1065 Instruction Form 1065

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2018

Department of the Treasury
Internal Revenue Service

Instructions for Form 1065
U.S. Return of Partnership Income

DRAFT AS OF
October 4, 2018

Section references are to the Internal Revenue Code
unless otherwise noted.

Contents

The Taxpayer Advocate Service Is
Here To Help You . . . . . . . .
How To Get Forms and
Publications . . . . . . . . . . .
General Instructions . . . . . . . . .
Purpose of Form . . . . . . . .
Definitions . . . . . . . . . . . .
Who Must File . . . . . . . . . .
Termination of the
Partnership . . . . . . . . . .
Electronic Filing . . . . . . . . .
When To File . . . . . . . . . . .
Where To File . . . . . . . . . .
Who Must Sign . . . . . . . . .
Penalties . . . . . . . . . . . . .
Accounting Methods . . . . . .
Accounting Periods . . . . . . .
Rounding Off to Whole
Dollars . . . . . . . . . . . . .
Recordkeeping . . . . . . . . .
Amended Return . . . . . . . .
Assembling the Return . . . .
Entity Classification Election .
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 . . . . . . . . .
Income . . . . . . . . . . . . . . .
Deductions . . . . . . . . . . . .
Schedule B. Other
Information . . . . . . . . . .
Schedules K and K-1.
Partners' Distributive
Share Items . . . . . . . . . .
Specific Instructions
(Schedule K-1 Only) . . . .
Part I. Information About the
Partnership . . . . . . . . . .
Part II. Information About the
Partner . . . . . . . . . . . . .

Oct 03, 2018

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Contents

Page

Specific Instructions
(Schedules K and K-1,
Part III, Except as Noted)
Analysis of Net Income
(Loss) . . . . . . . . . . . .
Schedule L. Balance Sheets
per Books . . . . . . . . . .
Schedule M-1.
Reconciliation of Income
(Loss) per Books With
Income (Loss) per
Return . . . . . . . . . . . .
Schedule M-2. Analysis of
Partners' Capital
Accounts . . . . . . . . . .
Codes for Principal Business
Activity and Principal Product
or Service . . . . . . . . . . . .
Index . . . . . . . . . . . . . . . . . .

. . . 30
. . . 48

. . . 48

. . . 49

. . . 49
. . . 51
. . . 54

Future Developments

For the latest information about
developments related to Form 1065 and its
instructions, such as legislation enacted after
they were published, go to IRS.gov/
Form1065.

What's New
Address change for filing returns. The
filing address for partnerships located in
some states has changed. See Where To
File, later.
Technical terminations. On page 1, in
Item G, the check box for technical
terminations has been removed because
technical terminations do not apply for
partnership tax years beginning after 2017.
Tax, payments, and refunds. The
following payments can now be made with
Form 1065, and refunds of overpayments
can be claimed using the new Tax and
Payment section on page 1 of the form.
• Interest due under the look-back method
for the completed contract method and the
income forecast method.
• Bipartisan Budget Act of 2015 (BBA)
Administrative Adjustment Request (AAR)
imputed underpayment.
• Other taxes.
• Refunds of overpayments.
• Modification payment made under section
6225(c)(2).
Changes to Schedule B questions. The
questions relating to the Tax Equity and
Fiscal Responsibility Act of 1982 (TEFRA)
have been removed from Schedule B
because TEFRA has been repealed and
replaced by BBA.

