defined in the
Instructions for Schedule M-3.
Section 108(i) election and reporting by
tiered partnerships. A partnership that
receives a Schedule K-1 from another
partnership containing information relating to
a section 108(i) election must report on the
Schedules K-1 to its partners certain
information relative to the section 108(i)
election. See Rev. Proc. 2009-37, 2009-36
I.R.B. 309 for details. See also Temporary
Regulations section 1.108(i)-2T.
A partnership filing Form 1065 that is not
required to file Schedule M-3 may voluntarily
file Schedule M-3 instead of Schedule M-1.
Enter the gross receipts or sales from all
trade or business operations except those
that must be reported on lines 4 through 7.
For example, do not include gross receipts
from farming on this line. Instead, show the
net profit (loss) from farming on line 5. Also,
do not include on line 1a rental activity
income or portfolio income.
In general, advance payments are
reported in the year of receipt. To report
income from long-term contracts, see
section 460. For special rules for reporting
certain advance payments for goods and
long-term contracts, see Regulations section
1.451-5. For permissible methods for
reporting advance payments for services
and certain goods by an accrual method
partnership, see Rev. Proc. 2004-34,
2004-22 I.R.B. 991.
Installment sales. Generally, the
installment method cannot be used for
dealer dispositions of property. A “dealer
disposition” is any disposition of:
1. Personal property by a person who
regularly sells or otherwise disposes of
personal property of the same type on the
installment plan or
2. Real property held for sale to
customers in the ordinary course of the
taxpayer’s trade or business.
Any partnership that files Schedule M-3
must also complete and file Schedule C,
Additional Information for Schedule M-3
Filers.
See the Instructions for Schedule C and
Schedule M-3 for more information.
Income
Report only trade or business activity
income on lines 1a through 8. Do not
CAUTION
report rental activity income or
portfolio income on these lines. See Passive
Activity Limitations beginning on page 10 for
definitions of rental income and portfolio
income. Rental activity income and portfolio
income are reported on Schedules K and
K-1. Rental real estate activities are also
reported on Form 8825.
!
Tax-exempt income. Do not include any
tax-exempt income on lines 1a through 8. A
partnership that receives any tax-exempt
income other than interest, or holds any
property or engages in any activity that
produces tax-exempt income, reports this
income on line 18b of Schedule K and in
box 18 of Schedule K-1 using code B.
Report tax-exempt interest income,
including exempt-interest dividends received
as a shareholder in a mutual fund or other
regulated investment company, on line 18a
of Schedule K and in box 18 of Schedule
K-1 using code A.
See Deductions on page 16 for
information on how to report expenses
related to tax-exempt income.
Election to defer income from cancelled
debt. The partnership can elect to defer
certain income from cancellations of debt
(COD) that occur after 2008, but before
2011. If the partnership elects to defer COD
income, the exclusions for COD under
sections 108(a)(1)(A), (B), (C), and (D) do
not apply to the income from the COD for
the tax year of the election and any later
year. If the partnership issued a debt
instrument with original issue discount (OID)
that is subject to section 108(i)(2) because
of an election under section 108(i) to defer
COD income, the deduction for all or a
portion of the OID that accrues prior to the
first tax year the COD is includible in income
is deferred until the COD is includible in
income. The amount of OID deferred is
limited to the amount of COD income
subject to the section 108(i) election. See
section 108(i) and Rev. Proc. 2009-37,
2009-36 I.R.B. 309 for more information.
See also Temporary Regulations section
1.108(i)-2T.
Instructions for Form 1065
Line 1a. Gross Receipts or
Sales
Exception. These restrictions on using
the installment method do not apply to
dispositions of property used or produced in
a farming business or sales of timeshares
and residential lots. However, if the
partnership elects to report dealer
dispositions of timeshares and residential
lots on the installment method, each
partner’s tax liability must be increased by
the partner’s allocable share of the interest
payable under section 453(l)(3).
Enter on line 1a the gross profit on
collections from installment sales for any of
the following.
• Dealer dispositions of property before
March 1, 1986.
• Dispositions of property used or produced
in the trade or business of farming.
• Certain dispositions of timeshares and
residential lots reported under the
installment method.
Attach a statement showing the following
information for the current year and the 3
preceding years.
• Gross sales.
• Cost of goods sold.
• Gross profits.
• Percentage of gross profits to gross sales.
• Amount collected.
• Gross profit on the amount collected.
Nonaccrual-experience method.
Partnerships that qualify to use the
nonaccrual-experience method (described
on page 5) should attach a statement
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showing total gross receipts, the amount not
accrued as a result of the application of
section 448(d)(5), and the net amount
accrued. Enter the net amount on line 1a.
Line 2. Cost of Goods Sold
See the instructions for Schedule A
beginning on page 19.
Line 4. Ordinary Income (Loss)
From Other Partnerships,
Estates, and Trusts
Enter the ordinary income (loss) shown on
Schedule K-1 (Form 1065) or Schedule K-1
(Form 1041), or other ordinary income (loss)
from a foreign partnership, estate, or trust.
Show the partnership’s, estate’s, or trust’s
name, address, and EIN on a separate
statement attached to this return. If the
amount entered is from more than one
source, identify the amount from each
source.
Do not include portfolio income or rental
activity income (loss) from other
partnerships, estates, or trusts on this line.
Instead, report these amounts on Schedules
K and K-1, or on line 20a of Form 8825 if the
amount is from a rental real estate activity.
Ordinary income (loss) from another
partnership that is a publicly traded
partnership is not reported on this line.
Instead, report the amount separately on
line 11 of Schedule K and in box 11 of
Schedule K-1 using code F.
Treat shares of other items separately
reported on Schedule K-1 issued by the
other entity as if the items were realized or
incurred by this partnership.
If there is a loss from another
partnership, the amount of the loss that may
be claimed is subject to the at-risk and basis
limitations as appropriate.
If the tax year of your partnership does
not coincide with the tax year of the other
partnership, estate, or trust, include the
ordinary income (loss) from the other entity
in the tax year in which the other entity’s tax
year ends.
Line 5. Net Farm Profit (Loss)
Enter the partnership’s net farm profit (loss)
from Schedule F (Form 1040), Profit or Loss
From Farming. Attach Schedule F (Form
1040) to Form 1065. Do not include on this
line any farm profit (loss) from other
partnerships. Report those amounts on line
4. In figuring the partnership’s net farm profit
(loss), do not include any section 179
expense deduction; this amount must be
separately stated.
Also report the partnership’s fishing
income on this line.
For a special rule concerning the method
of accounting for a farming partnership with
a corporate partner and for other tax
information on farms, see Pub. 225,
Farmer’s Tax Guide.
Note. Because the election to deduct the
expenses of raising any plant with a
preproductive period of more than 2 years is
made by the partner and not the
partnership, farm partnerships that are not
required to use an accrual method should
not capitalize such expenses. Instead, state
them separately on an attachment to
Schedule K, line 13d, and in box 13 of
Schedule K-1, using code P. See
Regulations section 1.263A-4(d) for more
information.
Line 6. Net Gain (Loss) From
Form 4797
Include only ordinary gains or losses
from the sale, exchange, or
CAUTION
involuntary conversion of assets
used in a trade or business activity. Ordinary
gains or losses from the sale, exchange, or
involuntary conversion of rental activity
assets are reported separately on line 19 of
Form 8825 or line 3c of Schedule K and box
3 of Schedule K-1, generally as a part of the
net income (loss) from the rental activity.
A partnership that is a partner in another
partnership must include on Form 4797,
Sales of Business Property, its share of
ordinary gains (losses) from sales,
exchanges, or involuntary conversions
(other than casualties or thefts) of the other
partnership’s trade or business assets.
Partnerships should not use Form 4797
to report the sale or other disposition of
property if a section 179 expense deduction
was previously passed through to any of its
partners for that property. Instead, report it
in box 20 of Schedule K-1 using code L. See
the instructions on page 37 for Dispositions
of property with section 179 deductions
(code L) for details.
!
Line 7. Other Income (Loss)
Enter any other trade or business income
(loss) not included on lines 1a through 6.
List the type and amount of income on an
attached statement. Examples of other
income include the following.
1. Interest income derived in the
ordinary course of the partnership’s trade or
business, such as interest charged on
receivable balances.
2. Recoveries of bad debts deducted in
prior years under the specific charge-off
method.
3. Taxable income from insurance
proceeds.
4. The amount included in income from
line 7 of Form 6478, Alcohol and Cellulosic
Biofuel Fuels Credit.
5. The amount included in income from
line 8 of Form 8864, Biodiesel and
Renewable Diesel Fuels Credit.
6. The recapture amount under section
280F if the business use of listed property
drops to 50% or less. To figure the
recapture amount, complete Part IV of Form
4797.
7. Any recapture amount under section
179A for clean-fuel vehicle refueling
property that ceases to qualify. See
Regulations section 1.179A-1 for details.
8. All section 481 income adjustments
resulting from changes in accounting
methods. Show the computation of the
section 481 adjustments on an attached
statement.
9. Part or all of the proceeds received
from certain employer-owned life insurance
contracts issued after August 17, 2006.
Partnerships that own one or more
employer-owned life insurance contracts
issued after this date must file Form 8925,
Report of Employer-Owned Life Insurance
Contracts. See section 101(j) for details.
Do not include items requiring separate
computations that must be reported on
Schedules K and K-1. See the instructions
for Schedules K and K-1 later in these
instructions.
Do not report portfolio or rental activity
income (loss) on this line.
Deductions
!
Report only trade or business activity
deductions on lines 9 through 20.
CAUTION
Do not report the following expenses on
lines 9 through 20.
• Rental activity expenses. Report these
expenses on Form 8825 or line 3b of
Schedule K.
• Deductions allocable to portfolio income.
Report these deductions on line 13d of
Schedule K and in box 13 of Schedule K-1
using code I, K, or L.
• Nondeductible expenses (for example,
expenses connected with the production of
tax-exempt income). Report nondeductible
expenses on line 18c of Schedule K and in
box 18 of Schedule K-1 using code C.
• Qualified expenditures to which an
election under section 59(e) may apply. The
instructions for line 13c of Schedule K and
for Schedule K-1, box 13, code J, explain
how to report these amounts.
• Items the partnership must state
separately that require separate
computations by the partners. Examples
include expenses incurred for the production
of income instead of in a trade or business,
charitable contributions, foreign taxes paid
or accrued, intangible drilling and
development costs, soil and water
conservation expenditures, amortizable
basis of reforestation expenditures, and
exploration expenditures. The distributive
shares of these expenses are reported
separately to each partner on Schedule K-1.
Limitations on Deductions
Section 263A uniform capitalization
rules. The uniform capitalization rules of
section 263A generally require partnerships
to capitalize or include in inventory costs,
certain costs incurred in connection with the
following.
• The production of real property and
tangible personal property held in inventory
or held for sale in the ordinary course of
business.
• Real property or personal property
(tangible and intangible) acquired for resale.
• The production of real property and
tangible personal property by a partnership
for use in its trade or business or in an
activity engaged in for profit.
Tangible personal property produced by
a partnership includes a film, sound
recording, videotape, book, or similar
property.
The costs required to be capitalized
under section 263A are not deductible until
the property to which the costs relate is sold,
used, or otherwise disposed of by the
partnership.
Exceptions. Section 263A does not
apply to the following.
• Inventoriable items accounted for in the
same manner as materials and supplies that
are not incidental. See Schedule A. Cost of
Goods Sold on page 19 for details.
• Personal property acquired for resale if
the partnership’s average annual gross
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receipts for the 3 prior tax years were $10
million or less.
• Timber.
• Most property produced under a
long-term contract.
• Certain property produced in a farming
business. See the note at the end of the
instructions for line 5.
• Geological and geophysical costs
amortized under section 167(h).
The partnership must report the following
costs separately to the partners for
purposes of determinations under section
59(e).
• Research and experimental costs under
section 174.
• Intangible drilling costs for oil, gas, and
geothermal property.
• Mining exploration and development
costs.
Indirect costs. Partnerships subject to
the uniform capitalization rules are required
to capitalize not only direct costs but an
allocable part of most indirect costs
(including taxes) that benefit the assets
produced or acquired for resale, or are
incurred because of the performance of
production or resale activities.
For inventory, indirect costs that must be
capitalized include the following.
• Administration expenses.
• Taxes.
• Depreciation.
• Insurance.
• Compensation paid to officers attributable
to services.
• Rework labor.
• Contributions to pension, stock bonus,
and certain profit-sharing, annuity, or
deferred compensation plans.
Regulations section 1.263A-1(e)(3)
specifies other indirect costs that relate to
production or resale activities that must be
capitalized and those that may be currently
deductible.
Interest expense paid or incurred during
the production period of designated property
must be capitalized and is governed by
special rules. For more details, see
Regulations sections 1.263A-8 through
1.263A-15.
For more details on the uniform
capitalization rules, see Regulations
sections 1.263A-1 through 1.263A-3.
Transactions between related taxpayers.
Generally, an accrual basis partnership can
deduct business expenses and interest
owed to a related party (including any
partner) only in the tax year of the
partnership that includes the day on which
the payment is includible in the income of
the related party. See section 267 for
details.
Business start-up and organizational
costs. Generally, a partnership can elect to
deduct up to $5,000 of business start-up
and organizational costs paid or incurred
after October 22, 2004. Any remaining costs
must be amortized. The $5,000 deduction is
reduced (but not below zero) by the amount
the total costs exceed $50,000. If the total
costs are $55,000 or more, the deduction is
reduced to zero. Any costs not deducted
must be amortized as explained below. See
sections 195(b) and 248(a).
Special rule for 2010 start-up costs.
For a tax year beginning in 2010, a
partnership can elect to deduct up to
Instructions for Form 1065
$10,000 of business start-up costs paid or
incurred after December 31, 2009. The
$10,000 deduction is reduced (but not below
zero) by the amount such start-up costs
exceed $60,000. Any remaining costs must
be amortized. See section 195(b)(3).
Note. For start-up and organizational costs
paid or incurred after September 8, 2008,
the partnership is not required to attach a
statement or specifically identify the amount
deducted for the election under sections
195(b) (start-up costs) and 709(b)
(organizational costs) to be effective. It is a
deemed election. Whether a partnership
deducts a portion of its start-up and
organizational costs under Temporary
Regulations sections 1.195-1T and 1.709-1T
or elects to amortize the full amount of such
costs, its election is irrevocable.
For start-up and organizational costs
paid or incurred after October 22, 2004, and
before September 9, 2008, a partnership
generally must attach the statement
required by Regulations sections 1.195-1(b)
and 1.709-1(c) to make the election to
deduct a portion of such costs (as explained
above). This election is irrevocable.
However, a partnership can apply the
provisions of Temporary Regulations
sections 1.195-1T and 1.709-1T to start-up
and organizational costs paid or incurred
after October 22, 2004, provided the period
of limitations on assessment has not expired
for the year of election. Otherwise, the
provisions under Regulations sections
1.195-1(b) and 1.709-1(c) apply.
Amortization. Any costs not deducted
under the above rules must be amortized
ratably over a 180-month period, beginning
with the month the partnership begins
business. See the Instructions for Form
4562 for details.
Report the deductible amount of these
costs and any amortization on line 20. For
amortization that began during the tax year,
complete and attach Form 4562.
Syndication costs. Costs for issuing and
marketing interests in the partnership, such
as commissions, professional fees, and
printing costs, must be capitalized. They
cannot be depreciated or amortized. See the
instructions for line 10 for the treatment of
syndication fees paid to a partner.
Reducing certain expenses for which
credits are allowable. The partnership
may need to reduce the otherwise allowable
deductions for expenses used to figure
certain credits. The following are examples
of such credits. (Do not reduce the amount
of the allowable deduction for any portion of
the credit that was passed through to the
partnership from another pass-through
entity.)
1. Work opportunity credit.
2. Credit for increasing research
activities.
3. Disabled access credit.
4. Empowerment zone employment
credit.
5. Indian employment credit.
6. Credit for employer social security
and Medicare taxes paid on certain
employee tips.
7. Orphan drug credit.
8. Credit for small employer pension
plan startup costs.
9. Credit for employer-provided
childcare facilities and services.
Instructions for Form 1065
10. Low sulfur diesel fuel production
credit.
11. Mine rescue team training credit.
12. Agricultural chemicals security credit.
13. Credit for employer differential wage
payments.
14. Credit for small employer health
insurance premiums.
If the partnership has any of these
credits, figure each current year credit
before figuring the deductions for expenses
on which the credit is based.
If the partnership has a qualified
investment taken into account in
determining the qualifying therapeutic
discovery project credit or grant, it may need
to reduce the otherwise allowable
deductions for such a qualified investment.
For details, see section 280C and Notice
2010-45, 2010-23 I.R.B. 734.
Line 9. Salaries and Wages
Enter the salaries and wages paid or
incurred for the tax year, reduced by the
amount of the following credits, if applicable:
• Work Opportunity Credit (Form 5884);
• Empowerment Zone Employment Credit
(Form 8844);
• Indian Employment Credit (Form 8845);
• Mine Rescue Team Training Credit (Form
8923); and
• Credit for Employer Differential Wage
Payments (Form 8932).
Do not reduce the amount of the
allowable deduction for any portion of the
credit that was passed through to the
partnership from another pass-through
entity. See the instructions for these forms
for more information.
Do not include salaries and wages
reported elsewhere on the return, such as
amounts included in cost of goods sold,
elective contributions to a section 401(k)
cash or deferred arrangement, or amounts
contributed under a salary reduction SEP
agreement or a SIMPLE IRA plan.
Report the guaranteed payments to the
appropriate partners on Schedule K-1, box
4.
Line 11. Repairs and
Maintenance
Enter the costs of incidental repairs and
maintenance that do not add to the value of
the property or appreciably prolong its life,
but only to the extent that such costs relate
to a trade or business activity and are not
claimed elsewhere on the return.
The cost of new buildings, machinery, or
permanent improvements that increase the
value of the property are not deductible.
They are chargeable to capital accounts and
may be depreciated or amortized.
Line 12. Bad Debts
Enter the total debts that became worthless
in whole or in part during the year, but only
to the extent such debts relate to a trade or
business activity. Report deductible
nonbusiness bad debts as a short-term
capital loss on Schedule D or Schedule D-1
(Form 1065).
Cash method partnerships cannot
take a bad debt deduction unless the
CAUTION
amount was previously included in
income.
!
Line 13. Rent
Enter rent paid on business property used in
a trade or business activity. Do not deduct
rent for a dwelling unit occupied by any
partner for personal use.
If the partnership rented or leased a
vehicle, enter the total annual rent or lease
expense paid or incurred in the trade or
business activities of the partnership. Also
complete Part V of Form 4562, Depreciation
and Amortization. If the partnership leased a
vehicle for a term of 30 days or more, the
deduction for vehicle lease expense may
have to be reduced by an amount called the
inclusion amount. The partnership may have
an inclusion amount if:
The lease term began:
And the
vehicle’s
FMV on the
first day of
the lease
exceeded:
After 12/31/07 but before 1/1/11
. . . . $18,500
Line 10. Guaranteed Payments
to Partners
Deduct payments or credits to a partner for
services or for the use of capital if the
payments or credits are determined without
regard to partnership income and are
allocable to a trade or business activity. Also
include on line 10 amounts paid during the
tax year for insurance that constitutes
medical care for a partner, a partner’s
spouse, a partner’s dependents, or any
children under age 27 who are not
dependents.
For information on how to treat the
partnership’s contribution to a partner’s
Health Savings Account (HSA), see Notice
2005-8, 2005-4 I.R.B. 368.
Do not include any payments and credits
that should be capitalized. For example,
although payments or credits to a partner for
services rendered in syndicating a
partnership may be guaranteed payments,
they are not deductible on line 10. They are
capital expenditures. However, they should
be separately reported on Schedule K, line
4, and on Schedule K-1, box 4.
Do not include distributive shares of
partnership profits.
-17-
After 12/31/06 but before 1/1/08 . . . . . . . $15,500
After 12/31/04 but before 1/1/07 . . . . . . . $15,200
After 12/31/03 but before 1/1/05 . . . . . . . $17,500
If the lease term began before January 1, 2004, see Pub.
463, Travel, Entertainment, Gift, and Car Expenses, to
find out if the partnership has an inclusion amount. The
inclusion amount for lease terms beginning in 2011 will be
published in the Internal Revenue Bulletin in early 2011.
See Pub. 463 for instructions on figuring
the inclusion amount.
Line 14. Taxes and Licenses
Enter taxes and licenses paid or incurred in
the trade or business activities of the
partnership if not reflected elsewhere on the
return. Federal import duties and federal
excise and stamp taxes are deductible only
if paid or incurred in carrying on the trade or
business of the partnership.
Do not deduct the following taxes on line
14.
• Taxes not imposed on the partnership.
• Federal income taxes or taxes reported
elsewhere on the return.
• Section 901 foreign taxes. Report these
taxes separately on Schedule K, line 16l and
on Schedule K-1, box 16, using codes L and
M.
• Taxes allocable to a rental activity. Report
taxes allocable to rental real estate activity
on Form 8825. Report taxes allocable to a
rental activity other than a rental real estate
activity on line 3b of Schedule K.
• Taxes allocable to portfolio income.
Report these taxes on line 13d of Schedule
K and in box 13 of Schedule K-1 using code
K.
• Taxes paid or incurred for the production
or collection of income, or for the
management, conservation, or maintenance
of property held to produce income. Report
these taxes separately on line 13d of
Schedule K and in box 13 of Schedule K-1
using code W.
See section 263A(a) for rules on
capitalization of allocable costs (including
taxes) for any property.
• Taxes, including state or local sales
taxes, that are paid or incurred in connection
with an acquisition or disposition of property
(these taxes must be treated as a part of the
cost of the acquired property or, in the case
of a disposition, as a reduction in the
amount realized on the disposition).
• Taxes assessed against local benefits
that increase the value of the property
assessed (such as for paving, etc.).
See section 164(d) for information on
apportionment of taxes on real property
between seller and purchaser.
Line 15. Interest
Include only interest incurred in the trade or
business activities of the partnership that is
not claimed elsewhere on the return.
Do not include interest expense on the
following.
• Debt used to purchase rental property or
debt used in a rental activity. Interest
allocable to a rental real estate activity is
reported on Form 8825 and is used in
arriving at net income (loss) from rental real
estate activities on line 2 of Schedule K and
in box 2 of Schedule K-1. Interest allocable
to a rental activity other than a rental real
estate activity is included on line 3b of
Schedule K and is used in arriving at net
income (loss) from a rental activity (other
than a rental real estate activity). This net
amount is reported on line 3c of Schedule K
and in box 3 of Schedule K-1.
• Debt used to buy property held for
investment. Interest that is clearly and
directly allocable to interest, dividend,
royalty, or annuity income not derived in the
ordinary course of a trade or business is
reported on line 13b of Schedule K and in
box 13 of Schedule K-1 using code H. See
the instructions for line 13b of Schedule K;
box 13, code H of Schedule K-1; and Form
4952, Investment Interest Expense
Deduction, for more information on
investment property.
• Debt proceeds allocated to distributions
made to partners during the tax year.
Instead, report such interest on line 13d of
Schedule K and in box 13 of Schedule K-1
using code W. To determine the amount to
allocate to distributions to partners, see
Notice 89-35, 1989-1 C.B. 675.
• Debt required to be allocated to the
production of designated property.
Designated property includes real property,
personal property that has a class life of 20
years or more, and other tangible property
requiring more than 2 years (1 year in the
case of property with a cost of more than $1
million) to produce or construct. Interest
allocable to designated property produced
by a partnership for its own use or for sale
must be capitalized. In addition, a
partnership must also capitalize to the basis
of the designated property any interest on
debt allocable to an asset used to produce
designated property. A partner may have to
capitalize interest that the partner incurs
during the tax year for the partnership’s
production expenditures. Similarly, interest
incurred by a partnership may have to be
capitalized by a partner for the partner’s own
production expenditures. The information
required by the partner to properly capitalize
interest for this purpose must be provided by
the partnership on an attachment for box 20
of Schedule K-1, using code R. See section
263A(f) and Regulations sections 1.263A-8
through 1.263A-15.
Special rules apply to:
• Allocating interest expense among
activities so that the limitations on passive
activity losses, investment interest, and
personal interest can be properly figured.
Generally, interest expense is allocated in
the same manner as debt is allocated. Debt
is allocated by tracing disbursements of the
debt proceeds to specific expenditures.
Temporary Regulations section 1.163-8T
gives rules for tracing debt proceeds to
expenditures.
• Interest paid by a partnership to a partner
for the use of capital, which should be
entered on line 10 as guaranteed payments.
• Prepaid interest, which generally can only
be deducted over the term of the debt. See
section 461(g) and Regulations section
1.163-7, 1.446-2, and 1.1273-2(g) for
details.
• Interest which is allocable to unborrowed
policy cash values of life insurance,
endowment, or annuity contracts issued
after June 8, 1997, when the partnership is
a policyholder or beneficiary. See section
264(f). Attach a statement showing the
computation of the deduction.
Line 16. Depreciation
On line 16a, enter only the depreciation
claimed on assets used in a trade or
business activity. Enter on line 16b the
depreciation reported elsewhere on the
return (for example, on Schedule A) that is
attributable to assets used in trade or
business activities. See the Instructions for
Form 4562 or Pub. 946, How To Depreciate
Property, to figure the amount of
depreciation to enter on this line.
Complete and attach Form 4562 only if
the partnership placed property in service
during the tax year or claims depreciation on
any car or other listed property.
Do not include any section 179 expense
deduction on this line. This amount is not
deducted by the partnership. Instead, it is
passed through to the partners in box 12 of
Schedule K-1. However, reduce the basis of
any asset of the partnership by the amount
of section 179 expense elected by the
partnership, even if a portion of that amount
cannot be passed through to its partners this
-18-
year and must be carried forward because
of limitations at the partnership level.
Line 17. Depletion
If the partnership claims a deduction for
timber depletion, complete and attach Form
T (Timber), Forest Activities Schedule.
Do not deduct depletion for oil and
gas properties. Each partner figures
CAUTION
depletion on oil and gas properties.
See the instructions for Schedule K-1, box
20, “Depletion information – oil and gas
(code T),” for the information on oil and gas
depletion that must be supplied to the
partners by the partnership.
!
Line 18. Retirement Plans, etc.
Do not deduct payments for partners to
retirement or deferred compensation plans
including IRAs, qualified plans, and
simplified employee pension (SEP) and
SIMPLE IRA plans on this line. These
amounts are reported on Schedule K-1, box
13, using code R, and are deducted by the
partners on their own returns.
Enter the deductible contributions not
claimed elsewhere on the return made by
the partnership for its common-law
employees under a qualified pension,
profit-sharing, annuity, or SEP or SIMPLE
IRA plan, and under any other deferred
compensation plan.
If the partnership contributes to an
individual retirement arrangement (IRA) for
employees, include the contribution in
salaries and wages on page 1, line 9, or
Schedule A, line 3, and not on line 18.
Employers who maintain a pension,
profit-sharing, or other funded deferred
compensation plan (other than a SEP or
SIMPLE IRA), whether or not the plan is
qualified under the Internal Revenue Code
and whether or not a deduction is claimed
for the current year, generally must file the
applicable form listed below.
• Form 5500, Annual Return/Report of
Employee Benefit Plan.
• Form 5500-SF, Short Form Annual
Return/Report of Small Employee Benefit
Plan (generally filed instead of Form 5500 if
there are under 100 participants at the
beginning of the plan year).
Note. Form 5500 and Form 5500-SF must
be filed electronically under the
computerized ERISA Filing Acceptance
System (EFAST2). For more information,
see the EFAST2 website at www.efast.dol.
gov.
• Form 5500-EZ, Annual Return of
One-Participant (Owners and Their
Spouses) Retirement Plan. File this form for
a plan that only covers one or more partners
(or partners and their spouses).
Line 19. Employee Benefit
Programs
Enter the partnership’s contributions to
employee benefit programs not claimed
elsewhere on the return (for example,
insurance, health, and welfare programs)
that are not part of a pension, profit-sharing,
etc., plan included on line 18.