Cat. No. 11392V

Question 21. New question 21 asks if
the partnership is a section 721(c)
partnership defined in Regulations section
1.721(c)-1T(b)(14).
Question 22. New question 22 is added
for section 267A that provides that a
deduction for certain interest or royalties paid
or accrued by or to a related party pursuant
to a hybrid transaction, or by or to a hybrid
entity, may be disallowed to the extent the
related party does not include the amount in
income or is allowed a deduction with
respect to the amount paid. See section
267A for more information.
Questions 23 and 24. New question 23
and question 24 are added for section 163(j).
For tax years beginning in 2018, every
taxpayer who deducts business interest is
required to file Form 8990, Limitation on
Business Interest Expense Under Section
163(j), unless an exception for filing is met.
For more information, see Form 8990 and its
instructions.
Question 25. New question 25 is added
for the centralized partnership audit regime
elect out provision under section 6221(b).
Question 26. New question 26 is added
for the qualified opportunity fund. See Form
8996 and its related instructions for more
information.
Designation of partnership representative. On page 3, the tax matters partner
signature block has been replaced with the
designation of partnership representative
(PR), and includes the identity of the
designated individual for the PR if the PR is
an entity.
Changes to Schedule K. New line 6c is
added for dividend equivalents.
Changes have been made to the codes
for lines 11, 13, 16, and 20.
Qualified business income deduction.
For tax years beginning after 2017,
individuals, estates, and trusts may be
entitled to a deduction of up to 20% of their
qualified business income from a trade or
business, including income from a
pass-through entity (but not from a C
corporation), plus 20% of qualified real
estate investment trust (REIT) dividends and
qualified publicly traded partnership (PTP)
income. The deduction is subject to multiple
limitations such as the type of trade or
business, the taxpayer's taxable income, the
amount of W-2 wages paid with respect to
the trade or business, and the unadjusted
basis immediately after acquisition of
qualified property held by the trade or
business. The deduction can be taken in
addition to the standard or itemized

deductions. For more information, see
section 199A and Pub. 535, Business
Expenses.
Small business taxpayers. Effective for
tax years beginning after 2017, the eligibility
of small business taxpayers to use the cash
method has been expanded. See
Accounting Methods below.

Opportunity Zones Frequently Asked
Questions.

Reminders
Disaster relief. A new item was added to
code G of Schedule K-1 (Form 1065), box 13
to report qualified cash contributions for relief
efforts in certain disaster areas. See Cash
contributions for relief efforts in certain
disaster areas.
Eligible employers in certain disaster
areas can use Form 5884-A, Credits for
Affected Disaster Area Employers, to report
the employee retention credit.
For more information on these and other
disaster relief provisions, see Pub. 976,
Disaster Relief.

Schedules K-1 required to be issued by the
partnership to the number of Schedules K-1
required to be issued by any partner that is
an S corporation to its shareholders for the
taxable year of the S corporation ending with
or within the partnership taxable year. A
partnership is not an eligible partnership if it
is required to issue a Schedule K-1 to any of
the following partners.
• A partnership.
• A trust.
• A foreign entity that would not be treated
as a C corporation were it a domestic entity.
• A disregarded entity described in
Regulations section 301.7701–2(c)(2)(i).
• An estate of an individual other than a
deceased partner.
• Any person that holds an interest in the
partnership on behalf of another person.

DRAFT AS OF
October 4, 2018

Treatment of deferred foreign income
upon transition to participation exemption system of taxation. U.S. shareholders
of specified foreign corporations, as defined
in new section 965(e), may have an inclusion
based on post-1986 deferred foreign income
of such corporations determined as of
November 2, 2017, or December 31, 2017.
The U.S. shareholders may elect to pay the
liability under section 965 on the post-1986
deferred foreign income in eight installments.
See section 965. Also see Pub. 5292.
Inclusion of Global Intangible Low-Taxed
Income (GILTI). New section 951A
requires U.S. shareholders of controlled
foreign corporations to determine and
include their GILTI in taxable income every
year. Section 951A is effective for tax years
of foreign corporations beginning after 2017,
and for tax years of U.S. shareholders in
which or with which such tax years of foreign
corporations end. See section 951A for more
information.

Foreign-Derived Intangible Income
(FDII). New section 250 allows a domestic
corporation a deduction for the eligible
percentage of FDII and GILTI. Section 250 is
effective for tax years beginning after 2017. If
applicable, the partnership must provide the
necessary information to each domestic
corporate partner for its calculation of FDII
benefit. See section 250 for more
information.
Domestic production activities deduction
(DPAD). The DPAD has been repealed for
tax years beginning after 2017, with limited
exceptions. See Form 8903 and its
instructions for details.
Treatment of gain or loss from sale or exchange of interests in partnerships engaged in U.S. trade or business. New
section 864(c)(8) provides that gain or loss
from the sale, exchange, or other disposition
of a partnership interest by a nonresident
alien or foreign corporation is generally
effectively connected with the conduct of a
trade or business in in the United States to
the extent that the person would have had
effectively connected gain or loss had the
partnership sold all of its assets at fair market
value. See the instructions for Schedule K,
line 20, code AE for a new reporting
requirement.
Special rules for eligible gains invested
in Qualified Opportunity Funds. Effective
December 22, 2017, section 1400Z-2
provides partners investing eligible gains in
Qualified Opportunity Funds (QOF)
tax-favored investments. If the partnership is
operating as a QOF, see Other Forms and
Statements That May Be Required, later. For
additional information please see

Who must sign. The partnership return
must be signed by a partner. Beginning in
2017, any partner of a partnership or any
member of a limited liability company may
sign the return.

Foreign partnerships with wholly-owned
domestic disregarded entities. For tax
years beginning on or after January 1, 2017,
and ending on or after December 13, 2017, if
a foreign partnership wholly owns a domestic
disregarded entity (DE), the domestic DE is
treated as a domestic corporation separate
from its owner (the foreign partnership) for
the limited purposes of the requirements that
apply to certain foreign-owned domestic
corporations under section 6038A. See the
Instructions for Form 5472 for additional
information about reporting required by the
domestic DE.
Entertainment expenses, membership
dues, and facilities. No deduction is
allowed for certain entertainment expenses,
membership dues, and facilities used in
connection with these activities for amounts
incurred or paid after 2017. See Travel,
meals, and entertainment, later.
Bipartisan Budget Act. The Bipartisan
Budget Act of 2015 (BBA) created a new
centralized partnership audit regime effective
for partnership tax years beginning after
2017.
Partnership representative. Under the
centralized partnership audit regime,
partnerships are required to designate a
partnership representative. The partnership
representative will have the sole authority to
act on behalf of the partnership under the
centralized partnership audit regime. The
designated partnership representative is a
partner or other person with a substantial
presence in the United State.
Electing out of the centralized
partnership audit regime. A partnership
can elect out of the centralized partnership
audit regime for a taxable year if the
partnership is an eligible partnership that
year. A partnership is an eligible partnership
in the taxable year if it has 100 or fewer
eligible partners. The determination as to
whether the partnership has 100 or fewer
partners is made by adding the number of
-2-

Schedule B-2 (Form 1065). See
Schedule B-2 and its instructions if electing
out of the centralized partnership audit
regime.

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looking at the photographs and calling
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recognize a child.

The Taxpayer Advocate
Service Is Here To Help
You
What is the Taxpayer Advocate Service?
The Taxpayer Advocate Service (TAS) is an
independent organization within the Internal
Revenue Service that helps taxpayers and
protects taxpayer rights. Our job is to ensure
that every taxpayer is treated fairly and that
you know and understand your rights under
the Taxpayer Bill of Rights.
What can the Taxpayer Advocate Service
do for you? We can help you resolve
problems that you can’t resolve with the IRS.
And our service is free. If you qualify for our
assistance, you will be assigned to one
advocate who will work with you throughout
the process and will do everything possible
to resolve your issue.
How can you reach us? We have offices
in every state, the District of Columbia, and
Puerto Rico. Your local advocate's number is
in your local directory and at
www.taxpayeradvocate.irs.gov. You can also
call us at 1-877-777-4778.
How can you learn about your taxpayer
rights? The Taxpayer Bill of Rights
describes 10 basic rights that all taxpayers
have when dealing with the IRS. Our Tax
Toolkit at www.taxpayeradvocate.irs.gov can
help you understand what these rights mean

Instructions for Form 1065 (2018)

to you and how they apply. These are your
rights. Know them. Use them.
How else does the Taxpayer Advocate
Service help taxpayers? The TAS works
to resolve large-scale problems that affect
many taxpayers. If you know of one of these
broad issues, please report it to us at
IRS.gov/sams.