Do not include amounts paid during the
tax year for insurance that constitutes
medical care for a partner, a partner’s
spouse, a partner’s dependents, or any
children under age 27 who are not
dependents. Instead, include these amounts
Instructions for Form 1065
on line 10 as guaranteed payments on
Schedule K, line 4, and Schedule K-1, box
4, of each partner on whose behalf the
amounts were paid. Also report these
amounts on Schedule K, line 13d, and
Schedule K-1, box 13, using code M, of
each partner on whose behalf the amounts
were paid.
Line 20. Other Deductions
Enter the total allowable trade or business
deductions that are not deductible
elsewhere on page 1 of Form 1065. Attach a
statement listing by type and amount each
deduction included on this line. Examples of
other deductions include the following.
• Amortization. See the Instructions for
Form 4562 for more information. Complete
and attach Form 4562 if the partnership is
claiming amortization of costs that began
during the tax year.
• Insurance premiums.
• Legal and professional fees.
• Supplies used and consumed in the
business.
• Utilities.
• Certain business start-up and
organizational costs. See Limitations on
Deductions beginning on page 16 for more
details.
• Deduction for certain energy efficient
commercial building property. See section
179D, Notice 2006-52, 2006-26 I.R.B. 1175,
and Notice 2008-40, 2008-14 I.R.B. 725.
• Any negative net section 481(a)
adjustment.
Also see Special Rules, below.
Do not deduct the following on line 20.
• Items that must be reported separately on
Schedules K and K-1.
• Fines or penalties paid to a government
for violating any law. Report these expenses
on Schedule K, line 18c.
• Expenses allocable to tax-exempt
income. Report these expenses on
Schedule K, line 18c.
• Net operating losses. Only individuals and
corporations may claim a net operating loss
deduction.
• Amounts paid or incurred to participate or
intervene in any political campaign on behalf
of a candidate for public office, or to
influence the general public regarding
legislative matters, elections, or
referendums. Report these expenses on
Schedule K, line 18c.
• Expenses paid or incurred to influence
federal or state legislation, or to influence
the actions or positions of certain federal
executive branch officials. However, certain
in-house lobbying expenditures that do not
exceed $2,000 are deductible. See section
162(e) for more details.
Special Rules
Commercial revitalization deduction. If
the partnership constructs, purchases, or
substantially rehabilitates a qualified building
in a renewal community, it may qualify for a
deduction of either (a) 50% of qualified
capital expenditures in the year the building
is placed in service or (b) amortization of
100% of the qualified capital expenditures
over a 120-month period beginning with the
month the building is placed in service. If the
partnership elects to amortize these
expenditures, complete and attach Form
4562. To qualify, the building must be
nonresidential (as defined in section
Instructions for Form 1065
168(e)(2)) and placed in service by the
partnership. The partnership must be the
original user of the building unless it is
substantially rehabilitated. The qualified
expenditures cannot exceed the lesser of
$10 million or the amount allocated to the
building by the commercial revitalization
agency of the state in which the building is
located. Any remaining expenditures are
depreciated over the regular depreciation
recovery period. See Pub. 954, Tax
Incentives for Distressed Communities, and
section 1400I for details.
Note. The commercial revitalization
deduction is not available for buildings
placed in service after 2009.
Rental real estate. Do not report this
deduction on line 20 if the building is placed
in service as rental real estate. A
commercial revitalization deduction for
rental real estate is not deducted by the
partnership but is passed through to the
partners in box 13 of Schedule K-1 using
code Q.
Travel, meals, and entertainment.
Subject to limitations and restrictions
discussed below, a partnership can deduct
ordinary and necessary travel, meals, and
entertainment expenses paid or incurred in
its trade or business. Also, special rules
apply to deductions for gifts, skybox rentals,
luxury water travel, convention expenses,
and entertainment tickets. See section 274
and Pub. 463 for details.
Travel. The partnership cannot deduct
travel expenses of any individual
accompanying a partner or partnership
employee, including a spouse or dependent
of the partner or employee, unless:
• That individual is an employee of the
partnership and
• His or her travel is for a bona fide
business purpose and would otherwise be
deductible by that individual.
Meals and entertainment. Generally,
the partnership can deduct only 50% of the
amount otherwise allowable for meals and
entertainment expenses paid or incurred in
its trade or business. In addition (subject to
exceptions under section 274(k)(2)):
• Meals must not be lavish or extravagant;
• A bona fide business discussion must
occur during, immediately before, or
immediately after the meal; and
• A partner or employee of the partnership
must be present at the meal.
See section 274(n)(3) for a special rule
that applies to expenses for meals
consumed by individuals subject to the
hours of service limits of the Department of
Transportation.
Membership dues. The partnership
may deduct amounts paid or incurred for
membership dues in civic or public service
organizations, professional organizations
(such as bar and medical associations),
business leagues, trade associations,
chambers of commerce, boards of trade,
and real estate boards. However, no
deduction is allowed if a principal purpose of
the organization is to entertain, or provide
entertainment facilities for, members or their
guests. In addition, the partnership may not
deduct membership dues in any club
organized for business, pleasure, recreation,
or other social purpose. This includes
country clubs, golf and athletic clubs, airline
and hotel clubs, and clubs operated to
-19-
provide meals under conditions favorable to
business discussion.
Entertainment facilities. The
partnership cannot deduct an expense paid
or incurred for a facility (such as a yacht or
hunting lodge) used for an activity usually
considered entertainment, amusement, or
recreation.
Amounts treated as compensation.
Generally, the partnership may be able to
deduct otherwise nondeductible
entertainment, amusement, or recreation
expenses if the amounts are treated as
compensation to the recipient and reported
on Form W-2 for an employee or on Form
1099-MISC for an independent contractor.
Reforestation expenditures. If the
partnership made an election to deduct a
portion of its reforestation expenditures on
line 13d of Schedule K, it must amortize
over an 84-month period the portion of these
expenditures in excess of the amount
deducted on Schedule K (see section 194).
Deduct on line 20 only the amortization of
these excess reforestation expenditures.
See Reforestation expense deduction (code
S) on page 30.
Do not deduct amortization of
reforestation expenditures paid or
CAUTION
incurred before October 23, 2004. If
the partnership elected to amortize these
expenditures, report the amortizable basis
on line 20c of Schedule K. See Amortization
of reforestation costs (code U) on page 38
for details.
!
Schedule A. Cost of Goods
Sold
Cost of Goods Sold
Generally, inventories are required at the
beginning and end of each tax year if the
production, purchase, or sale of
merchandise is an income-producing factor.
See Regulations section 1.471-1.
However, if the partnership is a qualifying
taxpayer or a qualifying small business
taxpayer, it may adopt or change its
accounting method to account for
inventoriable items in the same manner as
materials and supplies that are not
incidental (unless its business is a tax
shelter (as defined in section 448(d)(3))).
A qualifying taxpayer is a taxpayer that,
for each prior tax year ending after
December 16, 1998, has average annual
gross receipts of $1 million or less for the
3-tax-year period ending with that prior tax
year. See Rev. Proc. 2001-10, 2001-2 I.R.B.
272 for details.
A qualifying small business taxpayer is a
taxpayer (a) that, for each prior tax year
ending on or after December 31, 2000, has
average annual gross receipts of $10 million
or less for the 3-tax-year period ending with
that prior tax year and (b) whose principal
business activity is not an ineligible activity.
See Rev. Proc. 2002-28, 2002-18 I.R.B. 815
for details.
Under this accounting method, inventory
costs for raw materials purchased for use in
producing finished goods and merchandise
purchased for resale are deductible in the
year the finished goods or merchandise are
sold (but not before the year the partnership
paid for the raw materials or merchandise if
it is also using the cash method). For
additional guidance on this method of
accounting for inventoriable items, see Pub.
538.
Enter amounts paid for all raw materials
and merchandise during the tax year on line
2. The amount the partnership can deduct
for the tax year is figured on line 8.
All filers that have not elected to treat
inventoriable items as materials and
supplies that are not incidental should see
Section 263A uniform capitalization rules on
page 16 before completing Schedule A.
Line 1. Inventory at Beginning
of Year
If the partnership is changing its method of
accounting for the current tax year, it must
refigure last year’s closing inventory using
its new method of accounting and enter the
result on line 1. If there is a difference
between last year’s closing inventory and
the refigured amount, attach an explanation
and take it into account when figuring the
partnership’s section 481(a) adjustment
(explained on page 5).
Line 2. Purchases
Reduce purchases by items withdrawn for
personal use. The cost of these items
should be shown on line 19b of Schedule K
and in box 19 of Schedule K-1, using code
C, as distributions to partners.
Line 4. Additional Section 263A
Costs
An entry is required on this line only for
partnerships that have elected a simplified
method.
For partnerships that have elected the
simplified production method, additional
section 263A costs are generally those
costs, other than interest, that were not
capitalized under the partnership’s method
of accounting immediately prior to the
effective date of section 263A that are
required to be capitalized under section
263A. Interest must be accounted for
separately. For new partnerships, additional
section 263A costs are the costs, other than
interest, that must be capitalized under
section 263A, but which the partnership
would not have been required to capitalize if
it had existed before the effective date of
section 263A. For more details, see
Regulations section 1.263A-2(b).
For partnerships that have elected the
simplified resale method, additional section
263A costs are generally those costs
incurred with respect to the following
categories.
• Off-site storage or warehousing.
• Purchasing.
• Handling, such as processing,
assembling, repackaging, and transporting.
• General and administrative costs (mixed
service costs).
For details, see Regulations section
1.263A-3(d).
Enter on line 4 the balance of section
263A costs paid or incurred during the tax
year not includible on lines 2, 3, and 5.
Attach a statement listing these costs.
Line 5. Other Costs
Enter on line 5 any other inventoriable costs
paid or incurred during the tax year not
entered on lines 2 through 4. Attach a
statement.
Line 7. Inventory at End of Year
See Regulations sections 1.263A-1 through
1.263A-3 for details on figuring the amount
of additional section 263A costs to be
included in ending inventory.
If the partnership accounts for
inventoriable items in the same manner as
materials and supplies that are not
incidental, enter on line 7 the portion of its
raw materials and merchandise purchased
for resale that is included on line 6 and was
not sold during the year.
Lines 9a Through 9c. Inventory
Valuation Methods
Inventories can be valued at:
• Cost,
• Cost or market value (whichever is lower),
or
• Any other method approved by the IRS
that conforms to the requirements of the
applicable regulations cited below.
However, if the partnership is using the
cash method of accounting, it is required to
use cost.
Partnerships that account for
inventoriable items in the same manner as
materials and supplies that are not
incidental can currently deduct expenditures
for direct labor and all indirect costs that
would otherwise be included in inventory
costs. See Rev. Proc. 2001-10 and Rev.
Proc. 2002-28 for more information.
The average cost (rolling average)
method of valuing inventories generally
does not conform to the requirements of the
regulations. See Rev. Rul. 71-234, 1971-1
C.B. 148; as modified by Rev. Proc.
2008-43. However, if a partnership uses the
average cost method for financial
accounting purposes, there are two safe
harbors under which this method will be
deemed to clearly reflect income for federal
income tax purposes. See Rev. Proc.
2008-43, 2008-30 I.R.B. 186, and Rev.
Proc. 2011-14, 2011-4 I.R.B. 330, for
details.
Partnerships that use erroneous
valuation methods must change to a method
permitted for federal tax purposes. Use
Form 3115 to make this change.
On line 9a, check the methods used for
valuing inventories. Under lower of cost or
market, the term “market” (for normal goods)
means the current bid price prevailing on the
inventory valuation date for the particular
merchandise in the volume usually
purchased by the taxpayer. For a
manufacturer, market applies to the basic
elements of cost — raw materials, labor, and
burden. If section 263A applies to the
taxpayer, the basic elements of cost must
reflect the current bid price of all direct costs
and all indirect costs properly allocable to
goods on hand at the inventory date.
Inventory may be valued below cost
when the merchandise is unsalable at
normal prices or unusable in the normal way
because the goods are subnormal due to
damage, imperfections, shopwear, etc.,
within the meaning of Regulations section
1.471-2(c). These goods may be valued at
the bona fide selling price, minus the direct
cost of disposition (but not less than scrap
value). Bona fide selling price means the
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price at which goods are actually offered
during a period ending not later than 30
days after the inventory date.
If this is the first year the Last-in First-out
(LIFO) inventory method was either adopted
or extended to inventory goods not
previously valued under the LIFO method,
attach Form 970, Application To Use LIFO
Inventory Method, or a statement with the
information required by Form 970. Also
check the box on line 9c.
If the partnership has changed or
extended its inventory method to LIFO and
has had to write up its opening inventory to
cost in the year of election, report the effect
of this write-up as income (line 7, page 1,
Form 1065) proportionately over a 3-year
period that begins in the tax year of the
LIFO election.
For more information on inventory
valuation methods, see Pub. 538,
Accounting Periods and Methods. For more
information on changes in the method of
accounting for inventory, see Form 3115
and the Instructions for Form 3115.
Schedule B. Other
Information
Question 1
Check box 1f for any other type of entity and
state the type.
Maximum Percentage Owned
for Purposes of Questions 3
and 4
To determine the maximum percentage
owned in the partnership’s profit, loss, or
capital for the purposes of questions 3a, 3b,
and 4b, determine separately the partner’s
percentage of interest in profit, loss, and
capital at the end of the partnership’s tax
year. This determination must be based on
the partnership agreement and it must be
made using the constructive ownership rules
described below. The maximum percentage
is the highest of these three percentages
(determined at the end of the tax year).
Go to IRS.gov, click on “Businesses,”
click on “Partnerships,” then click on “2008
Changes to Form 1065 - Frequently Asked
Questions,” for supplemental information
and examples of reasonable methods for
determining the maximum percentage
owned. Also see Item J. Partner’s Profit,
Loss, and Capital, later, for more information
on ownership percentages.
Questions 3 and 4
Constructive ownership of the
partnership. For purposes of question 3,
except with respect to foreign governments
within the meaning of section 892, in
determining an ownership interest in the
profit, loss, or capital of the partnership, the
constructive ownership rules of section
267(c) (excluding section 267(c)(3)) apply to
ownership of interests in the partnership as
well as corporate stock. An interest in the
partnership which is owned directly or
indirectly by or for another entity
(corporation, partnership, estate, trust, or
tax-exempt organization) is considered to be
owned proportionately by the owners
Instructions for Form 1065
(shareholders, partners, or beneficiaries) of
the owning entity.
Also, under section 267(c), an individual
is considered to own an interest owned
directly or indirectly by or for his or her
family. The family of an individual includes
only that individual’s spouse, brothers,
sisters, ancestors, and lineal descendants.
An interest will be attributed from an
individual under the family attribution rules
only if the person to whom the interest is
attributed owns a direct interest in the
partnership or an indirect interest under
section 267(c)(1) or (5). For purposes of
these instructions, an individual will not be
considered to own, under section 267(c)(2),
an interest in the partnership owned, directly
or indirectly, by a family member of the
individual unless the individual also owns an
interest in the partnership either directly or
indirectly through a corporation, partnership,
or trust.
For purposes of question 3, in
determining a foreign government’s
ownership interest in the profit, loss, or
capital of the partnership, the constructive
ownership rules of Regulation section
1.892-5T(c)(1)((i) apply to ownership of
interests in the partnership as well as
corporate stock. An interest in the
partnership which is owned directly or
indirectly by an integral part or controlled
entity of a foreign sovereign (within the
meaning of Regulation section 1.892-2T(a))
is considered to be owned proportionately
by such foreign sovereign.
Constructive ownership examples for
questions 3 and 4 are included below. For
the purposes of questions 3 and 4, add an
owner’s direct percentage ownership and
indirect percentage ownership in an entity to
determine if the owner owns, directly or
indirectly, 50% or more of the entity.
Example for question 3a. Corporation A
owns, directly, an interest of 50% in the
profit, loss, or capital of Partnership B.
Corporation A also owns, directly, an
interest of 15% in the profit, loss, or capital
of Partnership C. Partnership B owns,
directly, an interest of 70% in the profit, loss,
or capital of Partnership C. Therefore,
Corporation A owns, directly or indirectly, an
interest of 50% in the profit, loss, or capital
of Partnership C (15% directly and 35%
indirectly through Partnership B). On
Partnership C’s Form 1065, it must answer
“Yes” to question 3a of Schedule B. See
Example 1 in the instructions for Schedule
B-1 (Form 1065) for guidance on providing
the rest of the information required of
entities answering “Yes” to this question.
Example for question 3b. A owns,
directly, 50% of the profit, loss, or capital of
Partnership X. B, the daughter of A, does
not own, directly, any interest in X and does
not own, indirectly, any interest in X through
any entity (corporation, partnership, trust, or
estate). Because family attribution rules
apply only when an individual (in this
example, B) owns a direct interest in the
partnership or an indirect interest through
another entity, A’s interest in Partnership X
is not attributable to B. On Partnership X’s
Form 1065, it must answer “Yes” to question
3b of Schedule B. See Example 2 in the
instructions for Schedule B-1 (Form 1065)
for guidance on providing the rest of the
information required of entities answering
“Yes” to this question.
Instructions for Form 1065
Constructive ownership of other entities
by the partnership. For purposes of
determining the partnership’s constructive
ownership of other entities, the constructive
ownership rules of section 267(c) (excluding
section 267(c)(3)) apply to ownership of
interests in partnerships and trusts as well
as corporate stock. Generally, if an entity (a
corporation, partnership, or trust) is owned,
directly or indirectly, by or for another entity
(corporation, partnership, estate, or trust),
the owned entity is considered to be owned
proportionally by or for the owners
(shareholders, partners, or beneficiaries) of
the owning entity.
Small partnerships can elect to be
subject to the rules for consolidated audit
proceedings by attaching Form 8893,
Election of Partnership Level Tax
Treatment, to the partnership return for the
first tax year for which the election is to be
effective. This election must be signed by all
persons who were partners of the
partnership at any time during the
partnership’s tax year. Once made, the
election may not be revoked without IRS
consent (see Form 8894, Request to
Revoke Partnership Level Tax Treatment
Election). See section 6231(a)(1)(B) and
Form 8893 for more information.
Question 4a. List each corporation in
which the partnership, at the end of the tax
year, owns, directly, 20% or more, or owns,
directly or indirectly, 50% or more of the
total voting power of all classes of stock
entitled to vote. Indicate the name, EIN,
country of incorporation, and the percentage
interest owned, directly or indirectly, in the
total voting power. List the parent
corporation of an affiliated group filing a
consolidated tax return rather than the
subsidiary members except for subsidiary
members in which an interest is owned,
directly or indirectly, independent of the
interest owned, directly or indirectly, in the
parent corporation. If a corporation is owned
through a disregarded entity, list the
information for the corporation rather than
the disregarded entity.
The partnership does not make this
election when it answers “Yes” to
question 5 or when it designates a
Tax Matters Partner on Form 1065. The
election must be made separately by filing
Form 8893, Election of Partnership Level
Tax Treatment.
Question 4b. List each partnership in
which the partnership, at the end of the tax
year, owns, directly, an interest of 20% or
more, or owns, directly or indirectly, an
interest of 50% or more in the profit, loss, or
capital of the partnership. List each trust in
which the partnership, at the end of the tax
year, owns, directly, an interest of 20% or
more, or owns, directly or indirectly, an
interest of 50% or more in the trust
beneficial interest. For each partnership or
trust listed, indicate the name, EIN, type of
entity (partnership or trust), and country of
origin. If the listed entity is a partnership,
enter in column (v) the maximum of
percentage interests owned, directly or
indirectly, in the profit, loss, or capital of the
partnership at the end of the partnership’s
tax year. If the entity is a trust, enter in
column (v) the percentage of the
partnership’s beneficial interest in the trust
owned, directly or indirectly, at the end of
the tax year. List a partnership or trust
owned through a disregarded entity rather
than the disregarded entity.
Question 5
Generally, the tax treatment of partnership
items is determined at the partnership level
in a consolidated audit proceeding under
sections 6221 through 6234, rather than in
separate proceedings with individual
partners. Small partnerships are not subject
to the rules for consolidated audit
proceedings. “Small partnerships” are
defined as any partnership having 10 or
fewer partners each of whom is an individual
(other than a nonresident alien), a C
corporation, or an estate of a deceased
partner. The small partnership exception to
the consolidated audit procedures does not
apply if any partner during the tax year is a
partnership, estate, trust, S corporation,
nominee, or disregarded entity.
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!
CAUTION
Question 6
Answer “Yes” if the partnership meets all
four of the requirements shown on the form.
Total receipts is defined as the sum of gross
receipts or sales (page 1, line 1a); all other
income (page 1, lines 4 through 7); income
reported on Schedule K, lines 3a, 5, 6a, and
7; income or net gain reported on Schedule
K, lines 8, 9a, 10, and 11; and income or net
gain reported on Form 8825, lines 2, 19, and
20a. Total assets is defined as the amount
that would be reported in item F on page 1
of Form 1065.
Question 7
Answer “Yes” if interests in the partnership
are traded on an established securities
market or are readily tradable on a
secondary market (or its substantial
equivalent).
Question 8
Generally, the partnership will have income
if debt is cancelled or forgiven. The
determination of the existence and amount
of cancellation of debt income is made at
the partnership level. Partnership
cancellation of indebtedness income is
separately stated on Schedule K and
Schedule K-1. The extent to which such
income is taxable is usually made by each
individual partner under rules found in
section 108. For more information, see Pub.
334, Tax Guide for Small Business.
Question 9
Answer “Yes” if the partnership filed, or is
required to file, a return under section 6111
to provide information on any reportable
transaction by a material advisor. Use Form
8918, Material Advisor Disclosure
Statement, to provide the information. For
details, see the Instructions for Form 8918.
Question 10. Foreign Accounts
Answer “Yes” if either 1 or 2 below applies
to the partnership. Otherwise, check the
“No” box.
1. At any time during calendar year
2010, the partnership had an interest in or
signature or other authority over a bank
account, securities account, or other
financial account in a foreign country (see
Form TD F 90-22.1, Report of Foreign Bank
and Financial Accounts); and
• The combined value of the accounts
was more than $10,000 at any time during
the calendar year and
• The accounts were not with a U.S.
military banking facility operated by a U.S.
financial institution.
2. The partnership owns more than 50%
of the stock in any corporation that would
answer the question “Yes” based on item 1
above.
If the “Yes” box is checked for the
question:
• Enter the name of the foreign country or
countries. Attach a separate sheet if more
space is needed.
• File Form TD F 90-22.1 by June 30, 2011,
with the U.S. Department of the Treasury at
the address shown on the form. Because
Form TD F 90-22.1 is not a tax form, do not
file it with Form 1065. You can order
Form TD F 90-22.1 by calling
1-800-TAX-FORM (1-800-829-3676) or you
can download it from the IRS website at
IRS.gov.
Question 11
The partnership may be required to file
Form 3520, Annual Return To Report
Transactions With Foreign Trusts and
Receipt of Certain Foreign Gifts, if:
• It directly or indirectly transferred property
or money to a foreign trust. For this purpose,
any U.S. person who created a foreign trust
is considered a transferor.
• It is treated as the owner of any part of
the assets of a foreign trust under the
grantor trust rules.
• It received a distribution from a foreign
trust.
For more information, see the
Instructions for Form 3520.
Note. An owner of a foreign trust must
ensure that the trust files an annual
information return on Form 3520-A, Annual
Information Return of Foreign Trust With a
U.S. Owner.
Questions 12a, 12b, and 12c
Note. You must check “Yes” or “No” for
each question.
Question 12a. Answer “Yes” if the
partnership is making, or has made (and
has not revoked) a section 754 election. If
the partnership technically terminated under
section 708(b)(1)(B), and the new
partnership does not make a section 754
election for its first tax year, the section 754
election is considered “revoked” for
purposes of completing question 12a. For
information about the election, see item 4
under Elections Made by the Partnership, on
page 9.
Question 12b. Answer “Yes” if the
partnership made an optional basis
adjustment under section 743(b) or 734(b)
for the tax year. If the partnership has made
a section 754 election (and it has not been
revoked) and either of the following
transactions occur, the partnership must
make a basis adjustment under section
734(b) or 743(b).
Section 743(b) basis adjustment. A
section 743(b) basis adjustment is required
if there is a transfer of an interest in the
partnership by a sale or exchange, or in the
death of a partner. See question 12c if the
partnership has a substantial built-in loss
immediately after such a transfer. The basis
adjustment affects only the transferee’s
basis in partnership property. The
partnership must attach a statement to the
return for the tax year in which the transfer
occurred. The statement must include:
• The name of the transferee partner,
• The EIN or SSN of the transferee partner,
• The computation of the adjustment, and
• The identity of the partnership properties
to which the adjustment has been allocated.
For details, see section 743 and Regulations
section 1.743-1. For details on allocating the
basis adjustment to partnership properties,
see section 755 and Regulations section
1.755-1.
Section 734(b) basis adjustment. A
section 734(b) basis adjustment is required
if there is a distribution of property to a
partner, whether or not in liquidation of the
partner’s entire interest in the partnership.
See question 12c if there is a substantial
built-in loss with respect to the distribution.
The basis adjustment affects each partner’s
basis in the partnership property. The
partnership must attach a statement to the
return for the tax year in which the
distribution occurred. The statement must
include:
• The computation of the adjustment,
• The class of property distributed (ordinary
income property or capital gain property),
and
• The partnership properties to which the
adjustment has been allocated.
For details, see section 734 and Regulations
section 1.734-1. For details on allocating the
basis adjustment to partnership properties,
see section 755 and Regulations section
1.755-1.
Question 12c. Answer “Yes” if the
partnership had to make a basis reduction
under section 743(b) because of a
substantial built-in loss (as defined in
section 743(d)) or under section 734(b)
because of a substantial basis reduction (as
defined in section 734(d)). Section 743(d)(1)
provides that, for purposes of section 743, a
partnership has a substantial built-in loss
with respect to a transfer of a partnership
interest if the partnership’s adjusted basis in
the partnership’s property exceeds by more
than $250,000 the fair market value of the
property. Under section 734(d), there is a
substantial basis reduction with respect to a
distribution if the sum of the following
amounts exceeds $250,000:
• The amount of loss recognized by the
distributee partner on a distribution in
liquidation of the partner’s interest in the
partnership (see section 731(a)(2)), and
• The excess of the basis of the distributed
property to the distributee partner
(determined under section 732) over the
adjusted basis of the distributed property to
the partnership immediately before the
distribution (as adjusted by section 732(d)).
Section 743(b) basis adjustment. For
a section 743(b) basis adjustment, attach a
statement that includes:
• Name of the transferee partner,
• EIN or SSN of the transferee partner,
• Computation of the adjustment, and
• Identity of the partnership properties to
which the adjustment has been allocated.
Section 734(b) basis adjustment. For
a section 734(b) basis adjustment, attach a
statement that includes:
• The computation of the adjustment,
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• The class of property distributed (ordinary
income property or capital gain property),
and
• The partnership properties to which the
adjustment has been allocated.
Question 13
Check the box if the partnership engaged in
a like-kind exchange during the current or
immediately preceding tax year and
received replacement property which it
distributed during the current tax year. For
purposes of this question, the partnership is
considered to have distributed replacement
property if the partnership contributed such
property to any entity other than a
disregarded entity. The distribution of its
ownership interest in a disregarded entity is
considered a distribution of the underlying
property.
Question 14
If a partnership distributed property to its
partners to be jointly owned, whether such
distribution is direct or through the formation
of an intermediate entity, the question must
be answered “Yes.” For purposes of
question 14, an “undivided interest in
partnership property” means property that
was owned by the partnership either directly
or through a disregarded entity and which
was distributed to partners as fractional
ownership interests. A tenancy in common
interest is a type of undivided ownership
interest in property which provides each
owner the right to transfer property to a third
party without destroying the tenancy in
common. Partners may agree to partition
property held as tenants in common or may
seek a court order to partition the property
(usually dividing the property into fractional
interests in accordance with each partner’s
ownership interest in the partnership.)
Example. Partnership P is a partnership
which files Form 1065. Partnership P holds
title to land held for investment. Partnership
P converts its title to the land to fractional
interests in the name of the partners and
distributes such interests to its partners.
Partnership P must answer “Yes” to
question 14.
Question 15
Enter the number of Form(s) 8858 that are
attached to the return. Form 8858 (and its
schedules) are used by certain U.S. persons
(including domestic partnerships) that own a
foreign disregarded entity (FDE) directly, (or,
in certain cases, indirectly or constructively)
to satisfy the reporting requirements of
sections 6011, 6012, 6031, 6038, and the
related regulations. See Form 8858 (and its
separate instructions) for information on
completing the form.
Question 16. Foreign Partners
Answer “Yes” if the partnership had any
foreign partners (for purposes of section
1446) at any time during the tax year.
Otherwise, answer “No.”
If the partnership had gross income
effectively connected with a trade or
business in the United States and foreign
partners, it may be required to withhold tax
under section 1446 on income allocable to
foreign partners (without regard to
distributions) and file Forms 8804, 8805,
and 8813. See Regulations sections
1.1446-1 through 7, for more information.
Instructions for Form 1065
Designation of Tax Matters
Partner (TMP)
If the partnership is subject to the rules for
consolidated audit proceedings in sections
6221 through 6234, the partnership can
designate a partner as the TMP for the tax
year for which the return is filed by
completing the Designation of Tax Matters
Partner section on page 3 of Form 1065.
The designated TMP must be a general
partner and, in most cases, also must be a
U.S. person. For details, see Regulations
section 301.6231(a)(7)-1.
For a limited liability company (LLC), only
a member manager of the LLC is treated as
a general partner. A member manager is
any owner of an interest in the LLC who,
alone or together with others, has the
continuing exclusive authority to make the
management decisions necessary to
conduct the business for which the LLC was
formed. If there are no elected or designated
member managers, each owner is treated
as a member manager. For details, see
Regulations section 301.6231(a)(7)-2.
Schedules K and K-1.
Partners’ Distributive
Share Items
Purpose of Schedules
Although the partnership is not subject to
income tax, the partners are liable for tax on
their shares of the partnership income,
whether or not distributed, and must include
their shares on their tax returns.
Schedule K. Schedule K is a summary
schedule of all the partners’ shares of the
partnership’s income, credits, deductions,
etc. All partnerships must complete
Schedule K. Rental activity income (loss)
and portfolio income are not reported on
page 1 of Form 1065. These amounts are
not combined with trade or business activity
income (loss). Schedule K is used to report
the totals of these and other amounts.
Schedule K-1. Schedule K-1 shows each
partner’s separate share. Attach a copy of
each Schedule K-1 to the Form 1065 filed
with the IRS; keep a copy with a copy of the
partnership return as a part of the
partnership’s records; and furnish a copy to
each partner. If a partnership interest is held
by a nominee on behalf of another person,
the partnership may be required to furnish
Schedule K-1 to the nominee. See
Temporary Regulations sections
1.6031(b)-1T and 1.6031(c)-1T for more
information.
Give each partner a copy of either the
Partner’s Instructions for Schedule K-1
(Form 1065) or specific instructions for each
item reported on the partner’s Schedule K-1.
Substitute Forms
The partnership does not need IRS approval
to use a substitute Schedule K-1 if it is an
exact copy of the IRS schedule. The boxes
must use the same numbers and titles and
must be in the same order and format as on
the comparable IRS Schedule K-1. The
Instructions for Form 1065
substitute schedule must include the OMB
number. The partnership must provide each
partner with the Partner’s Instructions for
Schedule K-1 (Form 1065) or other
prepared specific instructions for each item
reported on the partner’s Schedule K-1.
The partnership must request IRS
approval to use other substitute Schedules
K-1. To request approval, write to Internal
Revenue Service, Attention: Substitute
Forms Program, SE:W:CAR:MP:T:T:SP,
1111 Constitution Avenue NW, IR-6526,
Washington, DC 20224.
Each partner’s information must be on a
separate sheet of paper. Therefore,
separate all continuously printed substitutes
before you file them with the IRS.
specific allocation methods that are
generally reasonable.
See Dispositions of Contributed Property
on page 9 for special rules on the allocation
of income, gain, loss, and deductions on the
disposition of property contributed to the
partnership by a partner.
If the partnership agreement does not
provide for the partner’s share of income,
gain, loss, deduction, or credit, or if the
allocation under the agreement does not
have substantial economic effect, the
partner’s share is determined according to
the partner’s interest in the partnership. See
Regulations section 1.704-1 for more
information.
The partnership may be subject to a
penalty if it files Schedules K-1 that do not
conform to the specifications discussed in
Pub. 1167, General Rules and
Specifications for Substitute Forms and
Schedules.
Specific Instructions
(Schedule K-1 Only)
How Income Is Shared Among
Partners
Generally, the partnership is required to
prepare and give a Schedule K-1 to each
person who was a partner in the partnership
at any time during the year. Schedule K-1
must be provided to each partner on or
before the day on which the partnership
return is required to be filed.
However, if a foreign partnership meets
each of the following four requirements, it is
not required to file or provide Schedules K-1
for foreign partners (unless the foreign
partner is a pass-through entity through
which a U.S. person holds an interest in the
foreign partnership).
• The partnership had no gross income
effectively connected with the conduct of a
trade or business within the United States
during its tax year.
• All required Forms 1042 and 1042-S were
filed by the partnership or another
withholding agent as required by
Regulations section 1.1461-1(b) and (c).
• The tax liability for each foreign partner
for amounts reportable under Regulations
sections 1.1461-1(b) and (c) has been fully
satisfied by the withholding of tax at the
source.
• The partnership is not a withholding
foreign partnership as defined in
Regulations section 1.1441-5(c)(2)(i).
Generally, any person who holds an
interest in a partnership as a nominee for
another person must furnish to the
partnership the name, address, etc., of the
other person.
If a husband and wife each had an
interest in the partnership, prepare a
separate Schedule K-1 for each of them.
Allocate shares of income, gain, loss,
deduction, or credit among the partners
according to the partnership agreement for
sharing income or loss generally. Partners
may agree to allocate specific items in a
ratio different from the ratio for sharing
income or loss. For instance, if the net
income exclusive of specially allocated
items is divided evenly among three
partners but some special items are
allocated 50% to one, 30% to another, and
20% to the third partner, report the specially
allocated items on the appropriate line of the
applicable partner’s Schedule K-1 and the
total on the appropriate line of Schedule K,
instead of on the numbered lines on page 1
of Form 1065 or Schedules A or D.
If a partner’s interest changed during the
year, see section 706(d) before determining
each partner’s distributive share of any item
of income, gain, loss, deduction, etc. Income
(loss) is allocated to a partner only for the
part of the year in which that person is a
member of the partnership. The partnership
will either allocate on a daily basis or divide
the partnership year into segments and
allocate income, loss, or special items in
each segment among the persons who were
partners during that segment. Partnerships
that report their income on the cash basis
must allocate interest expense, taxes, and
any payment for services or for the use of
property on a daily basis if there is any
change in any partner’s interest during the
year.
Special rules on the allocation of income,
gain, loss, and deductions generally apply if
a partner contributes property to the
partnership and the FMV of that property at
the time of contribution differs from the
contributing partner’s adjusted tax basis.
Under these rules, the partnership must use
a reasonable method of making allocations
of income, gain, loss, and deductions from
the property so that the contributing partner
receives the tax burdens and benefits of any
built-in gain or loss (that is, precontribution
appreciation or diminution of value of the
contributed property). See Regulations
section 1.704-3 for details on how to make
these allocations, including a description of
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General Information
How To Complete Schedule K-1
If the return is for a fiscal year or a short tax
year, fill in the tax year space at the top of
each Schedule K-1. On each Schedule K-1,
enter the information about the partnership
and the partner in Parts I and II (items A
through M). In Part III, enter the partner’s
distributive share of each item of income,
deduction, and credit and any other
information the partner needs to file the
partner’s tax return.
Codes. In box 11 and boxes 13 through
20, identify each item by entering a code in
the column to the left of the entry space for
the dollar amount. These codes are
identified in these instructions and on the
back of the Schedule K-1.
Attached statements. Enter an asterisk (*)
after the code, if any, in the column to the
left of the dollar amount entry space for
each item for which you have attached a
statement providing additional information.
For those informational items that cannot be
reported as a single dollar amount, enter the
code and asterisk in the left-hand column
and enter “STMT” in the entry space to the
right to indicate that the information is
provided on an attached statement. More
than one attached statement can be placed
on the same sheet of paper and should be
identified in alphanumeric order by box
number followed by the letter code (if any).
For example: “Box 20, Code T — Depletion
information — oil and gas” (followed by the
information the partner needs).
purposes, enter the owner’s identifying
number in item E and the owner’s name and
address in item F.
Foreign address. If the partner has a
foreign address, enter the information in the
following order: City, province or state, and
country. Follow the country’s practice for
entering the postal code. Do not abbreviate
the country name.
For electronically filed returns, the
partnership must follow the
CAUTION
instructions for attachments as
described in Pub. 4164 when reporting the
additional information that may be required
for each respective box. See Pub. 4164 for
more information.
Too few entry spaces on Schedule K-1?
If the partnership has more coded items
than the number of spaces in box 11 or
boxes 13 through 20, do not enter a code or
dollar amount in the last entry space of the
box. In the last entry space, enter an
asterisk in the left column and enter “STMT”
in the entry space to the right. Report the
additional items on an attached statement
and provide the box number, code,
description, and dollar amount or
information for each additional item. For
example: “Box 15, Code J — Work
opportunity credit — $1,000.”
Check the foreign partner box if the partner
is a nonresident alien individual, foreign
partnership, foreign corporation, or a foreign
estate or trust. Otherwise, check the
domestic partner box.
!
Part I. Information About
the Partnership
On each Schedule K-1, enter the name,
address, and identifying number of the
partnership.
Part II. Information About
the Partner
Complete a Schedule K-1 for each partner.
On each Schedule K-1, enter the partner’s
name, address, identifying number, and
distributive share items.
Items E and F
For an individual partner, enter the partner’s
social security number (SSN) or individual
taxpayer identification number (ITIN). For all
other partners, enter the partner’s EIN.
However, if a partner is an individual
retirement arrangement (IRA), enter the
identifying number of the custodian of the
IRA. Do not enter the SSN of the person for
whom the IRA is maintained.
Foreign partners without a U.S. taxpayer
identifying number should be notified by the
partnership of the necessity of obtaining a
U.S. identifying number. Certain aliens who
are not eligible to obtain SSNs can apply for
an ITIN on Form W-7, Application for IRS
Individual Taxpayer Identification Number.
If a single member limited liability
company (LLC) owns an interest in the
partnership, and the LLC is treated as a
disregarded entity for federal income tax
Item G
Complete item G on all Schedules K-1. If a
partner holds interests as both a general
and limited partner, check both boxes and
attach a statement for each activity that
shows the amounts allocable to the
partner’s interest as a limited partner.
Item H. Domestic/Foreign
Partner
Item I. What Type of Entity Is
This Partner?
State on this line whether the partner is an
individual, a corporation, an estate, a trust, a
partnership, a disregarded entity, an exempt
organization, or a nominee (custodian). If
the entity is a limited liability company (LLC)
and it is treated as other than a disregarded
entity for federal income tax purposes, the
partnership must enter the LLC’s
classification for federal income tax
purposes (that is, a corporation or
partnership). If the partner is a nominee, use
one of the following codes after the word
“nominee” to indicate the type of entity the
nominee represents: I — Individual;
C — Corporation; F — Estate or Trust;
P — Partnership; DE — Disregarded Entity;
E — Exempt Organization; or
IRA — Individual Retirement Arrangement.
Item J. Partner’s Profit, Loss,
and Capital
On each line, enter the partner’s percentage
share of the partnership’s profit, loss, and
capital as of the beginning and end of the
partnership’s tax year, as determined under
the partnership agreement. If a partner’s
interest commences after the beginning of
the partnership’s tax year, enter in the
Beginning column the percentages that
existed for the partner immediately after
admission. If a partner’s interest terminates
before the end of the partnership’s tax year,
enter in the Ending column the percentages
that existed immediately before termination.
On the line for Capital, enter the
percentage share of the capital that the
partner would receive if the partnership was
liquidated by the distribution of undivided
interests in partnership assets and liabilities.
If the partner’s capital account is negative or
zero, express the percentage ownership of
capital as zero.
The partner’s percentage share of each
category must be expressed as a
percentage. The percentage must not be
negative. The total percentage interest in
each category must total 100% for all
partners. To determine whether the total
beginning and ending percentages are
100%, do not include the beginning
-24-
percentage for a partner that was not a
partner at the beginning of the partnership’s
tax year or the ending percentage for a
partner that left the partnership before the
end of the partnership’s tax year. If the
partnership agreement does not express the
partner’s share of profit, loss, and capital as
fixed percentages, the partnership may use
a reasonable method in arriving at each
percentage for purposes of completing the
items required by item J, as long as such
method is consistent with the partnership
agreement and is applied consistently from
year to year. Maintain records to support the
share of profits, share of losses, and share
of capital reported for each partner.
Item K. Partner’s Share of
Liabilities
Enter each partner’s share of nonrecourse
liabilities, partnership-level qualified
nonrecourse financing, and other recourse
liabilities at the end of the year.
“Nonrecourse liabilities” are those
liabilities of the partnership for which no
partner bears the economic risk of loss. The
extent to which a partner bears the
economic risk of loss is determined under
the rules of Regulations section 1.752-2. Do
not include partnership-level qualified
nonrecourse financing (defined below) on
the line for nonrecourse liabilities.
If the partner terminated his or her
interest in the partnership during the year,
enter the share that existed immediately
before the total disposition. In all other
cases, enter it as of the end of the year.
If the partnership is engaged in two or
more different types of at-risk activities, or a
combination of at-risk activities and any
other activity, attach a statement showing
the partner’s share of nonrecourse liabilities,
partnership-level qualified nonrecourse
financing, and other recourse liabilities for
each activity. See Pub. 925 to determine if
the partnership is engaged in more than one
at-risk activity.
The at-risk rules of section 465 generally
apply to any activity carried on by the
partnership as a trade or business or for the
production of income. These rules generally
limit the amount of loss and other
deductions a partner can claim from any
partnership activity to the amount for which
that partner is considered at risk. However,
for partners who acquired their partnership
interests before 1987, the at-risk rules do
not apply to losses from an activity of
holding real property the partnership placed
in service before 1987. The activity of
holding mineral property does not qualify for
this exception. Identify on an attachment to
Schedule K-1 the amount of any losses that
are not subject to the at-risk rules.
If a partnership is engaged in an activity
subject to the limitations of section 465(c)(1)
(such as films or videotapes, leasing section
1245 property, farming, or oil and gas
property), give each partner his or her share
of the total pre-1976 losses from that activity
for which there existed a corresponding
amount of nonrecourse liability at the end of
each year in which the losses occurred. See
Form 6198, At-Risk Limitations, and related
instructions for more information.
Qualified nonrecourse financing secured
by real property used in an activity of
holding real property that is subject to the
Instructions for Form 1065
at-risk rules is treated as an amount at risk.
“Qualified nonrecourse financing” generally
includes financing for which no one is
personally liable for repayment that is
borrowed for use in an activity of holding
real property and that is loaned or
guaranteed by a federal, state, or local
government or that is borrowed from a
“qualified” person. Qualified persons include
any person actively and regularly engaged
in the business of lending money, such as a
bank or savings and loan association.
Qualified persons generally do not include
related parties (unless the nonrecourse
financing is commercially reasonable and on
substantially the same terms as loans
involving unrelated persons), the seller of
the property, or a person who receives a fee
for the partnership’s investment in the real
property. See section 465(b)(6) for more
information on qualified nonrecourse
financing.
The partner as well as the partnership
must meet the qualified nonrecourse rules.
Therefore, the partnership must enter on an
attached statement any other information
the partner needs to determine if the
qualified nonrecourse rules are also met at
the partner level.
Item L. Partner’s Capital
Account Analysis
You are not required to complete item L if
the answer to question 6 of Schedule B is
“Yes.” If you are required to complete this
item, see the instructions for Schedule M-2
on page 40. Check the appropriate box that
describes the method of accounting used to
compute the partner’s capital account.
• Check the “Tax basis” box if the method
of accounting used to compute the partner’s
capital account is based on the partnership’s
income and deductions for federal tax
purposes.
• Check the “GAAP” box if it is based on
generally accepted accounting principles
(GAAP).
• Check the “Section 704(b) book” box if it
is based on the capital accounting rules
under Regulations section 1.704-1(b)(2)(iv).
• Check the “Other” box if any other method
is used to compute the partner’s capital
account and attach a statement describing
the method and showing how the partner’s
capital account was computed.
Item M. Did the Partner
Contribute Property With a
Built-in Gain or Loss?
Check the appropriate box to indicate
whether the partner contributed property
with a built-in gain or loss during the tax
year. If the “Yes” box is checked, attach a
statement that contains the following
information.
• A description of each property the partner
contributed.
• The date the property was contributed.
• The amount of the property’s built-in gain
or loss.
Exception. If a partner contributes more
than 10 properties with either a built-in gain
or built-in loss on any date during the tax
year, the partnership is not required to
provide the required information separately
for each property contributed for that date.
Instead, the partnership can report the (a)
number of properties contributed on that
date, (b) total amount of built-in gain, and (c)
Instructions for Form 1065
total amount of built-in loss. Do not net the
built-in gains and built-in losses; instead,
show the total built-in gain and total built-in
loss for all properties contributed on that
date.
A property’s built-in gain is the amount by
which the fair market value of the property
exceeds its adjusted tax basis at the time
the property is contributed to the
partnership. A property’s built-in loss is the
amount by which the fair market value of the
property is less than its adjusted tax basis at
the time the property is contributed to the
partnership. Partnerships are required to
keep track of this information (see
Regulations section 1.704-3). This
information is also needed for purposes of
allocating partnership items to partners
because income, gain, loss, and deductions
with respect to property contributed to the
partnership by a partner shall be shared
among the partners so as to take account of
the variation between the basis of the
property to the partnership and its fair
market value at the time of contribution. If
the partnership distributes any property
(other than built-in gain property) to a
partner that has contributed built-in gain
property to the partnership within the last 7
years, it will need this information for the
attached statement required in the
instructions for line 19b of Schedule K for
distributions subject to section 737 (code B).
If the partnership distributes contributed
property with a built-in gain or loss to any
partner other than the partner that
contributed the property and the date of the
distribution is within 7 years of the date the
property was contributed to the partnership,
it will need this information for the attached
statement required by the instructions for
line 20c of Schedule K for the
precontribution gain (loss) (code W).
Specific Instructions
(Schedules K and K-1, Part
III, Except as Noted)
These instructions refer to the lines on
Schedule K and the boxes on Schedule K-1.
Special Allocations
An item is specially allocated if it is allocated
to a partner in a ratio different from the ratio
for sharing income or loss generally.
Report specially allocated ordinary gain
(loss) on Schedule K, line 11, and on
Schedule K-1, box 11. Report other
specially allocated items in the applicable
boxes of the partner’s Schedule K-1, with
the total amount on the applicable line of
Schedule K. See How Income Is Shared
Among Partners on page 23.
Example. A partnership has a long-term
capital gain that is specially allocated to a
partner and a net long-term capital gain
reported on line 13 of Schedule D that must
be reported on line 9a of Schedule K.
Because specially allocated gains or losses
are not reported on Schedule D, the
partnership must report both the net
long-term capital gain from Schedule D and
the specially allocated gain on line 9a of
Schedule K. Box 9a of the Schedule K-1 for
the partner must include both the specially
allocated gain and the partner’s distributive
-25-
share of the net long-term capital gain from
Schedule D.
Income (Loss)
Line 1. Ordinary Business Income
(Loss)
Enter the amount from page 1, line 22. Enter
the income (loss) without reference to (a)
the basis of the partners’ interests in the
partnership, (b) the partners’ at-risk
limitations, or (c) the passive activity
limitations. These limitations, if applicable,
are determined at the partner level.
Line 1 should not include rental activity
income (loss) or portfolio income (loss).
Schedule K-1. Enter each partner’s
distributive share of ordinary business
income (loss) in box 1 of Schedule K-1. If
the partnership has more than one trade or
business activity, identify on an attachment
to Schedule K-1 the amount from each
separate activity. See Passive Activity
Reporting Requirements on page 13.
Line 2. Net Rental Real Estate
Income (Loss)
Enter the net income (loss) from rental real
estate activities of the partnership from
Form 8825. Attach this form to Form 1065.
Schedule K-1. Enter each partner’s
distributive share of net rental real estate
income (loss) in box 2 of Schedule K-1. If
the partnership has more than one rental
real estate activity, identify on an attachment
to Schedule K-1 the amount attributable to
each activity. See Passive Activity Reporting
Requirements on page 13.
Line 3. Other Net Rental Income
(Loss)
Enter on line 3a gross income from rental
activities other than those reported on Form
8825. Include on line 3a gain (loss) from line
17 of Form 4797 that is attributable to the
sale, exchange, or involuntary conversion of
an asset used in a rental activity other than
a rental real estate activity.
Enter on line 3b the deductible expenses
of the activity. Attach a statement of these
expenses to Form 1065.
Enter on line 3c the net income (loss).
See Rental Activities on page 11 and
Pub. 925 for more information on rental
activities.
Schedule K-1. Enter each partner’s
distributive share of net income (loss) from
rental activities other than rental real estate
activities in box 3 of Schedule K-1. If the
partnership has more than one rental activity
reported in box 3, identify on an attachment
to Schedule K-1 the amount from each
activity. See Passive Activity Reporting
Requirements on page 13.
Line 4. Guaranteed Payments to
Partners
Guaranteed payments to partners include:
• Payments for salaries, health insurance,
and interest deducted by the partnership
and reported on Form 1065, page 1, line 10;
Form 8825; or on Schedule K, line 3b;
• Compensation deferred under a section
409A nonqualified deferred compensation
plan that does not meet the requirements of
section 409A reported on line 20c of
Schedule K; and
• Payments the partnership must capitalize.
See the Instructions for Form 1065, line 10.
Generally, amounts reported on line 4
are not considered to be related to a passive
activity. For example, guaranteed payments
for personal services paid to a partner would
not be passive activity income. Likewise,
interest paid to any partner is not passive
activity income.
The distribution of property to a
TIP partner as part or all of a guaranteed
payment is a sale or exchange of
property. Complete Schedule D for the
distribution. See Rev. Rul. 2007-40, 2007-25
I.R.B. 1426, for more details.
Schedule K-1. Enter each partner’s
guaranteed payments in box 4 of Schedule
K-1.
Portfolio Income
See page 11 of these instructions for a
definition of portfolio income.
Do not reduce portfolio income by
deductions allocated to it. Report such
deductions (other than interest expense) on
line 13d of Schedule K. Report each
partner’s distributive share of deductions
(other than interest) allocable to portfolio
income in box 13 of Schedule K-1, using
codes I, K, and L.
Interest expense allocable to portfolio
income is generally investment interest
expense reported on line 13b of Schedule K.
Report each partner’s distributive share of
interest expense allocable to portfolio
income in box 13 of Schedule K-1 using
code H.
Line 5. Interest Income
Enter only taxable portfolio interest on this
line. Taxable interest is interest from all
sources except interest exempt from tax and
interest on tax-free covenant bonds. Include
interest income from the credit to holders of
tax credit bonds. See the instructions for
Other credits (code P) under Line 15f. Other
Credits and the instructions for Form 8912
for details.
Schedule K-1. Enter each partner’s
distributive share of interest income in box 5
of Schedule K-1. If the partnership is
reporting interest income from clean
renewable energy bonds or Midwestern tax
credit bonds, attach a statement to
Schedule K-1 that shows each partner’s
distributive share of interest income from
these credits. Partners need this information
to properly adjust the basis of their interest
in the partnership.
Line 6a. Ordinary Dividends
Enter only taxable ordinary dividends on line
6a, including any qualified dividends
reported on line 6b.
Schedule K-1. Enter each partner’s
distributive share of ordinary dividends in
box 6a of Schedule K-1.
Line 6b. Qualified Dividends
Enter qualified dividends on line 6b. Except
as provided below, qualified dividends are
dividends received from domestic
corporations and qualified foreign
corporations.
Exceptions. The following dividends are
not qualified dividends.
• Dividends the partnership received on any
share of stock held for less than 61 days
during the 121-day period that began 60
days before the ex-dividend date. When
determining the number of days the
partnership held the stock, do not count
certain days during which the partnership’s
risk of loss was diminished. The ex-dividend
date is the first date following the declaration
of a dividend on which the purchaser of a
stock is not entitled to receive the next
dividend payment. When counting the
number of days the partnership held the
stock, include the day the partnership
disposed of the stock but not the day the
partnership acquired it.
• Dividends attributable to periods totaling
more than 366 days that the partnership
received on any share of preferred stock
held for less than 91 days during the
181-day period that began 90 days before
the ex-dividend date. When determining the
number of days the partnership held the
stock, do not count certain days during
which the partnership’s risk of loss was
diminished. Preferred dividends attributable
to periods totaling less than 367 days are
subject to the 61-day holding period rule
above.
• Dividends that relate to payments that the
partnership is obligated to make with
respect to short sales or positions in
substantially similar or related property.
• Dividends paid by a regulated investment
company that are not treated as qualified
dividend income under section 854.
• Dividends paid by a real estate
investment trust that are not treated as
qualified dividend income under section
857(c).
See Pub. 550 for more details.
Qualified foreign corporation. A foreign
corporation is a qualified foreign corporation
if it is:
1. Incorporated in a possession of the
United States or
2. Eligible for benefits of a
comprehensive income tax treaty with the
United States that the Secretary determines
is satisfactory for this purpose and that
includes an exchange of information
program. See Notice 2006-101, 2006-47
I.R.B. 930, for details.
If the foreign corporation does not meet
either 1 or 2, then it may be treated as a
qualified foreign corporation for any dividend
paid by the corporation if the stock
associated with the dividend paid is readily
tradable on an established securities market
in the United States.
However, qualified dividends do not
include dividends paid by an entity which
was a passive foreign investment company
(defined in section 1297) in either the tax
year of the distribution or the preceding tax
year.
See Notice 2004-71, 2004-45 I.R.B. 793,
for more details.
Schedule K-1. Enter each partner’s
distributive share of qualified dividends in
box 6b of Schedule K-1.
Line 7. Royalties
Enter the royalties received by the
partnership.
Schedule K-1. Enter each partner’s
distributive share of royalties in box 7 of
Schedule K-1.
-26-
Line 8. Net Short-Term Capital
Gain (Loss)
Enter the gain (loss) that is portfolio income
(loss) from Schedule D (Form 1065), line 6.
Schedule K-1. Enter each partner’s
distributive share of net short-term capital
gain (loss) in box 8 of Schedule K-1.
Line 9a. Net Long-Term Capital
Gain (Loss)
Enter the gain or loss that is portfolio income
(loss) from Schedule D (Form 1065), line 13.
Schedule K-1. Enter each partner’s
distributive share of net long-term capital
gain (loss) in box 9a of Schedule K-1.
If any gain or loss from lines 6 or 13
of Schedule D is from the disposition
CAUTION
of nondepreciable personal property
used in a trade or business, it may not be
treated as portfolio income. Instead, report it
on line 11 of Schedule K and report each
partner’s distributive share in box 11 of
Schedule K-1 using code F.
!
Line 9b. Collectibles (28%) Gain
(Loss)
Figure the amount attributable to collectibles
from the amount reported on Schedule D
(Form 1065), line 13. A collectibles gain
(loss) is any long-term gain or deductible
long-term loss from the sale or exchange of
a collectible that is a capital asset.
Collectibles include works of art, rugs,
antiques, metal (such as gold, silver, or
platinum bullion), gems, stamps, coins,
alcoholic beverages, and certain other
tangible property.
Also, include gain (but not loss) from the
sale or exchange of an interest in a
partnership or trust held for more than 1
year and attributable to unrealized
appreciation of collectibles. For details, see
Regulations section 1.1(h)-1. Also attach the
statement required under Regulations
section 1.1(h)-1(e).
Schedule K-1. Report each partner’s
distributive share of the collectibles (28%)
gain (loss) in box 9b of Schedule K-1.
Line 9c. Unrecaptured Section
1250 Gain
The three types of unrecaptured section
1250 gain must be reported separately on
an attached statement to Form 1065.
From the sale or exchange of the
partnership’s business assets. Figure
this amount in Part III of Form 4797 for each
section 1250 property (except property for
which gain is reported using the installment
method on Form 6252) for which you had an
entry in Part I of Form 4797. Subtract line
26g of Form 4797 from the smaller of line 22
or line 24. Figure the total of these amounts
for all section 1250 properties. Generally,
the result is the partnership’s unrecaptured
section 1250 gain. However, if the
partnership is reporting gain on the
installment method for a section 1250
property held more than 1 year, see the next
paragraph.
The total unrecaptured section 1250 gain
for an installment sale of section 1250
property held more than 1 year is figured in
a manner similar to that used in the
preceding paragraph. However, the total
unrecaptured section 1250 gain must be
allocated to the installment payments
Instructions for Form 1065
received from the sale. To do so, the
partnership generally must treat the gain
allocable to each installment payment as
unrecaptured section 1250 gain until all
such gain has been used in full. Figure the
unrecaptured section 1250 gain for
installment payments received during the
tax year as the smaller of (a) the amount
from line 26 or line 37 of Form 6252
(whichever applies) or (b) the total
unrecaptured section 1250 gain for the sale
reduced by all gain reported in prior years
(excluding section 1250 ordinary income
recapture).
If the partnership chose not to treat
all of the gain from payments
received after May 6, 1997, and
before August 24, 1999, as unrecaptured
section 1250 gain, use only the amount the
partnership chose to treat as unrecaptured
section 1250 gain for those payments to
reduce the total unrecaptured section 1250
gain remaining to be reported for the sale.
See Regulations section 1.453-12.
!
CAUTION
From the sale or exchange of an interest
in a partnership. Also report as a separate
amount any gain from the sale or exchange
of an interest in a partnership attributable to
unrecaptured section 1250 gain. See
Regulations section 1.1(h)-1 and attach the
statement required under Regulations
section 1.1(h)-1(e).
From an estate, trust, REIT, or RIC. If the
partnership received a Schedule K-1 or
Form 1099-DIV from an estate, a trust, a
real estate investment trust (REIT), or a
regulated investment company (RIC)
reporting “unrecaptured section 1250 gain,”
do not add it to the partnership’s own
unrecaptured section 1250 gain. Instead,
report it as a separate amount. For example,
if the partnership received a Form 1099-DIV
from a REIT with unrecaptured section 1250
gain, report it as “Unrecaptured section
1250 gain from a REIT.”
Schedule K-1. Report each partner’s
distributive share of unrecaptured section
1250 gain from the sale or exchange of the
partnership’s business assets in box 9c of
Schedule K-1. If the partnership is reporting
unrecaptured section 1250 gain from an
estate, trust, REIT, or RIC or from the
partnership’s sale or exchange of an interest
in another partnership (as explained above),
enter “STMT” in box 9c and an asterisk (*) in
the left column of the box and attach a
statement that separately identifies the
amount of unrecaptured section 1250 gain
from:
• The sale or exchange of the partnership’s
business assets.
• The sale or exchange of an interest in
another partnership.
• An estate, trust, REIT, or RIC.
Line 10. Net Section 1231 Gain
(Loss)
Enter the net section 1231 gain (loss) from
Form 4797, line 7.
Do not include net gain or loss from
involuntary conversions due to casualty or
theft. Report net gain or loss from
involuntary conversions due to casualty or
theft on line 11 of Schedule K (box 11, code
B, of Schedule K-1). See the instructions for
line 11 on how to report net gain (loss) due
to a casualty or theft.
Instructions for Form 1065
Schedule K-1. Report each partner’s
distributive share of net section 1231 gain
(loss) in box 10 of Schedule K-1. If the
partnership has more than one rental, trade,
or business activity, identify on an
attachment to Schedule K-1 the amount of
section 1231 gain (loss) from each separate
activity. See Passive Activity Reporting
Requirements on page 13.
Line 11. Other Income (Loss)
Enter any other item of income or loss not
included on lines 1 through 10. On the line
to the left of the entry space for line 11,
identify the type of income. If there is more
than one type of income, attach a statement
to Form 1065 that separately identifies each
type and amount of income for each of the
following categories. The codes needed for
Schedule K-1 reporting are provided for
each category.
Other portfolio income (loss) (code A).
Portfolio income not reported on lines 5
through 10.
Report and identify other portfolio income
or loss on an attachment for line 11.
For example, income reported to the
partnership from a real estate mortgage
investment conduit (REMIC), in which the
partnership is a residual interest holder,
would be reported on an attachment for line
11. If the partnership holds a residual
interest in a REMIC, report on the
attachment for box 11 of Schedule K-1 the
partner’s share of the following.
• Taxable income (net loss) from the
REMIC (line 1b of Schedules Q (Form
1066)).
• Excess inclusion (line 2c of Schedules Q
(Form 1066)).
• Section 212 expenses (line 3b of
Schedules Q (Form 1066)). Do not report
these section 212 expense deductions
related to portfolio income on Schedules K
and K-1.
Because Schedule Q (Form 1066) is a
quarterly statement, the partnership must
follow the Schedule Q instructions to figure
the amounts to report to partners for the
partnership’s tax year.
Involuntary conversions (code B). Net
gain (loss) from involuntary conversions due
to casualty or theft. The amount for this line
is shown on Form 4684, Casualties and
Thefts, line 41a, 41b, or 42.
Each partner’s share must be entered on
Schedule K-1. Give each partner a schedule
that shows the amounts to be reported on
the partner’s Form 4684, line 37, columns
(b)(i), (b)(ii), and (c).
If there was a gain (loss) from a casualty
or theft to property not used in a trade or
business or for income-producing purposes,
notify the partner. The partnership should
not complete Form 4684 for this type of
casualty or theft. Instead, each partner will
complete his or her own Form 4684.
Section 1256 contracts and straddles
(code C). Report any net gain or loss from
section 1256 contracts from Form 6781,
Gains and Losses From Section 1256
Contracts and Straddles.
Mining exploration costs recapture (code
D). Provide the information partners need
to recapture certain mining exploration
expenditures. See Regulations section
1.617-3.
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Cancellation of debt (code E). If
cancellation of debt is reported to the
partnership on Form 1099-C, report each
partner’s distributive share in box 11 using
code E.
Note. Include the amount of income the
partnership must recognize for a transfer of
a partnership interest in satisfaction of a
partnership debt when the debt relieved
exceeds the FMV of the partnership interest.
See section 108(e)(8) for more information.
Do not report cancelled debt income
deferred under section 108(i) using
CAUTION
code E. Instead, report the deferred
income using code F. For information on the
section 108(i) election, see Election to defer
income from cancelled debt on page 15.
Other income (loss) (code F). Include
any other type of income, such as the
following.
• The partner’s distributive share of the
partnership’s gain or loss attributable to the
sale or exchange of qualified preferred stock
of the Federal National Mortgage
Association (Fannie Mae) and the Federal
Home Loan Mortgage Corporation (Freddie
Mac). On an attached statement, show (a)
the gain or loss attributable to the sale or
exchange of the qualified preferred stock,
(b) the date the stock was acquired by the
partnership, and (c) the date the stock was
sold or exchanged by the partnership. See
Rev. Proc. 2008-64, 2008-47 I.R.B. 1195 for
more information.
• Recoveries of tax benefit items (section
111).
• Gambling gains and losses subject to the
limitations in section 165(d). Indicate on an
attached statement whether or not the
partnership is in the trade or business of
gambling.
• Disposition of an interest in oil, gas,
geothermal, or other mineral properties.
Report the following information on an
attached statement to Schedule K-1.
(a) Description of the property,
(b) The partner’s share of the amount
realized on the sale, exchange, or
involuntary conversion of each property (fair
market value of the property for any other
disposition, such as a distribution),
(c) The partner’s share of the partnership’s
adjusted basis in the property (except for oil
or gas properties), and
(d) Total intangible drilling costs,
development costs, and mining exploration
costs (section 59(e) expenditures) passed
through to the partner for the property.
See Regulation section 1.1254-5 for more
information.
• Gains from the disposition of farm
recapture property (see Form 4797) and
other items to which section 1252 applies.
• Any income, gain, or loss to the
partnership under section 751(b).
• Specially allocated ordinary gain (loss).
• Any gain or loss from lines 6 or 13 of
Schedule D that is not portfolio income (for
example, gain or loss from the disposition of
nondepreciable personal property used in a
trade or business).
• Any cancellation of debt income
previously deferred as a result of a section
108(i) election that is includible in the
current year. See section 108(i) for events
that will cause previously deferred income to
be reportable, and a special rule for
allocating deferred income to the partners.
For more information, see Election to defer
!
income from cancelled debt on page 15.
Special rule for filers of Form 8865. Filers
of Form 8865, Return of U.S. Persons With
Respect to Certain Foreign Partnerships,
cannot defer recognizing and reporting
cancelled debt income on Form 8865, in
accordance with the section 108(i) election,
unless the foreign partnership filed a U.S.
partnership return and made the election. A
foreign partnership must file Form 1065 or
Form 1065-B to make the section 108(i)
election. These foreign partnerships also
have an annual reporting requirement on
Form 1065 or Form 1065-B for each tax
year after the election until all items deferred
under section 108(i) have been recognized.
See Rev. Proc. 2009-37, 2009-36 I.R.B. 309
for details.
• Gain from the sale or exchange of
qualified small business (QSB) stock (as
defined in the Instructions for Schedule D)
that is eligible for the partial section 1202
exclusion. The section 1202 exclusion
applies only to QSB stock held by the
partnership for more than 5 years.
Corporate partners are not eligible for the
section 1202 exclusion. Additional
limitations apply at the partner level. Report
each partner’s share of section 1202 gain on
Schedule K-1. Each partner will determine if
he or she qualifies for the section 1202
exclusion. Report on an attachment to
Schedule K-1 for each sale or exchange (a)
the name of the corporation that issued the
QSB stock, (b) the partner’s share of the
partnership’s adjusted basis and sales price
of the QSB stock, and (c) the dates the QSB
stock was bought and sold.
• Gain eligible for section 1045 rollover
(replacement stock purchased by the
partnership). Include only gain from the sale
or exchange of qualified small business
(QSB) stock (as defined in the Instructions
for Schedule D) that was deferred by the
partnership under section 1045 and reported
on Schedule D. See the Instructions for
Schedule D for more details. The
partnership makes the election for section
1045 rollover on a timely filed (including
extensions) return for the year in which the
sale occurred. Corporate partners are not
eligible for the section 1045 rollover.
Additional limitations apply at the partner
level. Each partner will determine if he or
she qualifies for the rollover. Report on an
attachment to Schedule K-1 for each sale or
exchange (a) the name of the corporation
that issued the QSB stock, (b) the partner’s
share of the partnership’s adjusted basis
and sales price of the QSB stock, (c) the
dates the QSB stock was bought and sold,
(d) the partner’s distributive share of gain
from the sale of the QSB stock, and (e) the
partner’s distributive share of the gain that
was deferred by the partnership under
section 1045. Do not include these amounts
on line 11 of Schedule K.
• Gain eligible for section 1045 rollover
(replacement stock not purchased by the
partnership). Include only gain from the sale
or exchange of qualified small business
(QSB) stock (as defined in the Instructions
for Schedule D) the partnership held for
more than 6 months but that was not
deferred by the partnership under section
1045. See the Instructions for Schedule D
for more details. A partner (other than a
corporation) may be eligible to defer his or
her distributive share of this gain under
section 1045 if he or she purchases other
QSB stock during the 60-day period that
began on the date the QSB stock was sold
by the partnership. Additional limitations
apply at the partner level. Report on an
attachment to Schedule K-1 for each sale or
exchange (a) the name of the corporation
that issued the QSB stock, (b) the partner’s
share of the partnership’s adjusted basis
and sales price of the QSB stock, (c) the
dates the QSB stock was bought and sold,
and (d) the partner’s distributive share of
gain from the sale of the QSB stock.
For more information, see Regulations
section 1.1045-1. Do not include these
amounts on line 11 of Schedule K.
Distribution of replacement QSB stock
to a partner that reduces another
partner’s interest in replacement QSB
stock. A partner must recognize gain upon
a distribution of replacement QSB stock to
another partner that reduces the partner’s
share of the replacement QSB stock held by
a partnership. The amount of gain that the
partner must recognize is based on the
amount of gain that the partner would
recognize upon a sale of the distributed
replacement QSB stock for its fair market
value on the date of the distribution, not to
exceed the amount that the partner
previously deferred under section 1045 with
respect to the distributed replacement QSB
stock. If the partnership distributed a
partner’s share of replacement QSB stock to
another partner, the partnership must give
the partner whose share of the replacement
QSB stock is reduced (a) the name of the
corporation that issued the replacement
QSB stock, (b) the date the replacement
QSB stock was distributed to another
partner or partners, and (c) the partner’s
share of the partnership’s adjusted basis
and fair market value of the replacement
QSB stock on such date.
Schedule K-1. Enter each partner’s
distributive share of the other income
categories listed on pages 27 and 28 in box
11 of Schedule K-1. Enter the applicable
code A, B, C, D, E, or F (as shown on pages
27 and 28).
If you are reporting each partner’s
distributive share of only one type of income
under code F, enter the code with an
asterisk (F*) and the dollar amount in the
entry space in box 11 and attach a
statement that shows “Box 11, Code F,” and
the type of income. If you are reporting
multiple types of income under code F, enter
the code with an asterisk (F*) and enter
“STMT” in the entry space in box 11 and
attach a statement that shows “Box 11,
Code F,” and the dollar amount of each type
of income.
If the partnership has more than one
trade or business or rental activity (for codes
B through F), identify on an attachment to
Schedule K-1 the amount from each
separate activity. See Passive Activity
Reporting Requirements on page 13.
Deductions
Line 12. Section 179 Deduction
A partnership can elect to expense part of
the cost of certain property the partnership
purchased during the tax year for use in its
trade or business or certain rental activities.
See Pub. 946 for a definition of what kind of
property qualifies for the section 179
expense deduction and the Instructions for
-28-
Form 4562 for limitations on the amount of
the section 179 expense deduction.
Complete Part I of Form 4562 to figure
the partnership’s section 179 expense
deduction. The partnership does not take
the deduction itself but instead passes it
through to the partners. Attach Form 4562 to
Form 1065 and show the total section 179
expense deduction on Schedule K, line 12.
The partnership must reduce the basis of
the asset by the amount of the section 179
expense elected by the partnership, even if
a portion of that amount cannot be passed
through to its partners that year and must be
carried forward because of limitations at the
partnership level. Do not reduce the
partnership’s basis in section 179 property
to reflect any portion of the section 179
expense that is allocable to a partner that is
a trust or estate.
Identify on an attachment to Schedules K
and K-1 the cost of section 179 property
placed in service during the year that is
qualified enterprise zone, renewal
community, qualified section 179 Recovery
Assistance, qualified section 179 disaster
assistance, or qualified real property.
See the instructions for line 20c of
Schedule K for sales or other dispositions of
property for which a section 179 deduction
has passed through to partners and for the
recapture rules if the business use of the
property dropped to 50% or less.
Schedule K-1. Report each partner’s
distributive share of the section 179
expense deduction in box 12 of Schedule
K-1. If any part of the section 179 expense
deduction is attributable to qualified real
property, report the partner’s distributive
share of that amount on an attached
statement. If the partnership has more than
one rental, trade, or business activity,
identify on an attachment to Schedule K-1
the amount of section 179 deduction from
each separate activity. See Passive Activity
Reporting Requirements on page 13.
Do not complete box 12 of Schedule K-1
for any partner that is an estate or trust;
estates and trusts are not eligible for the
section 179 expense deduction.
Line 13a. Contributions
Generally, no deduction is allowed for any
contribution of $250 or more unless the
partnership obtains a written
acknowledgment from the charitable
organization that shows the amount of cash
contributed, describes any property
contributed, and gives an estimate of the
value of any goods or services provided in
return for the contribution. The
acknowledgment must be obtained by the
due date (including extensions) of the
partnership return or, if earlier, the date the
partnership files its return. Do not attach the
acknowledgment to the tax return, but keep
it with the partnership’s records. These rules
apply in addition to the filing requirements
for Form 8283, Noncash Charitable
Contributions, described below.
Cash contributions of any amount must
be supported by a dated bank record or
receipt.
Enter charitable contributions made
during the tax year. Attach a statement to
Form 1065 that separately identifies the
partnership’s contributions for each of the
following categories. See Limits on
Instructions for Form 1065
Deductions in Pub. 526, Charitable
Contributions, for information on adjusted
gross income (AGI) limitations on
deductions for charitable contributions.
The codes needed for Schedule K-1
reporting are provided for each category.
Cash contributions (50%) (code A). Enter
cash contributions subject to the 50% AGI
limitation.
Cash contributions (30%) (code B). Enter
cash contributions subject to the 30% AGI
limitation.
Noncash contributions (50%) (code C).
Enter noncash contributions subject to the
50% AGI limitation. If property other than
cash is contributed and if the claimed
deduction for one item or group of similar
items of property exceeds $5,000, the
partnership must give each partner a copy
of Form 8283 to attach to the partner’s tax
return.
Qualified conservation contributions.
The AGI limit for qualified conservation
contributions under section 170(h) is 50%.
The carryover period is 15 years. See
section 170(b) and Notice 2007-50, 2007-25
I.R.B. 1430, for details. Report qualified
conservation contributions with a 50% AGI
limitation on Schedule K-1 in box 13 using
code C. Do not include in the amount
reported using code C the conservation
contributions of property used in agriculture
or livestock production reported on
Schedule K-1 using code G.
Charitable contributions of food
inventory. Attach a statement to Schedule
K-1 that shows:
• The deduction for charitable contributions
under section 170(e)(3) of qualified
inventory that was donated for the care of
the ill, needy, and infants (see section
170(e)(3)(C)). To qualify for the deduction,
the food must meet all the quality and
labeling standards imposed by federal,
state, and local laws and regulations. The
amount of the charitable contribution for
donated food inventory is the lesser of (a)
the basis of the donated food plus one-half
of the appreciation (gain if the donated food
was sold at fair market value on the date of
the gift) or (b) twice the amount of basis of
the donated food.
• The partner’s distributive share of the net
income for the tax year from the
partnership’s trades or businesses that
made the contribution of food inventory.
Do not include the amount of food
inventory contributions in the amount
CAUTION
reported in box 13 using code C.
These contributions must be reported
separately on an attached statement
because partners must separately
determine the limitations on the deduction.
Noncash contributions (30%) (code D).
Enter noncash contributions subject to the
30% AGI limitation.
Capital gain property to a 50%
organization (30%) (code E). Enter capital
gain property contributions subject to the
30% AGI limitation.
Capital gain property (20%) (code F).
Enter capital gain property contributions
subject to the 20% AGI limitation.
Contributions of property. See
Contributions of Property in Pub. 526 and
Pub. 561, Determining the Value of Donated
Property, for information on noncash
!
Instructions for Form 1065
contributions and contributions of capital
gain property. If the deduction claimed for
noncash contributions exceeds $500,
complete Form 8283 and attach it to Form
1065.
If the partnership made a qualified
conservation contribution under section
170(h), also include the fair market value of
the underlying property before and after the
donation, as well as the type of legal interest
contributed, and describe the conservation
purpose furthered by the donation. Give a
copy of this information to each partner.
Nondeductible contributions. Certain
contributions made to an organization
conducting lobbying activities are not
deductible. See section 170(f)(9) for more
details. Also, see Contributions You Cannot
Deduct in Pub. 526 for more examples of
nondeductible contributions.
Contributions (100%) (code G). Enter
qualified conservation contributions of
property used in agriculture or livestock
production. The contribution must be subject
to a restriction that the property remain
available for such production. See section
170(b) for details.
Qualified conservation contributions
of property used in agriculture or
livestock production. If the partnership is
a qualified farmer or rancher (as defined in
section 170(b)(1)(E)(v)), show each
partner’s distributive share of qualified
conservation contributions of property used
in agriculture or livestock production.
Partners will have to separately determine
whether they qualify for the 50% or 100%
AGI limitation for these contributions. Do not
include the amounts reported on the
attached statement using code G in the
amount reported on Schedule K-1 for
qualified conservation contributions using
code C.
Schedule K-1. Report each partner’s
distributive share of charitable contributions
in box 13 of Schedule K-1 using codes A
through G for each of the contribution
categories shown above. The partnership
must attach a copy of its Form 8283 to the
Schedule K-1 of each partner if the
deduction for any item or group of similar
items of contributed property exceeds
$5,000, even if the amount allocated to any
partner is $5,000 or less.
Line 13b. Investment Interest
Expense
Include on this line the interest properly
allocable to debt on property held for
investment purposes. Property held for
investment includes property that produces
income (unless derived in the ordinary
course of a trade or business) from interest,
dividends, annuities, or royalties; and gains
from the disposition of property that
produces those types of income or is held
for investment.
Investment interest expense does not
include interest expense allocable to a
passive activity.
Investment income and investment
expenses other than interest are reported on
lines 20a and 20b respectively. This
information is needed by partners to
determine the investment interest expense
limitation (see Form 4952, Investment
Interest Expense Deduction, for details).
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Schedule K-1. Report each partner’s
distributive share of investment interest
expense in box 13 of Schedule K-1 using
code H.
Lines 13c(1) and 13c(2). Section
59(e)(2) Expenditures
Generally, section 59(e) allows each partner
to make an election to deduct their
distributive share of the partnership’s
otherwise deductible qualified expenditures
ratably over 10 years (3 years for circulation
expenditures). The deduction is taken
beginning with the tax year in which the
expenditures were made (or for intangible
drilling and development costs, over the
60-month period beginning with the month in
which such costs were paid or incurred).
The term “qualified expenditures”
includes only the following types of
expenditures paid or incurred during the tax
year.
• Circulation expenditures.
• Research and experimental expenditures.
• Intangible drilling and development costs.
• Mining exploration and development
costs.
If a partner makes the election, these
items are not treated as AMT tax preference
items.
Because the partners are generally
allowed to make this election, the
partnership cannot deduct these amounts or
include them as AMT items on Schedule
K-1. Instead, the partnership passes through
the information the partners need to figure
their separate deductions.
On line 13c(1), enter the type of
expenditures claimed on line 13c(2). Enter
on line 13c(2) the qualified expenditures
paid or incurred during the tax year for
which an election under section 59(e) may
apply. Enter this amount for all partners
whether or not any partner makes an
election under section 59(e).
On an attached statement, identify the
property for which the expenditures were
paid or incurred. If the expenditures were for
intangible drilling costs or development
costs for oil and gas properties, identify the
month(s) in which the expenditures were
paid or incurred. If there is more than one
type of expenditure or more than one
property, provide the amounts (and the
months paid or incurred if required) for each
type of expenditure separately for each
property.
Schedule K-1. Report each partner’s
distributive share of section 59(e)
expenditures in box 13 of Schedule K-1
using code J. On an attached statement,
identify (a) the type of expenditure, (b) the
property for which the expenditures are paid
or incurred, and (c) for oil and gas properties
only, the month in which intangible drilling
costs and development costs were paid or
incurred. If there is more than one type of
expenditure or the expenditures are for
more than one property, provide each
partner’s distributive share of the amounts
(and the months paid or incurred for oil and
gas properties) for each type of expenditure
separately for each property.
Line 13d. Other Deductions
Enter deductions not included on lines 12,
13a, 13b, 13c(2), and 16l. On the line to the
left of the entry space for this line, identify
the type of deduction. If there is more than
one type of deduction, attach a statement to
Form 1065 that separately identifies the type
and amount of each deduction for the
following categories. The codes needed for
Schedule K-1 reporting are provided for
each category.
Note. Do not include the domestic
production activities informational amounts
in the total for line 13d.
Deductions — royalty income (code I).
Enter deductions related to royalty income.
Deductions — portfolio (2% floor) (code
K). Enter deductions related to portfolio
income that are subject to the 2% of AGI
floor (see the Instructions for Schedule A
(Form 1040)).
Deductions — portfolio (other) (code L).
Enter any other deductions related to
portfolio income.
No deduction is allowed under section
212 for expenses allocable to a convention,
seminar, or similar meeting. Because these
expenses are not deductible by partners, the
partnership does not report these expenses
on line 13d of Schedule K. The expenses
are nondeductible and are reported as such
on line 18c of Schedule K and in box 18 of
Schedule K-1 using code C.
Schedule K-1. In box 13, report the
partner’s distributive share of deductions
related to portfolio income that are reported
on line 13d of Schedule K using codes I (for
deductions related to royalty income), K (for
deductions related to portfolio income and
subject to the 2% of AGI floor), or L (for
other deductions related to portfolio
income).
Amounts paid for medical insurance
(code M). Enter amounts paid during the
tax year for insurance that constitutes
medical care for the partner (including the
partner’s spouse, dependents, and any
children under age 27 who are not
dependents).
Educational assistance benefits (code N).
Enter amounts paid during the tax year for
educational assistance benefits paid to a
partner.
Dependent care benefits (code O). Enter
amounts paid during the tax year for
dependent care benefits paid on behalf of
each partner.
Preproductive period expenses (code P).
If the partnership is required to use an
accrual method of accounting under section
447 or 448(a)(3), it must capitalize these
expenses. If the partnership is permitted to
use the cash method, enter the amount of
preproductive period expenses that qualify
under Regulations section 1.263A-4(d). An
election not to capitalize these expenses
must be made at the partner level. See
Uniform Capitalization Rules in Pub. 225,
Farmer’s Tax Guide.
Commercial revitalization deduction from
rental real estate activities (code Q).
Enter the commercial revitalization
deduction on line 13d only if it is for a rental
real estate activity. If the deduction is for a
nonrental building, enter it on line 20 of
Form 1065. See the instructions for line 20
on page 19 for more information.
Pensions and IRAs (code R). Enter the
payments for a partner to an IRA, qualified
plan, or simplified employee pension (SEP)
or SIMPLE IRA plan. If a qualified plan is a
defined benefit plan, a partner’s distributive
share of payments is determined in the
same manner as his or her distributive share
of partnership taxable income. For a defined
benefit plan, attach to the Schedule K-1 for
each partner a statement showing the
amount of benefit accrued for the tax year.
Reforestation expense deduction
(code S). The partnership can elect to
deduct a limited amount of its reforestation
expenditures paid or incurred during the tax
year. The amount the partnership can elect
to deduct is limited to $10,000 for each
qualified timber property. See section 194(c)
for a definition of reforestation expenditures
and qualified timber property. The
partnership must amortize over 84 months
any amount not deducted. See the
instructions for line 20 on page 19. See
Notice 2006-47, 2006-20 I.R.B. 892, for
details on making the election.
Schedule K-1. Enter the partner’s
distributive share of the allowable
reforestation expenses in box 13 of
Schedule K-1 using code S and attach a
statement that provides a description of the
qualified timber property. If the partnership
is electing to deduct amounts from more
than one qualified timber property, provide a
description and the amount for each
property.
Domestic production activities deduction
(codes T, U, and V). The partnership
does not compute the domestic production
activities deduction, but must provide its
partners the information they need to
compute the deduction on Form 8903,
Domestic Production Activities Deduction. If
the partnership meets certain requirements
(explained below), it can choose to calculate
qualified production activities income (QPAI)
and Form W-2 wages (W-2 wages) at the
partnership level and report these amounts
on Schedule K-1 for its qualified partners
using codes U and V. See QPAI and Form
W-2 wages computed at partnership level,
below, for details.
If the partnership does not compute
QPAI and W-2 wages at the partnership
level or it has partners that are required to
compute QPAI at the partner level, it must
report on Schedule K-1 using code T the
partner’s distributive share of the information
listed under QPAI and Form W-2 wages
computed at partner level, below.
QPAI and Form W-2 wages computed
at partner level (code T). If the
partnership does not calculate QPAI and
W-2 wages at the partnership level, attach a
statement to Schedule K-1 using code T
providing each partner’s distributive share of
the following information. Identify any
amounts from oil-related production
activities and list them separately. Do not
include these amounts in the total reported
on line 13d of Schedule K.
• Domestic production gross receipts
(DPGR).
• Gross receipts from all sources.
• Cost of goods sold allocable to DPGR.
• Cost of goods sold from all sources.
• Total deductions, expenses, and losses
directly allocable to DPGR.
• Total deductions, expenses, and losses
directly allocable to a non-DPGR class of
income.
• Other deductions, expenses, and losses
not directly allocable to DPGR or another
class of income.
• W-2 wages properly allocable to DPGR.
-30-
• Any other information a partner needs to
use the section 861 method to allocate and
apportion cost of goods sold and deductions
between DPGR and other receipts.
See Form 8903 and its instructions for more
details. If the partnership chooses to
compute QPAI at the partnership level, see
the instructions below.
QPAI and Form W-2 wages computed
at partnership level (codes U and V).
Eligible partnerships can choose to compute
QPAI and W-2 wages at the partnership
level and report each qualified partner’s
distributive share of QPAI (using code U)
and W-2 wages (using code V) on Schedule
K-1. See the special rules for non-qualifying
partners of an eligible section 861
partnership below. Generally, the
partnership must allocate QPAI to its
partners in the same proportion as gross
income and allocate W-2 wages in the same
proportion as wage expense. For
information on computing QPAI and W-2
wages at the partnership level, see Rev.
Proc. 2007-34, 2007-23 I.R.B. 1345, and the
Instructions for Form 8903. See the eligibility
requirements and reporting rules for each
type of eligible partnership below. Qualifying
in-kind partnerships and expanded affiliated
group partnerships (defined in Regulations
section 1.199-3(i)(7) and (8)) are not eligible
to compute QPAI and W-2 wages at the
partnership level.
QPAI from oil-related activities.
Partnerships computing QPAI at the
partnership level must report the total
amount of QPAI (including QPAI from
oil-related activities) using code U and
attach a statement for code U to separately
report the amount of oil-related QPAI (if
any).
1. Eligible section 861 partnership.
An eligible section 861 partnership is a
partnership that satisfies each of the
following requirements for its current tax
year.
• It has at least 100 partners on any day
during the partnership’s tax year.
• At least 70% of the partnership is owned,
at all times during its tax year, by qualifying
partners. A qualifying partner is a partner
that, on each day during the partnership’s
tax year that the partner owns an interest in
the partnership: (a) is not a general partner
or a managing member of a partnership
organized as a limited liability company, (b)
does not materially participate in the
activities of the partnership, (c) does not
own, alone or combined with the interests of
all related persons, 5% or more of the profits
or capital interests in the partnership, or (d)
is not an ineligible partnership (qualifying
in-kind partnerships and expanded affiliated
group partnerships defined in Regulations
section 1.199-3(i)(7) and (8)).
• It has DPGR.
An eligible section 861 partnership must
use the section 861 method of cost
allocation to figure QPAI and W-2 wages
(see the Instructions for Form 8903 for
details). The partnership cannot allocate
QPAI and W-2 wages computed at the
partnership level to non-qualifying partners
(qualifying partners are defined as part of
the definition of an eligible section 861
partnership above). Instead, it must attach a
statement to the Schedule K-1 for
non-qualifying partners that provides the
partner’s distributive share of the items
Instructions for Form 1065
listed under QPAI and Form W-2 wages
computed at partner level (code T) earlier.
The partnership items allocated to
non-qualifying partners must be excluded for
purposes of computing QPAI and W-2
wages at the partnership level.
2. Eligible widely-held pass-through
partnership. An eligible widely-held
pass-through partnership is a partnership
that satisfies each of the following
requirements for the current tax year.
• It has average annual gross receipts for
the 3 tax years preceding the current tax
year of $100 million or less, or has total
assets at the end of the current tax year of
$10 million or less.
• It has total cost of goods sold and
deductions that, together, are $100 million
or less.
• It has DPGR.
• On every day during the current tax year,
all of its partners are individuals, estates, or
trusts described (or treated as described) in
section 1361(c)(2).
• On every day during the current tax year,
no partner owns, alone or combined with the
ownership interests of all related persons,
more than 10% of the profits or capital
interests in the partnership.
An eligible widely-held pass-through
partnership must use the simplified
deduction method of cost allocation to figure
QPAI and W-2 wages (see the Instructions
for Form 8903 for details).
3. Eligible small pass-through
partnership. An eligible small
pass-through partnership is a partnership
that satisfies each of the following
requirements for the current tax year.
• The partnership satisfies one of the
following: (a) it has average annual gross
receipts for the 3 tax years preceding the
current tax year of $5 million or less, (b) it is
engaged in the trade or business of farming
and is not required to use the accrual
method of accounting, or (c) it is eligible to
use the cash method of accounting under
Rev. Proc. 2002-28, 2002-18 I.R.B. 815
(that is, it has average annual gross receipts
of $10 million or less and is not excluded
from using the cash method under section
448).
• It has total costs of goods sold and
deductions that, together, are $5 million or
less.
• It has DPGR.
• It does not have a partner that is an
ineligible partnership (qualifying in-kind
partnerships and expanded affiliated group
partnerships defined in Regulations section
1.199-3(i)(7) and (8)).
An eligible small pass-through
partnership must use the small business
simplified overall method to figure QPAI and
W-2 wages (see the Instructions for Form
8903 for details).
Note. If a partnership satisfies the
requirements for more than one type of
eligible partnership, it may choose any one
of the allocation methods for which it
qualified to figure QPAI and W-2 wages.
See Rev. Proc. 2007-34 for more
information on the eligibility requirements
and rules for computing QPAI and W-2
wages at the partnership level.
Other deductions (code W).
other deductions, such as:
Instructions for Form 1065
Include any
• Amounts paid by the partnership that
would be allowed as itemized deductions on
any of the partners’ income tax returns if
they were paid directly by a partner for the
same purpose. These amounts include, but
are not limited to, expenses under section
212 for the production of income other than
from the partnership’s trade or business.
However, do not enter expenses related to
portfolio income or investment interest
expense reported on line 13b of Schedule K
on this line.
• Any penalty on early withdrawal of
savings not reported on line 13b because
the partnership withdrew its time savings
deposit before its maturity.
• Soil and water conservation expenditures,
and endangered species recovery
expenditures (section 175).
• Expenditures paid or incurred for the
removal of architectural and transportation
barriers to the elderly and disabled that the
partnership has elected to treat as a current
expense. See section 190.
• Film and television production expenses.
The partnership can elect to deduct certain
costs of a qualified film or television
production if the aggregate cost of the
production does not exceed $15 million.
There is a higher dollar limitation for
productions in certain areas. Provide a
description of the film or television
production on an attached statement. If the
partnership makes the election for more
than one film or television production, attach
a statement to Schedule K-1 that shows
each partner’s distributive share of the
qualified expenditures separately for each
production. The deduction is subject to
recapture under section 1245 if the election
is voluntarily revoked or the production fails
to meet the requirements for the deduction.
See section 181 and Temporary
Regulations sections 1.181-1T through 6T
for details.
• Interest expense allocated to
debt-financed distributions. See Notice
89-35, 1989-1 C.B. 675, or Pub. 535,
chapter 4, for more information.
• Interest paid or accrued on debt properly
allocable to each general partner’s share of
a working interest in any oil or gas property
(if the partner’s liability is not limited).
General partners that did not materially
participate in the oil or gas activity treat this
interest as investment interest; for other
general partners, it is trade or business
interest.
• Contributions to a capital construction
fund. See Pub. 595.
• The partnership’s original issue discount
(OID) deduction deferred under section
108(i)(2) that is allowable as a deduction in
the current year. The aggregate amount of
OID that is deferred is generally allowed as
a deduction ratably over the five-year period
the deferred COD income is includible in
income under section 108(i). For more
information, see Election to defer income
from cancelled debt on page 15.
Special rule for filers of Form 8865. Filers
of Form 8865, Return of U.S. Persons With
Respect to Certain Foreign Partnerships,
cannot report a section 108(i) OID deduction
on Form 8865, in accordance with the
section 108(i) election, unless the foreign
partnership filed a U.S. partnership return
and made the election. A foreign partnership
must file Form 1065 or Form 1065-B to
make the section 108(i) election. These
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foreign partnerships also have an annual
reporting requirement on Form 1065 or
Form 1065-B for each tax year after the
election until all items deferred under
section 108(i) have been recognized. See
Rev. Proc. 2009-37, 2009-36 I.R.B. 309 for
details.
Schedule K-1. Enter each partner’s
distributive share of the deduction
categories listed earlier in box 13 of
Schedule K-1 or provide the information
required on an attached statement for the
deduction. Enter the applicable code I, K, L,
M, N, O, P, Q, R, S, T, U, V, or W (as shown
earlier).
If you are reporting only one type of
deduction under code W, enter code W with
an asterisk (W*) and the dollar amount in
the entry space in box 13 and attach a
statement that shows the box number, code,
and type of deduction. If you are reporting
multiple types of deductions under code W,
enter the code with an asterisk (W*), enter
“STMT” in the dollar amount entry space in
box 13, and attach a statement that shows
the box number, code, and the dollar
amount of each type of deduction.
If the partnership has more than one
trade or business activity, identify on an
attachment to Schedule K-1 the amount for
each separate activity. See Passive Activity
Reporting Requirements on page 13.
Self-Employment
Note. If the partnership is an options dealer
or a commodities dealer, see section 1402(i)
before completing lines 14a, 14b, and 14c,
to determine the amount of any adjustment
that may have to be made to the amounts
shown on theWorksheet for Figuring Net
Earnings (Loss) From Self-Employment
below. If the partnership is engaged solely in
the operation of a group investment
program, earnings from the operation are
not self-employment earnings for either
general or limited partners.
General partners. General partners’ net
earnings (loss) from self-employment do not
include:
• Dividends on any shares of stock and
interest on any bonds, debentures, notes,
etc., unless the dividends or interest are
received in the course of a trade or
business, such as a dealer in stocks or
securities or interest on notes or accounts
receivable.
• Rentals from real estate, except rentals of
real estate held for sale to customers in the
course of a trade or business as a real
estate dealer or payments for rooms or
space when significant services are
provided.
• Royalty income, except royalty income
received in the course of a trade or
business.
See the instructions for Schedule SE
(Form 1040), Self-Employment Tax, for
more information.
Limited partners. Generally, a limited
partner’s share of partnership income (loss)
is not included in net earnings (loss) from
self-employment. Limited partners treat as
self-employment earnings only guaranteed
payments for services they actually
rendered to, or on behalf of, the partnership
to the extent that those payments are
payment for those services.
Line 14a. Net Earnings (Loss) From
Self-Employment
Schedule K. Enter on line 14a the amount
from line 5 of the worksheet.
Schedule K-1. Do not complete this line
for any partner that is an estate, trust,
corporation, exempt organization, or
individual retirement arrangement (IRA).
Enter in box 14 of Schedule K-1 each
individual general partner’s share of the
amount shown on line 3c of the worksheet
and each individual limited partner’s share
of the amount shown on line 4c of the
worksheet, using code A.
Line 14b. Gross Farming or
Fishing Income
Enter on line 14b the partnership’s gross
farming or fishing income from
self-employment. Individual partners need
this amount to figure net earnings from
self-employment under the farm optional
method in Section B, Part II of Schedule SE
(Form 1040). Enter each individual partner’s
distributive share in box 14 of Schedule K-1
using code B.
Line 14c. Gross Nonfarm Income
Enter on line 14c the partnership’s gross
nonfarm income from self-employment.
Individual partners need this amount to
figure net earnings from self-employment
under the nonfarm optional method in
Section B, Part II of Schedule SE (Form
1040). Enter each individual partner’s share
in box 14 of Schedule K-1 using code C.
Worksheet Instructions
Line 1b. Include on line 1b any part of the
net income (loss) from rental real estate
activities from Schedule K, line 2, that is
from:
1. Rentals of real estate held for sale to
customers in the course of a trade or
business as a real estate dealer or
2. Rentals for which services were
rendered to the occupants (other than
services usually or customarily rendered for
the rental of space for occupancy only). The
supplying of maid service is such a service;
but the furnishing of heat and light, the
cleaning of public entrances, exits, stairways
and lobbies, trash collection, etc., are not
considered services rendered to the
occupants.
Lines 3b and 4b. Allocate the amounts on
these lines in the same way Form 1065,
page 1, line 22, is allocated to these
particular partners.
Line 4a. Include in the amount on line 4a
any guaranteed payments to partners
reported on Schedule K, line 4, and
Schedule K-1, box 4, and derived from a
trade or business as defined in section
1402(c). Also include other ordinary
business income and expense items (other
than expense items subject to separate
limitations at the partner level, such as the
section 179 expense deduction) reported on
Schedules K and K-1 that are used to figure
self-employment earnings under section
1402.
Credits
Note. Do not attach Form 3800, General
Business Credit, to Form 1065.
The partnership should provide the
information necessary for the partner to
determine whether the partnership is an
eligible small business under section
38(c)(5)(C) if general business credits are
claimed. If the partner and the partnership
meet the requirements of section
38(c)(5)(C), general business credits may
be treated as eligible small business credits.
Low-Income Housing Credit
Section 42 provides a credit that can be
claimed by owners of low-income residential
rental buildings. To qualify for this credit, the
partnership must file Form 8609,
Low-Income Housing Credit Allocation and
Certification, separately with the IRS. Do not
attach Form 8609 to Form 1065. Complete
and attach Form 8609-A, Annual Statement
for Low-Income Housing Credit and Form
8586, Low-Income Housing Credit to Form
1065.
Line 15a. Low-Income Housing
Credit (Section 42(j)(5))
Enter on line 15a the total low-income
housing credit for property with respect to
which a partnership is to be treated under
section 42(j)(5) as the taxpayer to which the
low-income housing credit was allowed.
If the partnership invested in another
partnership to which the provisions of
section 42(j)(5) apply, report on line 15a the
credit reported to the partnership on
Schedule K-1 (Form 1065), box 15, code A
and code C.
Schedule K-1. Report in box 15 of
Schedule K-1 each partner’s distributive
share of the low-income housing credit
reported on line 15a of Schedule K. Use
code A to report credits attributable to
buildings placed in service before 2008. Use
code C to report credits attributable to
buildings placed in service after 2007. If the
partnership has credits from more than one
rental activity, identify on an attachment to
Schedule K-1 the amount for each separate
activity. See Passive Activity Reporting
Requirements on page 13.
Line 15b. Low-Income Housing
Credit (Other)
Enter on line 15b any low-income housing
credit not reported on line 15a. This includes
any credit reported to the partnership on
Schedule K-1 (Form 1065), box 15, using
code B and code D.
Schedule K-1. Report in box 15 of
Schedule K-1 each partner’s distributive
share of the low-income housing credit
reported on line 15b of Schedule K. Use
code B to report credits attributable to
buildings placed in service before 2008. Use
code D to report credits attributable to
buildings placed in service after 2007. If the
partnership has credits from more than one
rental activity, identify on an attachment to
Worksheet for Figuring Net Earnings (Loss) From Self-Employment
1a Ordinary business income (loss) (Schedule K, line 1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1a
b Net income (loss) from certain rental real estate activities (see instructions) . . . . . . . . . . . . . . . . .
1b
c Other net rental income (loss) (Schedule K, line 3c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1c
d Net loss from Form 4797, Part II, line 17, included on line 1a above. Enter as a positive amount . . .
1d
e Combine lines 1a through 1d . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1e
2
Net gain from Form 4797, Part II, line 17, included on line 1a above . . . . . . . . . . . . . . . . . . . . . .
3a Subtract line 2 from line 1e. If line 1e is a loss, increase the loss on line 1e by the amount on line 2
b Part of line 3a allocated to limited partners, estates, trusts, corporations, exempt organizations, and
IRAs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2
3a
3b
c Subtract line 3b from line 3a. If line 3a is a loss, reduce the loss on line 3a by the amount on line 3b. Include each individual
general partner’s share in box 14 of Schedule K-1, using code A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4a Guaranteed payments to partners (Schedule K, line 4) derived from a trade or business as defined in
section 1402(c) (see instructions) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4a
b Part of line 4a allocated to individual limited partners for other than services and to estates, trusts,
corporations, exempt organizations, and IRAs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4b
c Subtract line 4b from line 4a. Include each individual general partner’s share and each individual limited partner’s share in box
14 of Schedule K-1, using code A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5
Net earnings (loss) from self-employment. Combine lines 3c and 4c. Enter here and on Schedule K, line 14a . . . . . . . . . . . .
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3c
4c
5
Instructions for Form 1065
Schedule K-1 the amount for each separate
activity. See Passive Activity Reporting
Requirements on page 13.
Line 15c. Qualified Rehabilitation
Expenditures (Rental Real Estate)
Enter on line 15c the total qualified
rehabilitation expenditures related to rental
real estate activities of the partnership. See
the Instructions for Form 3468 for details on
qualified rehabilitation expenditures.
Schedule K-1. Report each partner’s
distributive share of qualified rehabilitation
expenditures related to rental real estate
activities in box 15 of Schedule K-1 using
code E. Attach a statement to Schedule K-1
that provides the information and the
partner’s distributive share of the amounts
the partner will need to complete lines 11b
through 11j and line 11m of Form 3468. See
the Instructions for Form 3468 for details. If
the partnership has expenditures from more
than one rental real estate activity, identify
on an attachment to Schedule K-1 the
amount for each separate activity. See
Passive Activity Reporting Requirements on
page 13.
Qualified rehabilitation expenditures
for property not related to rental real
CAUTION
estate activities must be reported in
box 20, using code D.
!
Line 15d. Other Rental Real Estate
Credits
Enter on line 15d any other credit (other
than credits reported on lines 15a through
15c) related to rental real estate activities.
On the dotted line to the left of the entry
space for line 15d, identify the type of credit.
If there is more than one type of credit,
attach a statement to Form 1065 that
identifies the type and amount for each
credit. These credits may include any type
of credit listed in the instructions for line 15f.
Schedule K-1. Report in box 15 of
Schedule K-1 each partner’s distributive
share of other rental real estate credits
using code F. If you are reporting each
partner’s distributive share of only one type
of rental real estate credit under code F,
enter the code with an asterisk (F*) and the
dollar amount in the entry space in box 15
and attach a statement that shows “Box 15,
Code F,” and type of credit. If you are
reporting multiple types of rental real estate
credit under code F, enter the code with an
asterisk (F*) and enter “STMT” in the entry
space in box 15 and attach a statement that
shows “Box 15, Code F,” and the type and
dollar amount of the credits. If the
partnership has credits from more than one
rental real estate activity, identify on the
attached statement the amount of each type
of credit for each separate activity. See
Passive Activity Reporting Requirements on
page 13.
Line 15e. Other Rental Credits
Enter on line 15e any other credit (other
than credits reported on lines 15a through
15d) related to rental activities. On the
dotted line to the left of the entry space for
line 15e, identify the type of credit. If there is
more than one type of credit, attach a
statement to Form 1065 that identifies the
type and amount for each credit. These
credits may include any type of credit listed
in the instructions for line 15f.
Instructions for Form 1065
Schedule K-1. Report in box 15 of
Schedule K-1 each partner’s distributive
share of other rental credits using code G. If
you are reporting each partner’s distributive
share of only one type of rental credit under
code G, enter the code with an asterisk (G*)
and the dollar amount in the entry space in
box 15 and attach a statement that shows
“Box 15, Code G,” and type of credit. If you
are reporting multiple types of rental credit
under code G, enter the code with an
asterisk (G*) and enter “STMT” in the entry
space in box 15 and attach a statement that
shows “Box 15, Code G,” and the type and
dollar amount of the credits. If the
partnership has credits from more than one
rental activity, identify on the attached
statement the amount of each type of credit
for each separate activity. See Passive
Activity Reporting Requirements on page
13.
Line 15f. Other Credits
Enter on line 15f any other credit, except
credits or expenditures shown or listed for
lines 15a through 15e. If any of these credits
are attributable to rental activities, enter the
amount on line 15d or 15e. On the dotted
line to the left of the entry space for line 15f,
identify the type of credit. If there is more
than one type of credit or if there are any
credits subject to recapture, attach a
statement to Form 1065 that separately
identifies each type and amount of credit
and credit recapture information for the
following categories. The codes needed for
box 15 of Schedule K-1 are provided in the
heading of each category.
Undistributed capital gains credit
(code H). This credit represents taxes paid
on undistributed capital gains by a regulated
investment company (RIC) or a real estate
investment trust (REIT). As a shareholder of
a RIC or REIT, the partnership will receive
notice of the amount of tax paid on
undistributed capital gains on Form 2439,
Notice to Shareholder of Undistributed
Long-Term Capital Gains.
Alcohol and cellulosic biofuel fuels credit
(code I). Complete Form 6478 to figure the
credit. Attach it to Form 1065. Include the
amount shown on line 7 of Form 6478 in the
partnership’s income on line 7 of Form
1065. See section 40(f) for an election the
partnership can make to not have the credit
apply. If this credit includes the small
ethanol producer credit, identify on a
statement attached to Schedule K-1 (a)
each partner’s distributive share of the small
ethanol producer credit, (b) the number of
gallons of qualified ethanol fuel claimed by
the partnership for the small ethanol
producer credit, and (c) the partnership’s
productive capacity for alcohol.
Work opportunity credit (code J).
Complete Form 5884 to figure the credit.
Attach it to Form 1065.
Disabled access credit (code K).
Complete Form 8826 to figure the credit.
Attach it to Form 1065.
Empowerment zone and renewal
community employment credit (code L).
Complete Form 8844 to figure the credit.
Attach it to Form 1065.
Credit for increasing research activities
(code M). Complete Form 6765 to figure
the credit. Attach it to Form 1065.
Credit for employer social security and
Medicare taxes paid on certain employee
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tips (code N). Complete Form 8846 to
figure the credit. Attach it to Form 1065.
Backup withholding (code O). This credit
is for backup withholding on dividends,
interest, and other types of income of the
partnership.
Other credits (code P). Attach a
statement to Form 1065 that identifies the
type and amount of any other credits not
reported elsewhere, such as:
• New markets credit. Complete Form 8874
to figure the credit. Attach it to Form 1065.
• Nonconventional source fuel credit.
Complete Form 8907 to figure the credit and
attach it to Form 1065.
• Qualified railroad track maintenance
credit. Complete Form 8900 to figure the
credit and attach it to Form 1065.
• Unused investment credit from the
qualifying advanced coal project credit,
qualifying gasification project credit,
qualifying advanced energy project credit, or
qualifying therapeutic discovery project
credit allocated from cooperatives.
• Unused investment credit from the
rehabilitation credit or energy credit
allocated from cooperatives.
• Renewable electricity, refined coal, and
Indian coal production credit. See Rev.
Proc. 2007-65, as modified by
Announcement 2009-69 and Announcement
2007-112, for a safe harbor method for
allocating the credit for wind energy
production. Complete Form 8835 to figure
the credit. Attach a statement to Form 1065
and Schedule K-1 showing separately the
amount of the credit from Part I and from
Part II of Form 8835. Attach Form 8835 to
Form 1065.
• Indian employment credit. Complete Form
8845 to figure the credit and attach it to
Form 1065.
• Orphan drug credit. Complete Form 8820
to figure the credit and attach it to Form
1065.
• Credit for small employer pension plan
startup costs. Complete Form 8881 to figure
the credit and attach it to Form 1065.
• Credit for employer-provided childcare
facilities and services. Complete Form 8882
to figure the credit and attach it to Form
1065.
• Biodiesel and renewable diesel fuels
credit. Complete Form 8864 to figure the
credit and attach it to Form 1065. Include
the amount from line 8 of Form 8864 in the
partnership’s income on line 7 of Form
1065. If this credit includes the small
agri-biodiesel producer credit, identify on a
statement attached to Schedule K-1 (a)
each partner’s distributive share of the small
agri-biodiesel producer credit included in the
total credit allocated to the partner, (b) the
number of gallons for which the partnership
claimed the small agri-biodiesel producer
credit, and (c) the partnership’s productive
capacity for agri-biodiesel.
• Low sulfur diesel fuel production credit.
Complete Form 8896 to figure the credit and
attach it to Form 1065.
• General credits from an electing large
partnership.
• Distilled spirits credit (Form 8906).
• Energy efficient home credit (Form 8908).
• Energy efficient appliance credit (Form
8909).
• Alternative motor vehicle credit (Form
8910).
• Alternative fuel vehicle refueling property
credit (Form 8911).
• Clean renewable energy bond credit
(Form 8912). The amount of this credit
(excluding any credits from other
partnerships, estates, and trusts) must also
be reported as interest income on line 5 of
Schedule K.
• Midwestern tax credit bond credit (Form
8912). The amount of this credit (excluding
any credits from other partnerships, estates,
and trusts) must also be reported as interest
income on line 5 of Schedule K.
• New clean renewable energy bond credit
(Form 8912). The amount of this credit
(excluding any credits from other
partnerships, estates, and trusts) must also
be reported as interest income on line 5 of
Schedule K. In addition, the amount of this
credit must also be reported as a cash
distribution on line 19a of Schedule K.
• Qualified energy conservation bond credit
(Form 8912). The amount of this credit
(excluding any credits from other
partnerships, estates, and trusts) must also
be reported as interest income on line 5 of
Schedule K. In addition, the amount of this
credit must also be reported as a cash
distribution on line 19a of Schedule K.
• Qualified forestry conservation bond
credit (Form 8912). The amount of this
credit (excluding any credits from other
partnerships, estates, and trusts) must also
be reported as interest income on line 5 of
Schedule K. In addition, the amount of this
credit must also be reported as a cash
distribution on line 19a of Schedule K.
• Qualified zone academy bond credit
(Form 8912). The amount of this credit
(excluding any credits from other
partnerships, estates, and trusts) must also
be reported as interest income on line 5 of
Schedule K. In addition, the amount of this
credit must also be reported as a cash
distribution on line 19a of Schedule K.
• Qualified school construction bond credit
(Form 8912). The amount of this credit
(excluding any credits from other
partnerships, estates, and trusts) must also
be reported as interest income on line 5 of
Schedule K. In addition, the amount of this
credit must also be reported as a cash
distribution on line 19a of Schedule K.
• Build America bond credit (Form 8912).
The amount of this credit (excluding any
credits from other partnerships, estates, and
trusts) must also be reported as interest
income on line 5 of Schedule K. In addition,
the amount of this credit must also be
reported as a cash distribution on line 19a of
Schedule K.
• Mine rescue team training credit (Form
8923).
• Agricultural chemicals security credit
(Form 8931).
• Credit for employer differential wage
payments (Form 8932).
• Carbon dioxide sequestration credit (Form
8933).
• Qualified plug-in electric drive motor
vehicle credit (Form 8936).
• Qualified plug-in electric vehicle credit
(Part I of Form 8834).
• Credit for small employer health
insurance premiums (Form 8941).
• New hire retention credit (Form 5884-B).
Schedule K-1. Enter in box 15 of Schedule
K-1 each partner’s distributive share of the
credits listed above. See additional
Schedule K-1 reporting information provided
in the instructions above. Enter the
applicable code, H through P, in the column
to the left of the dollar amount entry space.
If you are reporting each partner’s
distributive share of only one type of credit
under code P, enter the code with an
asterisk (P*) and the dollar amount in the
entry space in box 15 and attach a
statement that shows “Box 15, Code P,” and
type of credit. If you are reporting multiple
types of credit under code P, enter the code
with an asterisk (P*) and enter “STMT” in
the entry space in box 15 and attach a
statement that shows “Box 15, Code P,” and
the type and dollar amount of the credits. If
the partnership has credits from more than
one activity, identify on an attached
statement to Schedule K-1 the amount of
each type of credit for each separate
activity. See Passive Activity Reporting
Requirements on page 13.
Foreign Transactions
Lines 16a through 16n must be completed if
the partnership has foreign income,
deductions, or losses, or has paid or
accrued foreign taxes.
Attach a statement to Schedule K-1 for
these coded items providing the information
described below. If the partnership had
income from, or paid or accrued taxes to,
more than one country or U.S. possession,
see the requirement for an attached
statement in the instruction for line 16a
below. See Pub. 514, Foreign Tax Credit for
Individuals, and the Instructions for Form
1116, for more information.
Line 16a. Name of Country or U.S.
Possession (Code A)
Enter the name of the foreign country or
U.S. possession from which the partnership
had income or to which the partnership paid
or accrued taxes. If the partnership had
income from, or paid or accrued taxes to,
more than one foreign country or U.S.
possession, enter “See attached” and attach
a statement for each country for lines 16a
through 16n (codes A through N and code Q
of Schedule K-1). On Schedule K-1, if there
is more than one country enter code A
followed by an asterisk (A*), enter “STMT,”
and attach a statement to Schedule K-1 for
each country for the information and
amounts coded A through N and code Q.
Line 16b. Gross Income From all
Sources (Code B)
Enter the partnership’s gross income from
all sources (both U.S. and foreign).
Line 16c. Gross Income Sourced at
Partner Level (Code C)
Enter the total gross income of the
partnership that is required to be sourced at
the partner level. This includes income from
the sale of most personal property, other
than inventory, depreciable property, and
certain intangible property. See Pub. 514
and section 865 for details. Attach a
statement to Form 1065 showing the
following information.
• The amount of this gross income (without
regard to its source) in each category
identified in the instructions for lines 16d,
16e, and 16f, including each of the listed
categories.
• Specifically identify gains on the sale of
personal property other than inventory,
-34-
depreciable property, and certain intangible
property on which a foreign tax of 10% or
more was paid or accrued. Also list losses
on the sale of such property if the foreign
country would have imposed a 10% or
higher tax had the sale resulted in a gain.
See Determining the Source of Income
From the Sales or Exchanges of Certain
Personal Property in Pub. 514 and section
865.
• Specify foreign source capital gains or
losses within each separate limitation
category. Also separately identify foreign
source gains or losses within each separate
limitation category that are collectibles
(28%) gains and losses or unrecaptured
section 1250 gains.
Lines 16d –16f. Foreign Gross
Income Sourced at Partnership
Level
Separately report gross income from
sources outside the United States by
category of income as follows. See Pub. 514
for more information on the categories of
income.
Line 16d. Passive category (code D).
Passive category foreign source income.
This category includes the following income.
• Passive income.
• Dividends from a domestic international
sales corporation (DISC) or a former DISC.
• Distributions from a former foreign sales
corporation.
See Line 16f. Other (code F) for exceptions.
!
Passive income does not include
export financing interest.
CAUTION
Line 16e. General category (code E).
General category foreign source income.
Include all foreign income sourced at the
partnership level that is not passive category
income. See Line 16f. Other (code F) for
exceptions.
Line 16f. Other (code F). Attach a
statement separately showing the amount of
foreign source income included in the
following categories:
• Section 901(j) income, and
• Certain income re-sourced by treaty.
Lines 16g –16h. Deductions
Allocated and Apportioned at
Partner Level
Line 16g. Interest expense (code G).
Enter on line 16g the partnership’s total
interest expense (including interest
equivalents under Temporary Regulations
section 1.861-9T(b)). Do not include interest
directly allocable under Temporary
Regulations section 1.861-10T to income
from a specific property. This type of interest
is allocated and apportioned at the
partnership level and is included on lines 16i
through 16k.
Line 16h. Other (code H). Enter the total
of all other deductions or losses that are
required to be allocated at the partner level.
For example, include on line 16h research
and experimental expenditures (see
Regulations section 1.861-17(f)).
Lines 16i–16k. Deductions
Allocated and Apportioned at
Partnership Level to Foreign
Source Income
Separately report partnership deductions
that are allocated and apportioned at the
Instructions for Form 1065
partnership level by category of income as
follows. See Pub. 514 for more information.
Line 16m. Reduction in Taxes
Available for Credit (Code N)
Note. Creditable foreign expenditures
generally must be allocated in accordance
with each partner’s interest in the
partnership. See Treasury Decision 9292,
2006-47 I.R.B. 914 for details.
Enter the total reduction in taxes available
for credit. Attach a statement showing the
reductions for:
• Taxes on foreign mineral income (section
901(e)).
• Taxes on foreign oil and gas extraction
income and foreign oil related income
(section 907(a)).
• Taxes attributable to boycott operations
(section 908).
• Failure to timely file (or furnish all of the
information required on) Forms 5471 and
8865.
• Any other items (specify).
Line 16i (code I). Enter the amount of
deductions allocated and apportioned at the
partnership level to passive category foreign
source income (defined in the instructions
for line 16d).
Line 16j. General category (code J).
Enter the amount of deductions allocated
and apportioned at the partnership level to
general category foreign source income
(defined in the instructions for line 16e).
Line 16k. Other (code K). Attach a
statement separately showing the amount of
deductions allocated and apportioned at the
partnership level to the following two
categories:
• Section 901(j) income, and
• Certain income re-sourced by treaty.
Line 16l. Total Foreign Taxes Paid
or Accrued
Enter in U.S. dollars the total foreign taxes
(described in section 901 or section 903)
that were paid or accrued by the partnership
(according to its method of accounting for
such taxes). Enter the amount paid on line
16l. Translate these amounts into U.S.
dollars by using the applicable exchange
rate (see Pub. 514).
Foreign taxes paid (code L). If the
partnership uses the cash method of
accounting, check the Paid box and enter
foreign taxes paid during the tax year on line
16l. Report each partner’s distributive share
in box 16 of Schedule K-1 using code L.
Foreign taxes accrued (code M). If the
partnership uses the accrual method of
accounting, check the Accrued box and
enter foreign taxes accrued on line 16l.
Report each partner’s distributive share in
box 16 of Schedule K-1 using code M.
A partnership reporting foreign taxes
using the cash method can make an
irrevocable election to report these taxes
using the accrual method for the year of the
election and all future years. Make this
election by reporting all foreign taxes using
the accrual method on line 16l and check
the Accrued box (see Regulations section
1.905-1).
Attach a statement reporting the
following information.
1. The total amount of foreign taxes
(including foreign taxes on income sourced
at the partner level) relating to each
category of income (see instructions for
lines 16d – 16f).
2. The dates on which the taxes were
paid or accrued, the exchange rates used,
and the amounts in both foreign currency
and U.S. dollars, for:
• Taxes withheld at source on interest.
• Taxes withheld at source on dividends.
• Taxes withheld at source on rents and
royalties.
• Other foreign taxes paid or accrued.
Instructions for Form 1065
Line 16n. Other Foreign Tax
Information
• Foreign trading gross receipts (code
O). Report the partner’s distributive share of
foreign trading gross receipts from line 15 of
Form 8873 using code O. See
Extraterritorial Income Exclusion on page
14.
• Extraterritorial income exclusion (code
P). If the partnership is not permitted to
deduct the extraterritorial income exclusion
as a non-separately stated item, attach a
statement to Schedule K-1 showing the
partner’s distributive share of the
extraterritorial income exclusion reported on
line 52 of Form 8873. Also identify the
activity to which the exclusion is related.
• Other foreign transactions (code Q).
Enter in box 16 of Schedule K-1 any other
foreign transaction information the partners
need to prepare their tax returns using code
Q.
Alternative Minimum Tax (AMT)
Items
Lines 17a through 17f must be completed
for all partners except certain small
corporations exempt from the alternative
minimum tax (AMT) under section 55(e).
Enter items of income and deductions
that are adjustments or tax preference items
for the AMT. See Form 6251, Alternative
Minimum Tax — Individuals; Form 4626,
Alternative Minimum Tax — Corporations; or
Schedule I (Form 1041), Alternative
Minimum Tax — Estates and Trusts, to
determine the amounts to enter and for
other information.
Do not include as a tax preference item
any qualified expenditures to which an
election under section 59(e) may apply.
Instead, report these expenditures on line
13c(2). Because these expenditures are
subject to an election by each partner, the
partnership cannot figure the amount of any
tax preference related to them. Instead, the
partnership must pass through to each
partner in box 13, code J, of Schedule K-1
the information needed to figure the
deduction.
Schedule K-1. Report each partner’s
distributive share of amounts reported on
lines 17a through 17f (concerning alternative
minimum tax items) in box 17 of Schedule
K-1 using codes A through F, respectively. If
the partnership is reporting items of income
or deduction for oil, gas, and geothermal
properties, you may be required to identify
these items on a statement attached to
Schedule K-1 (see the instructions for Oil,
Gas, and Geothermal Properties — Gross
-35-
Income and Deductions, later, for details).
Also see the requirement for an attached
statement in the instructions for line 17f.
Line 17a. Post-1986 Depreciation
Adjustment
Figure the adjustment for line 17a based
only on tangible property placed in service
after 1986 (and tangible property placed in
service after July 31, 1986, and before 1987
for which the partnership elected to use the
general depreciation system). Do not make
an adjustment for motion picture films,
videotapes, sound recordings, certain public
utility property (as defined in section
168(f)(2)), property depreciated under the
unit-of-production method (or any other
method not expressed in a term of years),
qualified Indian reservation property,
property eligible for a special depreciation
allowance, qualified revitalization
expenditures, or the section 179 expense
deduction.
For property placed in service before
1999, refigure depreciation for the AMT as
follows (using the same convention used for
the regular tax).
• For section 1250 property (generally,
residential rental and nonresidential real
property), use the straight line method over
40 years.
• For tangible property (other than section
1250 property) depreciated using the
straight line method for the regular tax, use
the straight line method over the property’s
class life. Use 12 years if the property has
no class life.
• For any other tangible property, use the
150% declining balance method, switching
to the straight line method the first tax year it
gives a larger deduction, over the property’s
AMT class life. Use 12 years if the property
has no class life.
Note. See Pub. 946 for a table of class
lives.
For property placed in service after 1998,
refigure depreciation for the AMT only for
property depreciated for the regular tax
using the 200% declining balance method.
For the AMT, use the 150% declining
balance method, switching to the straight
line method the first tax year it gives a larger
deduction, and the same convention and
recovery period used for the regular tax.
Figure the adjustment by subtracting the
AMT deduction for depreciation from the
regular tax deduction and enter the result on
line 17a. If the AMT deduction is more than
the regular tax deduction, enter the
difference as a negative amount.
Depreciation capitalized to inventory must
also be refigured using the AMT rules.
Include on this line the current year
adjustment to income, if any, resulting from
the difference.
Line 17b. Adjusted Gain or Loss
If the partnership disposed of any tangible
property placed in service after 1986 (or
after July 31, 1986, if an election was made
to use the General Depreciation System), or
if it disposed of a certified pollution control
facility placed in service after 1986, refigure
the gain or loss from the disposition using
the adjusted basis for the AMT. The
property’s adjusted basis for the AMT is its
cost or other basis minus all depreciation or
amortization deductions allowed or
allowable for the AMT during the current tax
year and previous tax years. Enter on this
line the difference between the regular tax
gain (loss) and the AMT gain (loss). If the
AMT gain is less than the regular tax gain,
or the AMT loss is more than the regular tax
loss, or there is an AMT loss and a regular
tax gain, enter the difference as a negative
amount.
If any part of the adjustment is allocable
to net short-term capital gain (loss), net
long-term capital gain (loss), or net section
1231 gain (loss), attach a statement that
identifies the amount of the adjustment
allocable to each type of gain or loss.
For a net long-term capital gain (loss),
also identify the amount of the adjustment
that is collectibles (28%) gain (loss).
For a net section 1231 gain (loss), also
identify the amount of adjustment that is
unrecaptured section 1250 gain.
Line 17c. Depletion (Other Than Oil
and Gas)
Do not include any depletion on oil and gas
wells. The partners must figure their oil and
gas depletion deductions and preference
items separately under section 613A.
Refigure the depletion deduction under
section 611 for mines, wells (other than oil
and gas wells), and other natural deposits
for the AMT. Percentage depletion is limited
to 50% of the taxable income from the
property as figured under section 613(a),
using only income and deductions for the
AMT. Also, the deduction is limited to the
property’s adjusted basis at the end of the
year as figured for the AMT. Figure this limit
separately for each property. When
refiguring the property’s adjusted basis, take
into account any AMT adjustments made
this year or in previous years that affect
basis (other than the current year’s
depletion).
Enter the difference between the regular
tax and AMT deduction. If the AMT
deduction is greater, enter the difference as
a negative amount.
Oil, Gas, and Geothermal
Properties—Gross Income and
Deductions
Generally, the amounts to be entered on
lines 17d and 17e are only the income and
deductions for oil, gas, and geothermal
properties that are used to figure the
partnership’s ordinary income (loss) (line 22
of Form 1065).
If there are any items of income or
deductions for oil, gas, and geothermal
properties included in the amounts that are
required to be passed through separately to
the partners on Schedule K-1 (items not
reported on line 1 of Schedule K-1), give
each partner a statement that shows, for the
box in which the income or deduction is
included, the amount of income or
deductions included in the total amount for
that box. Do not include any of these direct
pass-through amounts on line 17d or 17e.
Figure the amounts for lines 17d and 17e
separately for oil and gas properties that are
not geothermal deposits and for all
properties that are geothermal deposits.
Give each partner a statement that
shows the separate amounts included in the
computation of the amounts on lines 17d
and 17e of Schedule K.
Line 17d. Oil, Gas, and Geothermal
Properties—Gross Income
Enter the total amount of gross income
(within the meaning of section 613(a)) from
all oil, gas, and geothermal properties
received or accrued during the tax year and
included on page 1, Form 1065.
Line 17e. Oil, Gas, and Geothermal
Properties—Deductions
Enter any deductions allowed for the AMT
that are allocable to oil, gas, and geothermal
properties.
Line 17f. Other AMT Items
Attach a statement to Form 1065 and
Schedule K-1 that shows other items not
shown on lines 17a through 17e that are
adjustments or tax preference items or that
the partner needs to complete Form 6251,
Form 4626, or Schedule I (Form 1041). See
these forms and their instructions to
determine the amount to enter.
Other AMT items include the following.
• Accelerated depreciation of real property
under pre-1987 rules.
• Accelerated depreciation of leased
personal property under pre-1987 rules.
• Long-term contracts entered into after
February 28, 1986. Except for certain home
construction contracts, the taxable income
from these contracts must be figured using
the percentage of completion method of
accounting for the AMT.
• Losses from tax shelter farm activities. No
loss from any tax shelter farm activity is
allowed for the AMT.
• Any information needed by certain
corporate partners to compute the adjusted
current earnings (ACE) adjustment.
Schedule K-1. If you are reporting each
partner’s distributive share of only one type
of AMT item under code F, enter the code
with an asterisk (F*) and the dollar amount
in the entry space in box 17 and attach a
statement that shows the type of AMT item.
If you are reporting multiple types of AMT
items under code F, enter the code with an
asterisk (F*) and enter “STMT” in the entry
space in box 17 and attach a statement that
shows the dollar amount of each type of
AMT item.
Tax-Exempt Income and
Nondeductible Expenses
Line 18a. Tax-exempt interest income.
Enter on line 18a tax-exempt interest
income, including any exempt-interest
dividends received from a mutual fund or
other regulated investment company.
Line 18b. Other tax-exempt income.
Enter on line 18b all income of the
partnership exempt from tax other than
tax-exempt interest.
Line 18c. Nondeductible expenses. Enter
on line 18c nondeductible expenses paid or
incurred by the partnership.
Do not include separately stated
deductions shown elsewhere on Schedules
K and K-1, capital expenditures, or items the
deduction for which is deferred to a later tax
year.
Schedule K-1. Report in box 18 of
Schedule K-1 each partner’s distributive
share of amounts reported on lines 18a,
18b, and 18c of Schedule K (concerning
items affecting partners’ basis) using codes
A through C, respectively.
-36-
Distributions
Line 19a. Distributions of cash and
marketable securities. Enter on line 19a
the total distributions to each partner of cash
and marketable securities that are treated
as money under section 731(c)(1). Also
include the amount of the credits to holders
of tax credit bonds that are treated as cash
distributions under section 54A(g) and
54AA(f)(2). The instructions for the separate
credits (see Other Credits (Code P) under
Line 15f Other Credits) state when the
amount of the credit must be reported as a
cash distribution. Do not include
distributions of section 737 property (see
Distributions subject to section 737 (code
B), below). Generally, marketable securities
are valued at FMV on the date of
distribution. However, the value of
marketable securities does not include the
distributee partner’s share of the gain on the
securities distributed to that partner. See
section 731(c)(3)(B) for details.
If the amount on line 19a includes
marketable securities treated as money,
state separately on an attachment to
Schedules K and K-1 (a) the partnership’s
adjusted basis of those securities
immediately before the distribution and (b)
the FMV of those securities on the date of
distribution (excluding the distributee
partner’s share of the gain on the securities
distributed to that partner).
Line 19b. Distributions of other property.
Enter on line 19b the total distributions to
each partner of property not included on line
19a. In box 19 of Schedule K-1, distributions
of section 737 property will be reported
separately from other property. The codes
used when reporting amounts from line 19b
in box 19 of Schedule K-1 appear in the
heading for the categories.
Distributions subject to section 737
(code B). If a partner contributed section
704(c) built-in gain property within the last 7
years and the partnership made a
distribution of property to that partner other
than the previously contributed built-in gain
property, attach a statement to the
distributee partner’s Schedule K-1 that
provides the following information.
• The fair market value of the distributed
property (other than money).
• The amount of money received in the
distribution.
• The net precontribution gain of the
partner. This is the net gain (if any) that
would have been recognized by the
distributee partner under section
704(c)(1)(B) if all the following property had
been distributed by the partnership to
another partner. This property includes all
property contributed by the distributee
partner during the 7 years prior to the
distribution and that is still held by the
partnership at the time of the distribution
(see section 737).
For more information, see Recognition of
Precontribution Gain on Certain Partnership
Distributions on page 10.
Other property (code C). Include all
distributions of property not included on line
19a and that are not section 737 property. In
computing the amount of the distribution,
use the adjusted basis of the property to the
partnership immediately before the
distribution. In addition, attach a statement
Instructions for Form 1065
showing the adjusted basis and fair market
value of each property distributed.
Schedule K-1. Report in box 19 each
partner’s distributive share of the amount on
line 19a using code A. If a statement is
attached, enter an asterisk after the code
(A*) and “STMT” in the entry space, and
attach the required statement. For line 19b,
report distributions subject to section 737 in
box 19 using code B with an asterisk (B*)
and “STMT” in the entry space, and attach
the required statement. For distributions of
other property, report each partner’s
distributive share of the amount in box 19
using code C with an asterisk (C*) and
“STMT” in the entry space, and attach the
required statement.
sold or used during the tax year for a
nontaxable use qualifying for the credit for
taxes paid on fuel, type of use, and the
applicable credit per gallon. See Form 4136,
Credit for Federal Tax Paid on Fuels, for
details.
Other Information
Schedule K-1. Report each partner’s
distributive share of qualified rehabilitation
expenditures related to activities other than
rental real estate activities in box 20 of
Schedule K-1 using code D. Attach a
statement to Schedule K-1 that provides the
information and the partner’s distributive
share of the amounts the partner will need
to complete lines 11b through 11j and line
11m of Form 3468. See the Instructions for
Form 3468 for details. If the partnership has
expenditures from more than one activity,
identify on a statement attached to Schedule
K-1 the amount for each separate activity.
See Passive Activity Reporting
Requirements on page 13.
Lines 20a and 20b. Investment
Income and Expenses
Enter on line 20a the investment income
included on lines 5, 6a, 7, and 11, of
Schedule K. Do not include other portfolio
gains or losses on this line.
Investment income includes gross
income from property held for investment,
the excess of net gain attributable to the
disposition of property held for investment
over net capital gain from the disposition of
property held for investment, any net capital
gain from the disposition of property held for
investment that each partner elects to
include in investment income under section
163(d)(4)(B)(iii), and any qualified dividend
income that the partner elects to include in
investment income. Generally, investment
income and investment expenses do not
include any income or expenses from a
passive activity. See Regulations section
1.469-2(f)(10) for exceptions.
Property subject to a net lease is not
treated as investment property because it is
subject to the passive loss rules. Do not
reduce investment income by losses from
passive activities.
Enter investment expenses on line 20b.
Investment expenses are deductible
expenses (other than interest) directly
connected with the production of investment
income. See the instructions for Form 4952
for more information.
Schedule K-1. Report each partner’s
distributive share of amounts reported on
lines 20a and 20b (investment income and
expenses) in box 20 of Schedule K-1 using
codes A and B, respectively.
If there are other items of investment
income or expense included in the amounts
that are required to be passed through
separately to the partners on Schedule K-1,
such as net short-term capital gain or loss,
net long-term capital gain or loss, and other
portfolio gains or losses, give each partner a
statement identifying these amounts.
Line 20c. Other Items and Amounts
Report the following information on a
statement attached to Form 1065. On
Schedule K-1 enter the appropriate code in
box 20 for each information item followed by
an asterisk in the left-hand column of the
entry space (for example,“C*”). In the
right-hand column, enter “STMT.” The codes
are provided for each information category.
Fuel tax credit information (code C).
Report the number of gallons of each fuel
Instructions for Form 1065
Qualified rehabilitation expenditures
(other than rental real estate) (code D).
Enter total qualified rehabilitation
expenditures from activities other than rental
real estate activities. See the Instructions for
Form 3468 for details on qualified
rehabilitation expenditures.
Note. Report qualified rehabilitation
expenditures related to rental real estate
activities on line 15c.
Basis of energy property (code E). See
the Instructions for Form 3468 for details on
basis of energy property. In box 20 of
Schedule K-1, enter code E followed by an
asterisk and enter “STMT” in the entry
space for the dollar amount. Attach a
statement to Schedule K-1 that provides the
information and the partner’s distributive
share of the amounts the partner will need
to figure the amounts to report on lines
12a-d, 12f, 12g, 12i, 12j, 12l, 12m, 12o, and
12q-s of Form 3468. See the Instructions for
Form 3468 for details.
Recapture of low-income housing credit
(codes F and G). If recapture of part or all
of the low-income housing credit is required
because (a) the prior year qualified basis of
a building decreased or (b) the partnership
disposed of a building or part of its interest
in a building, see Form 8611, Recapture of
Low-Income Housing Credit. Complete lines
1 through 7 of Form 8611 to determine the
amount of credit to recapture. Use code F
on Schedule K-1 to report recapture of the
low-income housing credit from a section
42(j)(5) partnership. Use code G to report
recapture of any other low-income housing
credit. See the instructions for lines 15a and
15b on page 32 for more information.
Note. If a partner’s ownership interest in a
building decreased because of a transaction
at the partner level, the partnership must
provide the necessary information to the
partner to enable the partner to figure the
recapture.
The disposal of a building or an
interest therein will generate a credit
CAUTION
recapture unless it is reasonably
expected that the building will continue to be
operated as a qualified low-income building
for the remainder of the building’s
compliance period.
!
See Form 8586, Form 8611, and section
42 for more information.
-37-
Recapture of investment credit (code H).
Complete and attach Form 4255, Recapture
of Investment Credit, when investment credit
property is disposed of, or it no longer
qualifies for the credit, before the end of the
recapture period or the useful life applicable
to the property. State the type of property at
the top of Form 4255, and complete lines 2,
4, and 5, whether or not any partner is
subject to recapture of the credit.
Attach to each Schedule K-1 a separate
statement providing the information the
partnership is required to show on Form
4255, but list only the partner’s distributive
share of the cost of the property subject to
recapture. Also indicate the lines of Form
4255 on which the partners should report
these amounts.
Recapture of other credits (code I). On
an attached statement to Schedule K-1,
provide any information partners will need to
report recapture of credits (other than
recapture of low-income housing and
investment credit reported on Schedule K-1
using codes F, G, and H). Examples of
credits subject to the recapture and reported
using code I include:
• The qualified plug-in electric vehicle
credit. See section 30(e)(5) for details.
• The new markets credit. See Form 8874
for details.
• The Indian employment credit. See
section 45A(d) for details.
• The credit for employer-provided
childcare facilities and services. See section
45F(d).
• The alternative motor vehicle credit. See
section 30B(h)(8).
• The alternative fuel vehicle refueling
property credit. See section 30C(e)(5).
• The new qualified plug-in electric drive
motor vehicles credit. See section 30D(f)(5).
Look-back interest — completed
long-term contracts (code J). If the
partnership is closely held (defined in
section 460(b)(4)) and it entered into any
long-term contracts after February 28, 1986,
that are accounted for under either the
percentage of completion-capitalized cost
method or the percentage of completion
method, it must attach a statement to Form
1065 showing the information required in
items (a) and (b) of the instructions for lines
1 and 3 of Part II of Form 8697. It must also
report the amounts for Part II, lines 1 and 3,
to its partners. See the Instructions for Form
8697 for more information.
Look-back interest — income forecast
method (code K). If the partnership is
closely held (defined in section 460(b)(4))
and it depreciated certain property placed in
service after September 13, 1995, under the
income forecast method, it must attach to
Form 1065 the information specified in the
instructions for Form 8866, line 2, for the 3rd
and 10th tax years beginning after the tax
year the property was placed in service. It
must also report the line 2 amounts to its
partners. See the Instructions for Form 8866
for more details.
Dispositions of property with section 179
deductions (code L). This represents gain
or loss on the sale, exchange, or other
disposition of property for which a section
179 deduction has been passed through to
partners. The partnership must provide all
the following information with respect to
such dispositions (see the instructions for
line 6, on page 16).
• Description of the property.
• Date the property was acquired and
placed in service.
• Date of the sale or other disposition of the
property.
• The partner’s share of the gross sales
price or amount realized.
• The partner’s share of the cost or other
basis plus expense of sale (reduced as
explained in the instructions for Form 4797,
line 21).
• The partner’s share of the depreciation
allowed or allowable, determined as
described in the instructions for Form 4797,
line 22, but excluding the section 179
deduction.
• The partner’s share of the section 179
deduction (if any) passed through for the
property and the partnership’s tax year(s) in
which the amount was passed through.
• If the disposition is due to a casualty or
theft, a statement indicating so, and any
additional information needed by the
partner.
• For an installment sale made during the
partnership’s tax year, any information the
partner needs to complete Form 6252. The
partnership also must separately report the
partner’s share of all payments received for
the property in future tax years. (Installment
payments received for sales made in prior
tax years should be reported in the same
manner used in prior tax years.) See the
instructions for Form 6252 for details.
Recapture of section 179 deduction
(code M). This amount represents
recapture of section 179 deduction if
business use of the property dropped to
50% or less before the end of the recapture
period. If the business use of any property
(placed in service after 1986) for which a
section 179 deduction was passed through
to partners dropped to 50% or less (for a
reason other than disposition), the
partnership must provide all the following
information.
• The partner’s distributive share of the
original basis and depreciation allowed or
allowable (not including the section 179
deduction).
• The partner’s distributive share of the
section 179 deduction (if any) passed
through for the property and the
partnership’s tax year(s) in which the
amount was passed through.
See Regulations section 1.179-1(e) for
details.
Interest expense for corporate partners
(code N). Report as an information item
each corporate partner’s distributive share
of the total amount of interest expense
reported elsewhere on this return. A
corporate partner’s distributive share of
interest income, interest expense, and
partnership liabilities are treated as income,
expense, and liabilities of the corporation for
purposes of the limitation on the deduction
for interest under section 163(j).
Section 453(l)(3) information (code O).
Supply any information needed by a partner
to compute the interest due under section
453(l)(3). If the partnership elected to report
the dispositions of certain timeshares and
residential lots on the installment method,
each partner’s tax liability must be increased
by the partner’s distributive share of the
interest on tax attributable to the installment
payments received during the tax year.
Section 453A(c) information (code P).
Supply any information needed by a partner
to compute the interest due under section
453A(c). If an obligation arising from the
disposition of property to which section
453A applies is outstanding at the close of
the year, each partner’s tax liability must be
increased by the tax due under section
453A(c) on the partner’s distributive share of
the tax deferred under the installment
method.
Section 1260(b) information (code Q).
Supply any information needed by a partner
to figure the interest due under section
1260(b). If the partnership had gain from
certain constructive ownership transactions,
each partner’s tax liability must be increased
by the partner’s distributive share of interest
due on any deferral of gain recognition. See
section 1260(b) for details, including how to
figure the interest.
Interest allocable to production
expenditures (code R). Supply any
information needed by a partner to properly
capitalize interest as required by section
263A(f). See Section 263A uniform
capitalization rules on page 16 for more
information.
CCF nonqualified withdrawal (code S).
Report nonqualified withdrawals by the
partnership from a capital construction fund
to partners. See Pub. 595.
Depletion information – oil and gas (code
T). Report gross income and other
information relating to oil and gas well
properties to partners to allow them to figure
the depletion deduction for oil and gas well
properties. Allocate to each partner a
proportionate share of the adjusted basis of
each partnership oil or gas property. See
section 613A(c)(7)(D) for details.
The partnership cannot deduct depletion
on oil and gas wells. Each partner must
determine the allowable amount to report on
his or her return. See Pub. 535 for more
information.
Amortization of reforestation costs
(code U). Report the amortizable basis of
reforestation expenditures paid or incurred
before October 23, 2004, for which the
partnership elected amortization, and the tax
year the amortization began for the current
tax year and the 7 preceding tax years. The
amortizable basis cannot exceed $10,000
for each of those tax years.
Unrelated business taxable income
(code V). Report any information a partner
that is a tax-exempt organization may need
to figure its share of unrelated business
taxable income under section 512(a)(1) (but
excluding any modifications required by
paragraphs (8) through (15) of section
512(b)). Partners are required to notify the
partnership of their tax-exempt status. See
Form 990-T, Exempt Organization Business
Income Tax Return, and Pub. 598, Tax on
Unrelated Business Income of Exempt
Organizations, for more information.
Precontribution gain (loss) (code W). If
the partnership distributed any section
704(c) property to any partner other than
the contributing partner, and the date of the
distribution was within 7 years of the date
the section 704(c) property was contributed
to the partnership, the distribution must be
treated as if it were a sale by the
contributing partner taking place on the date
of the distribution. Section 704(c) property is
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property that had a fair market value which
was either greater or less than the
contributing partner’s adjusted basis at the
time the property was contributed to the
partnership. See Dispositions of Contributed
Property on page 9 for more information. If
the partnership made such a distribution
during its tax year, attach a statement to the
contributing partner’s Schedule K-1 that
provides the following information.
• The amount of the gain or loss that would
have been allocated to the contributing
partner if the partnership had sold the
section 704(c) property at its fair market
value at the time of the distribution. See
section 704(c)(1)(B) for details.
• The character of the gain or loss which
would have resulted if the partnership had
sold the section 704(c) property to the
distributee partner.
Enter code W in box 20 of Schedule K-1
with an asterisk (W*) and enter “STMT,” and
attach the required statement.
Section 108(i) information (code X).
Report the following.
• For the deferred cancellation of debt
(COD) income, report the partner’s deferred
amount that has not been included in
income in the current or prior tax years.
• For the deferred original issue discount
(OID) deduction, report the partner’s share
of the partnership’s OID deduction deferred
under section 108(i)(2)(A)(i) that has not
been deducted in the current or prior tax
years.
• For the section 752(b) distribution, report
the partner’s share of the deferred section
752 amount that is treated as a distribution
of money to the partner under section 752 in
the current tax year.
• For the deferred section 752(b)
distribution, report the partner’s deferred
section 752 amount remaining as of the end
of the current tax year.
Other information (code Y). Report to
each partner:
• Any information a partner that is a publicly
traded partnership may need to determine if
it meets the 90% qualifying income test of
section 7704(c)(2). Partners are required to
notify the partnership of their status as a
publicly traded partnership.
• If a partner that is a corporation elected
under section 168(k)(4) to accelerate the
corporation’s pre-2006 AMT and research
credits carryforwards in lieu of bonus
depreciation, it is required to notify the
partnership in writing of this election so the
partnership can adjust the electing corporate
partner’s distributive share of partnership
items that include bonus depreciation. See
Rev. Proc. 2009-16, 2009-6 I.R.B. 449, as
modified by Rev. Proc. 2009-33, 2009-29
I.R.B. 150, for more information about the
written notification that the electing
corporate partner must provide the
partnership. The partnership is required to
recompute the partner’s distributive share of
the depreciation on any eligible qualified
property or extension property placed in
service by the partnership to eliminate
bonus depreciation and use the straight line
depreciation method for such property. On
an attached statement, list each partnership
item that includes bonus depreciation and
show the electing corporate partner’s
adjustment for each item that results from
the recomputed depreciation and elimination
Instructions for Form 1065
of the bonus depreciation. See section
168(k)(4) for more information.
• If the partnership participates in a
transaction that must be disclosed on Form
8886 (see page 8), both the partnership and
its partners may be required to file Form
8886. The partnership must determine if any
of its partners are required to disclose the
transaction and provide those partners with
information they will need to file Form 8886.
This determination is based on the
category(s) under which a transaction
qualified for disclosures. See the
Instructions for Form 8886 for details.
• Compensation to partners deferred under
a section 409A nonqualified deferred
compensation plan that does not meet the
requirements of section 409A. Include in this
amount any earnings on these deferrals.
This amount must also be included on line 4
of Schedule K, Guaranteed payments. For
details, see the regulations under section
409A. These regulations do not provide
guidance on the application of section 409A
to arrangements between partnerships and
partners. For interim guidance on such
arrangements, see Q&A-7 in Notice 2005-1,
2005-2 I.R.B. 274, and the information
provided in the preamble to these
regulations (T.D. 9321). Also see Notice
2006-79, 2006-43 I.R.B. 763, Notice
2007-86, 2007-46 I.R.B. 990, and Notice
2008-113, 2008-51 I.R.B. 1305 for additional
information on transitional and relief rules.
• Any income or gain reported on lines 1
through 11 of Schedule K that qualifies as
inversion gain, if the partnership is an
expatriated entity or is a partner in an
expatriated entity. For details, see section
7874. Attach a statement to Form 1065 that
shows the amount of each type of income or
gain included in the inversion gain. The
partnership must report each partner’s
distributive share of the inversion gain in box
20 of Schedule K-1 using code Y. Attach a
statement to Schedule K-1 that shows the
partner’s distributive share of the amount of
each type of income or gain included in the
inversion gain.
• Qualifying advanced coal project property.
Attach a statement to Schedule K-1 showing
the partner’s distributive share of the
amounts that the partner will use when
figuring the amounts to report on lines 5a
through 5c of the partner’s Form 3468. See
the Instructions for Form 3468 for details.
• Qualifying gasification project property.
Attach a statement to Schedule K-1 showing
the partner’s distributive share of the
amounts that the partner will use when
figuring the amounts to report on lines 6a
and 6b of the partner’s Form 3468. See the
Instructions for Form 3468 for details.
• Qualified advanced energy project credit.
Attach a statement to Schedule K-1 showing
the partner’s distributive share of the
amounts that the partner will use when
figuring the amount to report on line 7 of the
partner’s Form 3468. See the Instructions
for Form 3468 for details.
• Qualifying Therapeutic Discovery Project
Credit. Attach a statement to Schedule K-1
showing the partner’s distributive share of
the amounts that the partner will use when
figuring the amount to report on line 8 of the
partner’s Form 3468. See the Instructions
for Form 3468 for details.
• The information needed to complete
Schedule P (Form 1120-F), List of Foreign
Partner Interests in Partnerships, on an
Instructions for Form 1065
attached statement for a partner that is (a) A
corporation (identified as a foreign partner
under Regulations section 1.1446-1(c)(3)) or
(b) A partnership (domestic or foreign) if you
know, or have reason to know, that one or
more of the partners is a foreign corporation.
If the partnership allocates effectively
connected income to the partner, provide
the information needed to complete lines 1
through 9, 12, 13, 14b, 16a, 16b, and 17 of
Schedule P (Form 1120-F). If the
partnership does not allocate effectively
connected income to the partner, provide
the information needed to complete lines 12,
13, and 17 of Schedule P (Form 1120-F).
The information must be provided in a
format which references the specific line
numbers on Schedule P for which the
information is provided. For more
information, see the Instructions for
Schedule P (Form 1120-F).
Exceptions. The statement is not required
in the following situations.
1. The direct or indirect foreign corporate
partner provides the partnership with a valid
Form W-8BEN (within the meaning of
Regulations section 1.1446-2(b)(2)(iii)) on
which the corporation claims an exemption
from U.S. tax by operation of an income tax
treaty or reciprocal agreement on the
grounds that none of the income is
attributable to a permanent establishment of
the partner.
2. The partnership does not allocate any
effectively connected income to the partner
(foreign corporation or partnership) and the
partnership receives a written statement
from the partner (corporation or partnership)
indicating that the information is not needed
to determine its (or its direct or indirect
partner(s)) U.S. federal income tax liabilities.
• The partner’s distributive share of any
conservation reserve program payments
made to the partnership.
• This item applies only to partners that are
corporations. Report the corporate partner’s
distributive share of the partnership’s
qualified timber gain that is allocable to the
period that begins after December 31, 2008,
and ends before May 23, 2009. For this
purpose, a qualified timber gain is the net
gain described in section 631(a) and (b),
determined by taking into account only trees
held more than 15 years. See section
1201(b) for more information. This gain is
included in the net long term capital gain
reported on line 9a of Schedule K.
• If the partnership has deductions
attributable to a farming business and
receives an applicable subsidy, report the
aggregate gross income or gain and the
aggregate deductions from the farming
business and any information the partners
need to comply with the limitation on excess
farm losses of certain taxpayers under
section 461(j).
• Any information necessary for the partner
to determine whether the partnership is an
eligible small business if the partnership is
reporting any general business credits. A
partnership is an eligible small business if its
average annual gross receipts for the three
preceding tax years were $50 million or less.
See section 38(c)(5)(C) for more
information.
• Any other information the partners need
to prepare their tax returns.
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Analysis of Net Income
(Loss)
For each type of partner shown, enter the
portion of the amount shown on line 1 that
was allocated to that type of partner. Report
all amounts for LLC members on the line for
limited partners. The sum of the amounts
shown on line 2 must equal the amount
shown on line 1. In addition, the amount on
line 1 must equal the amount on line 9,
Schedule M-1 (if the partnership is required
to complete Schedule M-1). If the
partnership files Schedule M-3, the amount
on line 1 must equal the amount in column
(d) of line 26, Part II.
In classifying partners who are
individuals as “active” or “passive,” the
partnership should apply the rules below. In
applying these rules, a partnership should
classify each partner to the best of its
knowledge and belief. It is assumed that in
most cases the level of a particular partner’s
participation in an activity will be apparent.
1. If the partnership’s principal activity is
a trade or business, classify a general
partner as “active” if the partner materially
participated in all partnership trade or
business activities; otherwise, classify a
general partner as “passive.”
2. If the partnership’s principal activity
consists of a working interest in an oil or gas
well, classify a general partner as “active.”
3. If the partnership’s principal activity is
a rental real estate activity, classify a
general partner as “active” if the partner
actively participated in all of the
partnership’s rental real estate activities;
otherwise, classify a general partner as
“passive.”
4. Classify as “passive” all partners in a
partnership whose principal activity is a
rental activity other than a rental real estate
activity.
5. If the partnership’s principal activity is
a portfolio activity, classify all partners as
“active.”
6. Classify as “passive” all limited
partners and LLC members in a partnership
whose principal activity is a trade or
business or rental activity.
7. If the partnership cannot make a
reasonable determination whether a
partner’s participation in a trade or business
activity is material or whether a partner’s
participation in a rental real estate activity is
active, classify the partner as “passive.”
Schedule L. Balance
Sheets per Books
Note. Schedules L, M-1, and M-2 are not
required to be completed if the partnership
answered “Yes” to question 6 of Schedule
B.
The balance sheets should agree with
the partnership’s books and records. Attach
a statement explaining any differences.
There are additional requirements for
completing Schedule L for partnerships that
are required to file Schedule M-3 (see the
Instructions for Schedule M-3 for details).
Partnerships reporting to the Interstate
Commerce Commission (ICC) or to any
national, state, municipal, or other public
officer may send copies of their balance
sheets prescribed by the ICC or national,
state, or municipal authorities, as of the
beginning and end of the tax year, instead of
completing Schedule L. However,
statements filed under this procedure must
contain sufficient information to enable the
IRS to reconstruct a balance sheet similar to
that contained on Form 1065 without
contacting the partnership during
processing.
All amounts on the balance sheet should
be reported in U.S. dollars. If the
partnership’s books and records are kept in
a foreign currency, the balance sheet should
be translated in accordance with U.S.
generally accepted accounting principles
(GAAP).
Exception. If the partnership or any
qualified business unit of the partnership
uses the U.S. dollar approximate separate
transactions method, Schedule L should
reflect the tax balance sheet prepared and
translated into U.S. dollars according to
Regulations section 1.985-3(d), and not a
U.S. GAAP balance sheet.
liabilities (which are included in the
computation of its adjusted basis). See the
Partner’s Instructions for Schedule K-1 for
details on how to figure the adjusted basis of
a partnership interest. If Schedule L is
non-tax-basis, investment in a partnership
may be shown as appropriate under the
non-tax-basis accounting method of the
partnership including, if required by the
non-tax-basis accounting method of the
partnership, the equity method of accounting
for investments, but must be shown as a
non-negative amount.
Example. Partnership A prepares a
tax-basis Schedule L and is a general
partner in Partnership B, a general
partnership. Partnership A’s adjusted basis
in Partnership B at the end of the tax year is
$16 million. Partnership A’s share of
Partnership B’s liabilities is $20 million,
which is included in the $16 million adjusted
basis amount. On its Schedule L,
Partnership A must report $16 million on line
8 as the amount of its investment asset in
Partnership B and report on line 20 its $20
million share of Partnership B’s liabilities.
These amounts cannot be netted on
Schedule L.
Partnerships Required To File
Schedule M-3
Nonrecourse loans are those liabilities of the
partnership for which no partner bears the
economic risk of loss. If the partnership’s
nonrecourse liabilities include its share of
the liabilities of another partnership, the
partnership’s share of those liabilities must
be reflected on line 18.
For partnerships required to file Schedule
M-3, the amounts reported on Schedule L
must be amounts from financial statements
used to complete Schedule M-3. If the
partnership prepares non-tax-basis financial
statements, Schedule M-3 and Schedule L
must report non-tax-basis financial
statement amounts. If the partnership does
not prepare non-tax-basis financial
statements, Schedule L must be based on
the partnership’s books and records and
may show tax-basis balance sheet amounts
if the partnership books and records reflect
only tax-basis amounts.
Line 5. Tax-Exempt Securities
Include on this line:
1. State and local government
obligations, the interest on which is
excludable from gross income under section
103(a), and
2. Stock in a mutual fund or other
regulated investment company that
distributed exempt-interest dividends during
the tax year of the partnership.
Line 14. Total Assets
Generally, total assets at the beginning of
the year (Schedule L, line 14, column (b)),
must equal total assets at the close of the
prior tax year (Schedule L, line 14, column
(d)). If total assets at the beginning of the
year do not equal total assets at the close of
the prior year, attach a statement explaining
the difference.
For purposes of measuring total assets
at the end of the year, the partnership’s
assets may not be netted against or reduced
by partnership liabilities. In addition, asset
amounts may not be reported as a negative
number. If the partnership has an interest in
another partnership and uses a tax-basis
method for Schedule L, it must show as an
asset the adjusted basis of its interest in the
other partnership and separately show as a
liability its share of the other partnership’s
Line 18. All Nonrecourse Loans
Line 20. Other Liabilities
A partnership that is a partner in a tiered
partnership must include as a liability on line
20 the partner’s share of the tiered
partnership’s liabilities to the extent they are
recourse liabilities to the partner.
Schedule M-1.
Reconciliation of Income
(Loss) per Books With
Income (Loss) per Return
Note. Schedule M-3 may be required
instead of Schedule M-1. See Item J.
Schedule C and Schedule M-3 on page 14.
See the Instructions for Schedule M-3 for
more information.
Line 2
Report on this line income included on
Schedule K, lines 1, 2, 3c, 5, 6a, 7, 8, 9a,
10, and 11, not recorded on the
partnership’s books this year. Describe each
such item of income. Attach a statement if
necessary.
Line 3. Guaranteed Payments
Include on this line guaranteed payments
shown on Schedule K, line 4 (other than
amounts paid for insurance that constitutes
medical care for a partner, a partner’s
spouse, a partner’s dependents, and any
children under age 27 who are not
dependents).
Line 4b. Travel and
Entertainment
Include on this line:
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• Meal and entertainment expenses not
deductible under section 274(n).
• Expenses for the use of an entertainment
facility. See section 274(a)(1)(B).
• The part of business gifts over $25. See
section 274(b).
• Expenses of an individual allocable to
conventions on cruise ships over $2,000.
See section 274(h)(2).
• Employee achievement awards over
$400. See section 274(j)(2)(A).
• The part of the cost of entertainment
tickets that exceeds face value (also subject
to 50% limit). See section 274(l)(1)(A).
• The part of the cost of skyboxes that
exceeds the face value of nonluxury box
seat tickets. See section 274(l)(2).
• The part of the cost of luxury water travel
expenses not deductible under section
274(m). See section 274(m)(1)(A).
• Expenses for travel as a form of
education. See section 274(m)(2).
• Nondeductible club dues. See section
274(a)(3).
• Other nondeductible travel and
entertainment expenses.
Schedule M-2. Analysis of
Partners’ Capital Accounts
Show what caused the changes during the
tax year in the partners’ capital accounts as
reflected on the partnership’s books and
records. The amounts on Schedule M-2
should equal the total of the amounts
reported in item L of all the partners’
Schedules K-1.
The partnership may use tax-basis
amounts or apply the rules in Regulations
section 1.704-1(b)(2)(iv) to determine the
partners’ capital accounts in Schedule M-2
and item L of the partners’ Schedules K-1. If
the beginning and ending capital accounts
reported under these rules differ from the
amounts reported on Schedule L, attach a
statement reconciling any differences.
Line 2. Capital Contributed
During Year
Include on line 2a the amount of money
contributed and on line 2b the amount of
property contributed by each partner to the
partnership as reflected on the partnership’s
books and records.
Line 3. Net Income (Loss) per
Books
Enter on line 3 the net income (loss) shown
on the partnership books used in
maintaining the partner’s capital accounts
for purposes of Schedule K-1.
Line 6. Distributions
Line 6a. Cash. Enter the amount of money
distributed to each partner by the
partnership. For purposes of line 6a,
“money” includes marketable securities, as
described in section 731(c).
Line 6b. Property. Enter the amount of
property distributed to each partner by the
partnership as reflected on the partnership’s
books and records. Include withdrawals
from inventory for the personal use of a
partner.
Instructions for Form 1065
Paperwork Reduction Act Notice. We ask for the information on these forms to carry out the Internal Revenue laws of the United States.
You are required to give us the information. We need it to ensure that you are complying with these laws and to allow us to figure and collect
the right amount of tax.
You are not required to provide the information requested on a form that is subject to the Paperwork Reduction Act unless the form
displays a valid OMB control number. Books or records relating to a form or its instructions must be retained as long as their contents may
become material in the administration of any Internal Revenue law. Generally, tax returns and return information are confidential, as
required by section 6103.
The time needed to complete and file the following forms will vary depending on individual circumstances. The estimated average times
are:
Form
Recordkeeping
Learning about the
law or the form
Preparing the form
Copying, assembling, and
sending the form to the IRS
1065
2 hr., 57 min.
35 hr., 37 min.
23 hr., 54 min.
35 hr., 47 min.
Instructions for Form
1065 – Worksheet for
Figuring Net Earnings
(Loss) From
Self-Employment
1hr., 34 min.
9 min.
20 min.
Sch. B-1 (Form 1065)
2 hr., 37 min.
Sch. C (Form 1065)
1 hr., 54 min.
24 min.
26 min.
Sch. D (Form 1065)
5 hr., 30 min.
2 hr., 58 min.
3 hr., 12 min.
2 min.
Sch. D-1 (Form 1065)
4 hr., 18 min.
Sch. K-1 (Form 1065)
12 hr., 12 min.
7 hr., 44 min.
8 hr., 17 min.
4 min.
Sch. L (Form 1065)
14 hr., 21 min.
2 hr., 8 min.
7 hr., 7 min.
Sch. M-1 (Form 1065)
3 hr., 6 min.
12 min.
15 min.
Sch. M-2 (Form 1065)
3 hr., 6 min.
12 min.
15 min.
Sch. M-3 (Form 1065)
58 hr., 49 min.
8 hr., 55 min.
23 hr., 18 min.
1 hr., 20 min.
3 hr., 45 min.
If you have comments concerning the accuracy of these time estimates or suggestions for making these forms simpler, we would be
happy to hear from you. You can write to the Internal Revenue Service, Tax Products Coordinating Committee, SE:W:CAR:MP:T:T:SP,
1111 Constitution Ave. NW, IR-6526, Washington, DC 20224. Do not send the tax form to this address. Instead, see Where To File on
page 4.
Instructions for Form 1065
-41-
Codes for Principal Business
Activity and Principal Product
or Service
This list of Principal Business Activities and their
associated codes is designed to classify an
enterprise by the type of activity in which it is
engaged to facilitate the administration of the
Internal Revenue Code. These Principal Business
Activity Codes are based on the North American
Industry Classification System.
Code
Agriculture, Forestry, Fishing
and Hunting
Crop Production
111100 Oilseed & Grain Farming
111210 Vegetable & Melon Farming
(including potatoes & yams)
111300 Fruit & Tree Nut Farming
111400 Greenhouse, Nursery, &
Floriculture Production
111900 Other Crop Farming
(including tobacco, cotton,
sugarcane, hay, peanut,
sugar beet & all other crop
farming)
Animal Production
112111 Beef Cattle Ranching &
Farming
112112 Cattle Feedlots
112120 Dairy Cattle & Milk
Production
112210 Hog & Pig Farming
112300 Poultry & Egg Production
112400 Sheep & Goat Farming
112510 Aquaculture (including
shellfish & finfish farms &
hatcheries)
112900 Other Animal Production
Forestry and Logging
113110 Timber Tract Operations
113210 Forest Nurseries & Gathering
of Forest Products
113310 Logging
Fishing, Hunting and Trapping
114110 Fishing
114210 Hunting & Trapping
Support Activities for Agriculture
and Forestry
115110 Support Activities for Crop
Production (including cotton
ginning, soil preparation,
planting, & cultivating)
115210 Support Activities for Animal
Production
115310 Support Activities For
Forestry
Mining
211110
212110
212200
212310
212320
Oil & Gas Extraction
Coal Mining
Metal Ore Mining
Stone Mining & Quarrying
Sand, Gravel, Clay, &
Ceramic & Refractory
Minerals Mining & Quarrying
212390 Other Nonmetallic Mineral
Mining & Quarrying
213110 Support Activities for Mining
Utilities
221100 Electric Power Generation,
Transmission & Distribution
221210 Natural Gas Distribution
221300 Water, Sewage & Other
Systems
221500 Combination Gas & Electric
Construction
Construction of Buildings
236110 Residential Building
Construction
236200 Nonresidential Building
Construction
Using the list of activities and codes below,
determine from which activity the business derives
the largest percentage of its “total receipts.” Total
receipts is defined as the sum of gross receipts or
sales (page 1, line 1a); all other income (page 1,
lines 4 through 7); income reported on Schedule K,
lines 3a, 5, 6a, and 7; income or net gain reported
on Schedule K, lines 8, 9a, 10, and 11; and income
or net gain reported on Form 8825, lines 2, 19, and
20a. If the business purchases raw materials and
Code
Heavy and Civil Engineering
Construction
237100 Utility System Construction
237210 Land Subdivision
237310 Highway, Street, & Bridge
Construction
237990 Other Heavy & Civil
Engineering Construction
Specialty Trade Contractors
238100 Foundation, Structure, &
Building Exterior Contractors
(including framing carpentry,
masonry, glass, roofing, &
siding)
238210 Electrical Contractors
238220 Plumbing, Heating, &
Air-Conditioning Contractors
238290 Other Building Equipment
Contractors
238300 Building Finishing
Contractors (including
drywall, insulation, painting,
wallcovering, flooring, tile, &
finish carpentry)
238900 Other Specialty Trade
Contractors (including site
preparation)
Manufacturing
Food Manufacturing
311110 Animal Food Mfg
311200 Grain & Oilseed Milling
311300 Sugar & Confectionery
Product Mfg
311400 Fruit & Vegetable Preserving
& Specialty Food Mfg
311500 Dairy Product Mfg
311610 Animal Slaughtering and
Processing
311710 Seafood Product Preparation
& Packaging
311800 Bakeries & Tortilla Mfg
311900 Other Food Mfg (including
coffee, tea, flavorings &
seasonings)
Beverage and Tobacco Product
Manufacturing
312110 Soft Drink & Ice Mfg
312120 Breweries
312130 Wineries
312140 Distilleries
312200 Tobacco Manufacturing
Textile Mills and Textile Product
Mills
313000 Textile Mills
314000 Textile Product Mills
Apparel Manufacturing
315100 Apparel Knitting Mills
315210 Cut & Sew Apparel
Contractors
315220 Men’s & Boys’ Cut & Sew
Apparel Mfg
315230 Women’s & Girls’ Cut & Sew
Apparel Mfg
315290 Other Cut & Sew Apparel Mfg
315990 Apparel Accessories & Other
Apparel Mfg
Leather and Allied Product
Manufacturing
316110 Leather & Hide Tanning &
Finishing
316210 Footwear Mfg (including
rubber & plastics)
316990 Other Leather & Allied
Product Mfg
supplies them to a subcontractor to produce the
finished product, but retains title to the product, the
business is considered a manufacturer and must use
one of the manufacturing codes (311110 – 339900).
Once the Principal Business Activity is
determined, enter the six-digit code from the list
below on page 1, item C. Also enter the business
activity in item A and a brief description of the
principal product or service of the business in item B.
Code
Wood Product Manufacturing
321110 Sawmills & Wood
Preservation
321210 Veneer, Plywood, &
Engineered Wood Product
Mfg
321900 Other Wood Product Mfg
Paper Manufacturing
322100 Pulp, Paper, & Paperboard
Mills
322200 Converted Paper Product Mfg
Printing and Related Support
Activities
323100 Printing & Related Support
Activities
Petroleum and Coal Products
Manufacturing
324110 Petroleum Refineries
(including integrated)
324120 Asphalt Paving, Roofing, &
Saturated Materials Mfg
324190 Other Petroleum & Coal
Products Mfg
Chemical Manufacturing
325100 Basic Chemical Mfg
325200 Resin, Synthetic Rubber, &
Artificial & Synthetic Fibers &
Filaments Mfg
325300 Pesticide, Fertilizer, & Other
Agricultural Chemical Mfg
325410 Pharmaceutical & Medicine
Mfg
325500 Paint, Coating, & Adhesive
Mfg
325600 Soap, Cleaning Compound, &
Toilet Preparation Mfg
325900 Other Chemical Product &
Preparation Mfg
Plastics and Rubber Products
Manufacturing
326100 Plastics Product Mfg
326200 Rubber Product Mfg
Nonmetallic Mineral Product
Manufacturing
327100 Clay Product & Refractory
Mfg
327210 Glass & Glass Product Mfg
327300 Cement & Concrete Product
Mfg
327400 Lime & Gypsum Product Mfg
327900 Other Nonmetallic Mineral
Product Mfg
Primary Metal Manufacturing
331110 Iron & Steel Mills & Ferroalloy
Mfg
331200 Steel Product Mfg from
Purchased Steel
331310 Alumina & Aluminum
Production & Processing
331400 Nonferrous Metal (except
Aluminum) Production &
Processing
331500 Foundries
Fabricated Metal Product
Manufacturing
332110 Forging & Stamping
332210 Cutlery & Handtool Mfg
332300 Architectural & Structural
Metals Mfg
332400 Boiler, Tank, & Shipping
Container Mfg
332510 Hardware Mfg
332610 Spring & Wire Product Mfg
332700 Machine Shops; Turned
Product; & Screw, Nut, & Bolt
Mfg
-42-
Code
332810 Coating, Engraving, Heat
Treating, & Allied Activities
332900 Other Fabricated Metal
Product Mfg
Machinery Manufacturing
333100 Agriculture, Construction, &
Mining Machinery Mfg
333200 Industrial Machinery Mfg
333310 Commercial & Service
Industry Machinery Mfg
333410 Ventilation, Heating,
Air-Conditioning, &
Commercial Refrigeration
Equipment Mfg
333510 Metalworking Machinery Mfg
333610 Engine, Turbine & Power
Transmission Equipment Mfg
333900 Other General Purpose
Machinery Mfg
Computer and Electronic Product
Manufacturing
334110 Computer & Peripheral
Equipment Mfg
334200 Communications Equipment
Mfg
334310 Audio & Video Equipment
Mfg
334410 Semiconductor & Other
Electronic Component Mfg
334500 Navigational, Measuring,
Electromedical, & Control
Instruments Mfg
334610 Manufacturing &
Reproducing Magnetic &
Optical Media
Electrical Equipment, Appliance, and
Component Manufacturing
335100 Electric Lighting Equipment
Mfg
335200 Household Appliance Mfg
335310 Electrical Equipment Mfg
335900 Other Electrical Equipment &
Component Mfg
Transportation Equipment
Manufacturing
336100 Motor Vehicle Mfg
336210 Motor Vehicle Body & Trailer
Mfg
336300 Motor Vehicle Parts Mfg
336410 Aerospace Product & Parts
Mfg
336510 Railroad Rolling Stock Mfg
336610 Ship & Boat Building
336990 Other Transportation
Equipment Mfg
Furniture and Related Product
Manufacturing
337000 Furniture & Related Product
Manufacturing
Miscellaneous Manufacturing
339110 Medical Equipment &
Supplies Mfg
339900 Other Miscellaneous
Manufacturing
Wholesale Trade
Merchant Wholesalers, Durable
Goods
423100 Motor Vehicle & Motor
Vehicle Parts & Supplies
423200 Furniture & Home
Furnishings
423300 Lumber & Other Construction
Materials
423400 Professional & Commercial
Equipment & Supplies
Codes for Principal Business Activity and Principal Product or Service (continued)
Code
423500 Metal & Mineral (except
Petroleum)
423600 Electrical & Electronic Goods
423700 Hardware, & Plumbing &
Heating Equipment &
Supplies
423800 Machinery, Equipment, &
Supplies
423910 Sporting & Recreational
Goods & Supplies
423920 Toy & Hobby Goods &
Supplies
423930 Recyclable Materials
423940 Jewelry, Watch, Precious
Stone, & Precious Metals
423990 Other Miscellaneous Durable
Goods
Merchant Wholesalers, Nondurable
Goods
424100 Paper & Paper Products
424210 Drugs & Druggists’ Sundries
424300 Apparel, Piece Goods, &
Notions
424400 Grocery & Related Products
424500 Farm Product Raw Materials
424600 Chemical & Allied Products
424700 Petroleum & Petroleum
Products
424800 Beer, Wine, & Distilled
Alcoholic Beverages
424910 Farm Supplies
424920 Book, Periodical, &
Newspapers
424930 Flower, Nursery Stock, &
Florists’ Supplies
424940 Tobacco & Tobacco Products
424950 Paint, Varnish, & Supplies
424990 Other Miscellaneous
Nondurable Goods
Wholesale Electronic Markets and
Agents and Brokers
425110 Business to Business
Electronic Markets
425120 Wholesale Trade Agents &
Brokers
Retail Trade
Motor Vehicle and Parts Dealers
441110 New Car Dealers
441120 Used Car Dealers
441210 Recreational Vehicle Dealers
441221 Motorcycle Dealers
441222 Boat Dealers
441229 All Other Motor Vehicle
Dealers
441300 Automotive Parts,
Accessories, & Tire Stores
Furniture and Home Furnishings
Stores
442110 Furniture Stores
442210 Floor Covering Stores
442291 Window Treatment Stores
442299 All Other Home Furnishings
Stores
Electronics and Appliance Stores
443111 Household Appliance Stores
443112 Radio, Television, & Other
Electronics Stores
443120 Computer & Software Stores
443130 Camera & Photographic
Supplies Stores
Building Material and Garden
Equipment and Supplies Dealers
444110 Home Centers
444120 Paint & Wallpaper Stores
444130 Hardware Stores
444190 Other Building Material
Dealers
444200 Lawn & Garden Equipment &
Supplies Stores
Food and Beverage Stores
445110 Supermarkets and Other
Grocery (except
Convenience) Stores
445120 Convenience Stores
445210 Meat Markets
Code
445220
445230
445291
445292
445299
Fish & Seafood Markets
Fruit & Vegetable Markets
Baked Goods Stores
Confectionery & Nut Stores
All Other Specialty Food
Stores
445310 Beer, Wine, & Liquor Stores
Health and Personal Care Stores
446110 Pharmacies & Drug Stores
446120 Cosmetics, Beauty Supplies,
& Perfume Stores
446130 Optical Goods Stores
446190 Other Health & Personal
Care Stores
Gasoline Stations
447100 Gasoline Stations (including
convenience stores with gas)
Clothing and Clothing Accessories
Stores
448110 Men’s Clothing Stores
448120 Women’s Clothing Stores
448130 Children’s & Infants’ Clothing
Stores
448140 Family Clothing Stores
448150 Clothing Accessories Stores
448190 Other Clothing Stores
448210 Shoe Stores
448310 Jewelry Stores
448320 Luggage & Leather Goods
Stores
Sporting Goods, Hobby, Book, and
Music Stores
451110 Sporting Goods Stores
451120 Hobby, Toy, & Game Stores
451130 Sewing, Needlework, & Piece
Goods Stores
451140 Musical Instrument &
Supplies Stores
451211 Book Stores
451212 News Dealers & Newsstands
451220 Prerecorded Tape, Compact
Disc, & Record Stores
General Merchandise Stores
452110 Department Stores
452900 Other General Merchandise
Stores
Miscellaneous Store Retailers
453110 Florists
453210 Office Supplies & Stationery
Stores
453220 Gift, Novelty, & Souvenir
Stores
453310 Used Merchandise Stores
453910 Pet & Pet Supplies Stores
453920 Art Dealers
453930 Manufactured (Mobile) Home
Dealers
453990 All Other Miscellaneous Store
Retailers (including tobacco,
candle, & trophy shops)
Nonstore Retailers
454110 Electronic Shopping &
Mail-Order Houses
454210 Vending Machine Operators
454311 Heating Oil Dealers
454312 Liquefied Petroleum Gas
(Bottled Gas) Dealers
454319 Other Fuel Dealers
454390 Other Direct Selling
Establishments (including
door-to-door retailing, frozen
food plan providers, party
plan merchandisers, &
coffee-break service
providers)
Transportation and
Warehousing
Air, Rail, and Water Transportation
481000 Air Transportation
482110 Rail Transportation
483000 Water Transportation
Truck Transportation
484110 General Freight Trucking,
Local
Code
484120 General Freight Trucking,
Long-distance
484200 Specialized Freight Trucking
Transit and Ground Passenger
Transportation
485110 Urban Transit Systems
485210 Interurban & Rural Bus
Transportation
485310 Taxi Service
485320 Limousine Service
485410 School & Employee Bus
Transportation
485510 Charter Bus Industry
485990 Other Transit & Ground
Passenger Transportation
Pipeline Transportation
486000 Pipeline Transportation
Scenic & Sightseeing Transportation
487000 Scenic & Sightseeing
Transportation
Support Activities for Transportation
488100 Support Activities for Air
Transportation
488210 Support Activities for Rail
Transportation
488300 Support Activities for Water
Transportation
488410 Motor Vehicle Towing
488490 Other Support Activities for
Road Transportation
488510 Freight Transportation
Arrangement
488990 Other Support Activities for
Transportation
Couriers and Messengers
492110 Couriers
492210 Local Messengers & Local
Delivery
Warehousing and Storage
493100 Warehousing & Storage
(except lessors of
miniwarehouses &
self-storage units)
Information
Publishing Industries (except
Internet)
511110 Newspaper Publishers
511120 Periodical Publishers
511130 Book Publishers
511140 Directory & Mailing List
Publishers
511190 Other Publishers
511210 Software Publishers
Motion Picture and Sound
Recording Industries
512100 Motion Picture & Video
Industries (except video
rental)
512200 Sound Recording Industries
Broadcasting (except Internet)
515100 Radio & Television
Broadcasting
515210 Cable & Other Subscription
Programming
Telecommunications
517000 Telecommunications
(including paging, cellular,
satellite, cable & other
program distribution,
resellers, other
telecommunications, &
Internet service providers)
Data Processing Services
518210 Data Processing, Hosting, &
Related Services
Other Information Services
519100 Other Information Services
(including news syndicates,
libraries, Internet publishing,
& broadcasting)
Finance and Insurance
Depository Credit Intermediation
522110 Commercial Banking
522120 Savings Institutions
-43-
Code
522130 Credit Unions
522190 Other Depository Credit
Intermediation
Nondepository Credit Intermediation
522210 Credit Card Issuing
522220 Sales Financing
522291 Consumer Lending
522292 Real Estate Credit (including
mortgage bankers &
originators)
522293 International Trade Financing
522294 Secondary Market Financing
522298 All Other Nondepository
Credit Intermediation
Activities Related to Credit
Intermediation
522300 Activities Related to Credit
Intermediation (including loan
brokers, check clearing, &
money transmitting)
Securities, Commodity Contracts,
and Other Financial Investments and
Related Activities
523110 Investment Banking &
Securities Dealing
523120 Securities Brokerage
523130 Commodity Contracts
Dealing
523140 Commodity Contracts
Brokerage
523210 Securities & Commodity
Exchanges
523900 Other Financial Investment
Activities (including portfolio
management & investment
advice)
Insurance Carriers and Related
Activities
524140 Direct Life, Health, & Medical
Insurance & Reinsurance
Carriers
524150 Direct Insurance &
Reinsurance (except Life,
Health & Medical) Carriers
524210 Insurance Agencies &
Brokerages
524290 Other Insurance Related
Activities (including
third-party administration of
insurance and pension funds)
Funds, Trusts, and Other Financial
Vehicles
525100 Insurance & Employee
Benefit Funds
525910 Open-End Investment Funds
(Form 1120-RIC)
525920 Trusts, Estates, & Agency
Accounts
525990 Other Financial Vehicles
(including mortgage REITs &
closed-end investment funds)
“Offices of Bank Holding Companies”
and “Offices of Other Holding
Companies” are located under
Management of Companies (Holding
Companies) below.
Real Estate and Rental and
Leasing
Real Estate
531110 Lessors of Residential
Buildings & Dwellings
(including equity REITs)
531114 Cooperative Housing
(including equity REITs)
531120 Lessors of Nonresidential
Buildings (except
Miniwarehouses) (including
equity REITs)
531130 Lessors of Miniwarehouses &
Self-Storage Units (including
equity REITs)
531190 Lessors of Other Real Estate
Property (including equity
REITs)
531210 Offices of Real Estate Agents
& Brokers
531310 Real Estate Property
Managers
Codes for Principal Business Activity and Principal Product or Service (continued)
Code
531320 Offices of Real Estate
Appraisers
531390 Other Activities Related to
Real Estate
Rental and Leasing Services
532100 Automotive Equipment Rental
& Leasing
532210 Consumer Electronics &
Appliances Rental
532220 Formal Wear & Costume
Rental
532230 Video Tape & Disc Rental
532290 Other Consumer Goods
Rental
532310 General Rental Centers
532400 Commercial & Industrial
Machinery & Equipment
Rental & Leasing
Lessors of Nonfinancial Intangible
Assets (except copyrighted works)
533110 Lessors of Nonfinancial
Intangible Assets (except
copyrighted works)
Professional, Scientific, and
Technical Services
Legal Services
541110 Offices of Lawyers
541190 Other Legal Services
Accounting, Tax Preparation,
Bookkeeping, and Payroll Services
541211 Offices of Certified Public
Accountants
541213 Tax Preparation Services
541214 Payroll Services
541219 Other Accounting Services
Architectural, Engineering, and
Related Services
541310 Architectural Services
541320 Landscape Architecture
Services
541330 Engineering Services
541340 Drafting Services
541350 Building Inspection Services
541360 Geophysical Surveying &
Mapping Services
541370 Surveying & Mapping (except
Geophysical) Services
541380 Testing Laboratories
Specialized Design Services
541400 Specialized Design Services
(including interior, industrial,
graphic, & fashion design)
Computer Systems Design and
Related Services
541511 Custom Computer
Programming Services
541512 Computer Systems Design
Services
541513 Computer Facilities
Management Services
541519 Other Computer Related
Services
Other Professional, Scientific, and
Technical Services
541600 Management, Scientific, &
Technical Consulting
Services
541700 Scientific Research &
Development Services
541800 Advertising & Related
Services
541910 Marketing Research & Public
Opinion Polling
541920 Photographic Services
541930 Translation & Interpretation
Services
Code
541940 Veterinary Services
541990 All Other Professional,
Scientific, & Technical
Services
Management of Companies
(Holding Companies)
551111 Offices of Bank Holding
Companies
551112 Offices of Other Holding
Companies
Administrative and Support
and Waste Management and
Remediation Services
Administrative and Support Services
561110 Office Administrative
Services
561210 Facilities Support Services
561300 Employment Services
561410 Document Preparation
Services
561420 Telephone Call Centers
561430 Business Service Centers
(including private mail centers
& copy shops)
561440 Collection Agencies
561450 Credit Bureaus
561490 Other Business Support
Services (including
repossession services, court
reporting, & stenotype
services)
561500 Travel Arrangement &
Reservation Services
561600 Investigation & Security
Services
561710 Exterminating & Pest Control
Services
561720 Janitorial Services
561730 Landscaping Services
561740 Carpet & Upholstery Cleaning
Services
561790 Other Services to Buildings &
Dwellings
561900 Other Support Services
(including packaging &
labeling services, &
convention & trade show
organizers)
Waste Management and
Remediation Services
562000 Waste Management &
Remediation Services
Educational Services
611000 Educational Services
(including schools, colleges,
& universities)
Health Care and Social
Assistance
Offices of Physicians and Dentists
621111 Offices of Physicians (except
mental health specialists)
621112 Offices of Physicians, Mental
Health Specialists
621210 Offices of Dentists
Offices of Other Health Practitioners
621310 Offices of Chiropractors
621320 Offices of Optometrists
621330 Offices of Mental Health
Practitioners (except
Physicians)
621340 Offices of Physical,
Occupational & Speech
Therapists, & Audiologists
Code
621391 Offices of Podiatrists
621399 Offices of All Other
Miscellaneous Health
Practitioners
Outpatient Care Centers
621410 Family Planning Centers
621420 Outpatient Mental Health &
Substance Abuse Centers
621491 HMO Medical Centers
621492 Kidney Dialysis Centers
621493 Freestanding Ambulatory
Surgical & Emergency
Centers
621498 All Other Outpatient Care
Centers
Medical and Diagnostic Laboratories
621510 Medical & Diagnostic
Laboratories
Home Health Care Services
621610 Home Health Care Services
Other Ambulatory Health Care
Services
621900 Other Ambulatory Health
Care Services (including
ambulance services & blood
& organ banks)
Hospitals
622000 Hospitals
Nursing and Residential Care
Facilities
623000 Nursing & Residential Care
Facilities
Social Assistance
624100 Individual & Family Services
624200 Community Food & Housing,
& Emergency & Other Relief
Services
624310 Vocational Rehabilitation
Services
624410 Child Day Care Services
Arts, Entertainment, and
Recreation
Performing Arts, Spectator Sports,
and Related Industries
711100 Performing Arts Companies
711210 Spectator Sports (including
sports clubs & racetracks)
711300 Promoters of Performing Arts,
Sports, & Similar Events
711410 Agents & Managers for
Artists, Athletes, Entertainers,
& Other Public Figures
711510 Independent Artists, Writers,
& Performers
Museums, Historical Sites, and
Similar Institutions
712100 Museums, Historical Sites, &
Similar Institutions
Amusement, Gambling, and
Recreation Industries
713100 Amusement Parks & Arcades
713200 Gambling Industries
713900 Other Amusement &
Recreation Industries
(including golf courses, skiing
facilities, marinas, fitness
centers, & bowling centers)
Accommodation and Food
Services
Accommodation
721110 Hotels (except Casino Hotels)
& Motels
-44-
Code
721120 Casino Hotels
721191 Bed & Breakfast Inns
721199 All Other Traveler
Accommodation
721210 RV (Recreational Vehicle)
Parks & Recreational Camps
721310 Rooming & Boarding Houses
Food Services and Drinking Places
722110 Full-Service Restaurants
722210 Limited-Service Eating
Places
722300 Special Food Services
(including food service
contractors & caterers)
722410 Drinking Places (Alcoholic
Beverages)
Other Services
Repair and Maintenance
811110 Automotive Mechanical &
Electrical Repair &
Maintenance
811120 Automotive Body, Paint,
Interior, & Glass Repair
811190 Other Automotive Repair &
Maintenance (including oil
change & lubrication shops &
car washes)
811210 Electronic & Precision
Equipment Repair &
Maintenance
811310 Commercial & Industrial
Machinery & Equipment
(except Automotive &
Electronic) Repair &
Maintenance
811410 Home & Garden Equipment &
Appliance Repair &
Maintenance
811420 Reupholstery & Furniture
Repair
811430 Footwear & Leather Goods
Repair
811490 Other Personal & Household
Goods Repair & Maintenance
Personal and Laundry Services
812111 Barber Shops
812112 Beauty Salons
812113 Nail Salons
812190 Other Personal Care
Services (including diet &
weight reducing centers)
812210 Funeral Homes & Funeral
Services
812220 Cemeteries & Crematories
812310 Coin-Operated Laundries &
Drycleaners
812320 Drycleaning & Laundry
Services (except
Coin-Operated)
812330 Linen & Uniform Supply
812910 Pet Care (except Veterinary)
Services
812920 Photofinishing
812930 Parking Lots & Garages
812990 All Other Personal Services
Religious, Grantmaking, Civic,
Professional, and Similar
Organizations
813000 Religious, Grantmaking,
Civic, Professional, & Similar
Organizations (including
condominium and
homeowners associations)
Index
A
Accounting methods . . . . . . . . . . . 4
Accrual method . . . . . . . . . . . . . 5
Change in accounting
method . . . . . . . . . . . . . . . . . . . 5
Mark-to-market accounting
method . . . . . . . . . . . . . . . . . . . 5
Nonaccrual experience
method . . . . . . . . . . . . . . . . . . 15
Nonaccrual-experience
method . . . . . . . . . . . . . . . . . . . 5
Percentage of completion
method . . . . . . . . . . . . . . . . . . . 5
Accounting periods . . . . . . . . . . . . 5
Adjusting deductions for certain
credits . . . . . . . . . . . . . . . . . . . . . 17
Administrative adjustment
request . . . . . . . . . . . . . . . . . . . . . 6
Allocation of partnership items:
Contributed property . . . . . . . . 23
Liabilities . . . . . . . . . . . . . . . . . . 24
Nonrecourse liabilities . . . . . . 24
Partnership agreement . . . . . 23
Special allocations . . . . . . . . . 25
Alternative minimum tax . . . . . . 35
Adjusted gain (loss) . . . . . . . . 35
Depletion (other than oil and
gas) . . . . . . . . . . . . . . . . . . . . . 36
Depreciation adjustment on
property placed in service
after 1986 . . . . . . . . . . . . . . . 35
Oil, gas, and geothermal
properties . . . . . . . . . . . . . . . . 36
Amended return . . . . . . . . . . . . . . . 6
Analysis of net income
(loss) . . . . . . . . . . . . . . . . . . . . . . 39
Analysis of partner’s capital
account . . . . . . . . . . . . . . . . . . . . 25
Analysis of partners’ capital
accounts . . . . . . . . . . . . . . . . . . . 40
Assembling the return . . . . . . . . . 9
At-risk activities . . . . . . . . . . . . . . 24
Attached statements . . . . . . . . . . 24
Audits:
Tax Matters Partner . . . . . . . . 23
B
Balance sheets per books . . . . . 39
Business start-up
expenses . . . . . . . . . . . . . . . . . . 16
C
Capital gain:
Net long-term . . . . . . . . . . . . . . 26
Net short-term . . . . . . . . . . . . . 26
Change of address . . . . . . . . . . . 14
Charitable contribution . . . . . . . . 28
Codes:
Partner . . . . . . . . . . . . . . . . . . . . 24
Principal business
activity . . . . . . . . . . . . . . . . . . . 42
Schedule K-1 reporting . . . . . 23
Collectibles (28%) gain
(loss) . . . . . . . . . . . . . . . . . . . . . . 26
Commercial revitalization
deduction . . . . . . . . . . . . . . . . . . 19
Consolidated audit
procedures . . . . . . . . 5, 6, 21, 23
Contributions to the
partnership . . . . . . . . . . . . . . . . . 9
Cost of goods sold . . . . . . . . 15, 19
Inventory . . . . . . . . . . . . . . . . . . 20
Credits . . . . . . . . . . . . . . . . . . . . . . . 32
Low-income housing . . . . . . . . 32
Rehabilitation . . . . . . . . . . 33, 37
Rental activities . . . . . . . . . . . . 33
D
Deductions:
Bad debts . . . . . . . . . . . . . . . . . . 17
Depletion . . . . . . . . . . . . . . . . . . 18
Depreciation . . . . . . . . . . . . . . . 18
Employee benefit
programs . . . . . . . . . . . . . . . . 18
Entertainment facilities . . . . . . 19
Guaranteed payments . . . . . . 17
How to report . . . . . . . . . . . . . . 16
Interest . . . . . . . . . . . . . . . . . . . . 18
Limitations . . . . . . . . . . . . . . . . . 16
Meals and
entertainment . . . . . . . . . . . . 19
Membership dues . . . . . . . . . . 19
Reforestation
expenditures . . . . . . . . . . . . . 19
Rent . . . . . . . . . . . . . . . . . . . . . . . 17
Repairs and
maintenance . . . . . . . . . . . . . 17
Retirement plans . . . . . . . . . . . 18
Salaries and wages . . . . 17, 25
Taxes and licenses . . . . . . . . . 17
Transactions between related
taxpayers . . . . . . . . . . . . . . . . 16
Travel . . . . . . . . . . . . . . . . . . . . . 19
Wages . . . . . . . . . . . . . . . . . . . . . 17
Definitions . . . . . . . . . . . . . . . . . . . . 2
Depreciation . . . . . . . . . . . . . . . . . 18
Dispositions of contributed
property . . . . . . . . . . . . . . . . . . . . 9
Distributions:
Cash and marketable
securities . . . . . . . . . . . . . . . . 36
Other property . . . . . . . . . . . . . 36
Recognition of precontribution
gain . . . . . . . . . . . . . . . . . . . . . 10
Dividends . . . . . . . . . . . . . . . . . . . . 26
Domestic production activities
deduction . . . . . . . . . . . . . . . . . . 30
E
Elections:
By each partner . . . . . . . . . . . . . 9
By the partnership . . . . . . . . . . . 9
Electronic filing . . . . . . . . . . . . . . . . 3
Entity classification election . . . . 9
Extensions . . . . . . . . . . . . . . . . . . . . 3
Extraterritorial income
exclusion . . . . . . . . . . . . . . 14, 35
F
Foreign accounts . . . . . . . . . . . . . 21
Foreign partners,
withholding . . . . . . . . . . . . . . . . 22
Foreign partnership . . . . . . . . . . . . 2
Foreign taxes . . . . . . . . . . . . . . . . 34
Foreign trusts,
transactions . . . . . . . . . . . . . . . . 22
Forms:
How to get . . . . . . . . . . . . . . . . . . 1
That may be required . . . . . . . . 6
G
General partner . . . . . . . . . . . . . . . 2
General partnership . . . . . . . . . . . 2
Guaranteed payments . . . . 25, 40
I
Inclusion amount . . . . . . . . . . . . . 17
Income:
Gross receipts or sales . . . . . 15
Tax-exempt income . . . . . . . .
Trade or business . . . . . . . . . .
Installment sales . . . . . . . . . . . . .
Interest income . . . . . . . . . . . . . . .
Interest on production
expenditures . . . . . . . . . . . . . . .
Inventory valuation
methods . . . . . . . . . . . . . . . . . . .
Investment:
Income and expenses . . . . . .
Interest expense . . . . . . . . . . .
15
15
15
26
18
20
37
29
L
Limited liability company . . . . . . .
Limited liability partnership . . . . .
Limited partner . . . . . . . . . . . . . . . .
Limited partnership . . . . . . . . . . . .
2
2
2
2
N
Net section 1231 gain
(loss) . . . . . . . . . . . . . . . . . . . . . . 27
Nondeductible expenses . . . . . . 36
Nonrecourse liabilities . . . . . . . . 24
Nonrecourse loans (See also
Nonrecourse liabilities) . . . . . . 2,
24
Notice of inconsistent
treatment . . . . . . . . . . . . . . . . . . . 6
O
Ordinary business income
(loss) . . . . . . . . . . . . . . . . . . . . . . 25
P
Paid preparer authorization . . . . 4
Partner contributing property with
a built-in gain or loss . . . . . . . . 25
Passive activity limitations:
Grouping activities . . . . . . . . . . 12
Passive activities
defined . . . . . . . . . . . . . . . . . . 10
Recharacterization of passive
income . . . . . . . . . . . . . . . . . . 12
Rental activities . . . . . . . . . . . . 11
Reporting requirements . . . . . 13
Trade or business
activities . . . . . . . . . . . . . . . . . 10
Penalties . . . . . . . . . . . . . . . . . . . . . . 4
Failure to furnish information
timely . . . . . . . . . . . . . . . . . . . . 4
Late filing . . . . . . . . . . . . . . . . . . . 4
Trust fund recovery . . . . . . . . . . 4
Period covered . . . . . . . . . . . . . . . . 3
Portfolio income . . . . . . . . . . 11, 26
Private delivery services . . . . . . . 3
Publicly traded
partnerships . . . . . . . . . 2, 10, 15
Q
Qualifying small business
taxpayer . . . . . . . . . . . . . . . . . . . 19
R
Recapture:
Investment credit . . . . . . . . . . . 37
Low-income housing
credit . . . . . . . . . . . . . . . . . . . . 37
Mining exploration costs . . . . 27
Section 179 deduction . . . . . . 38
Reconciliation of income (loss) per
books with income (loss) per
return . . . . . . . . . . . . . . . . . . . . . . 40
Recordkeeping . . . . . . . . . . . . . . . . 5
-45-
Reforestation costs . . . . . . . 30, 38
Rental activities . . . . . . . . . . . . . . 11
Rounding off to whole
dollars . . . . . . . . . . . . . . . . . . . . . . 5
Royalties . . . . . . . . . . . . . . . . . . . . . 26
S
Sale of partnership
interests . . . . . . . . . . . . . . . . . . . 10
Sale of small business stock:
Exclusion . . . . . . . . . . . . . . . . . . 28
Rollover . . . . . . . . . . . . . . . . . . . 28
Schedule:
A . . . . . . . . . . . . . . . . . . . . . . . . . . 19
B . . . . . . . . . . . . . . . . . . . . . . . . . . 20
K . . . . . . . . . . . . . . . . . . . . . . 23, 25
K-1 . . . . . . . . . . . . . . . . . . . . 23, 25
L . . . . . . . . . . . . . . . . . . . . . . . . . . 39
M-1 . . . . . . . . . . . . . . . . . . . . . . . . 40
M-2 . . . . . . . . . . . . . . . . . . . . . . . . 40
M-3 . . . . . . . . . . . . . . . . . . . . 14, 40
Section 108(i) . . . . . . 9, 15, 27, 31,
38
Section 179 expense
deduction . . . . . . . . . . . . . . . . . . 28
Recapture . . . . . . . . . . . . . . . . . 38
Section 481(a) adjustment . . . . . 5
Section 59(e) expenditures . . . . . 9,
16, 29
Self-charged interest . . . . . . . . . . 12
Self-employment . . . . . . . . . . . . . 31
Signatures:
General partner or LLC member
manager . . . . . . . . . . . . . . . . . . 4
Paid preparer . . . . . . . . . . . . . . . 4
Small partnerships . . . . . . . . . . . . 21
Special allocations . . . . . . . . . . . . 25
Substitute forms . . . . . . . . . . . . . . 23
Syndication costs . . . . . . . . . . . . . 17
T
Tax Matters Partner (TMP) . . . . 23
Tax shelter:
Registration . . . . . . . . . . . . . . . . 21
Tax-exempt income . . . . . . . . . . . 36
Termination of partnership . . . . . 3
Travel and entertainment . . . . 19,
40
U
Uniform capitalization
rules . . . . . . . . . . . . . . . . . . . . . . .
Unrealized receivables and
inventory:
Sale of partnership
interests . . . . . . . . . . . . . . . . .
Unrecaptured section 1250
gain . . . . . . . . . . . . . . . . . . . . . . .
Unrelated business taxable
income . . . . . . . . . . . . . . . . . . . .
16
10
26
38
W
What’s new . . . . . . . . . . . . . . . . . . .
When to file . . . . . . . . . . . . . . . . . . .
Where to file . . . . . . . . . . . . . . . . . .
Who must file . . . . . . . . . . . . . . . . .
1
3
3
2
■
| File Type | application/pdf |
| File Title | 2010 Instruction 1065 |
| Subject | Instructions for Form 1065, U.S. Return of Partnership Income |
| Author | W:CAR:MP:FP |
| File Modified | 2011-02-02 |
| File Created | 2011-02-02 |