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.

qualified joint venture status doesn't alter the
application of the self-employment tax or the
passive loss limitation rules.
To make the qualified joint venture
election for 2018, jointly file the 2018 Form
1040, with the required schedules. This
generally doesn't increase the total tax on
the return, but it does give each spouse
credit for social security earnings on which
retirement benefits are based, provided
neither spouse exceeds the social security
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 don't need to amend that
return or file a final Form 1065 for the year
the election takes effect.
For more information on qualified joint
ventures, go to IRS.gov and enter “Qualified
Joint Venture” in the search box.

DRAFT AS OF
October 4, 2018

How To Get Forms and
Publications

Internet. You can access the IRS website
at IRS.gov 24 hours a day, 7 days a week to:
• E-file your return. Find out about
commercial tax preparation and e-file
services available free to eligible taxpayers;
• Download forms, including talking tax
forms, instructions, and publications;
• Use the online Internal Revenue Code,
regulations, or other official guidance;
• Get information on starting and operating
a small business;
• 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.
Tax forms and publications. The
partnership can download or print all of the
forms and publications it may need on
IRS.gov/formspubs. Otherwise, the
partnership can go to IRS.gov/orderforms to
place an order and have forms mailed to the
partnership. The partnership should receive
its order within 10 business days.

General Instructions
Purpose of Form

Form 1065 is an information return used to
report the income, gains, losses, deductions,
credits, and other information from the
operation of a partnership. A partnership
doesn't pay tax on its income but passes
through any profits or losses to its partners.
Partners must include partnership items on
their tax or information returns.

Definitions
Centralized Partnership Audit
Regime

The Bipartisan Budget Act of 2015 (BBA)
created a new centralized partnership audit
regime effective for partnership tax years
beginning after 2017. The new audit regime
replaces the consolidated audit proceedings
under TEFRA. The new audit regime applies
to all partnerships unless the partnership is
an eligible partnership and elects out by
making a valid election using Schedule B-2
(Form 1065).

Instructions for Form 1065 (2018)

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
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.

Business owned and operated by spouses. Generally, if you and your spouse
jointly own and operate an unincorporated
business and share in the profits and losses,
you 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 married couple who file a
joint return; both spouses materially
participate in the trade or business, as mere
joint ownership of property isn't enough; both
spouses elect not to be treated as a
partnership; and the business is co-owned
by both spouses and isn't held in the name of
a state law entity such as a partnership or
limited liability company.
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, as applicable.
If you and your spouse make the election
for your rental real estate business, you each
must report your share of income and
deductions on Schedule E. Rental real
estate income generally isn't included in net
earnings from self-employment subject to
self-employment tax and generally is subject
to the passive loss limitation rules. Electing
-3-

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.
If a domestic section 721(c) partnership is
formed on or after January 18, 2017, and the
gain deferral method is applied, then a U.S.
transferor must treat the section 721(c)
partnership as a foreign partnership and file
a Form 8865, Return of U.S. Person with
Respect to Certain Foreign Partnerships,
with respect to the partnership. See Form
8865 and its instructions. See also
Temporary Regulations section
1.721(c)-6T(b)(4).

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.

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 isn't

personally liable for the debts of the LLP or
any other partner, nor is a partner liable for
the acts or omissions of any other partner,
solely by reason of being a partner.

Limited Liability Company

A limited liability company (LLC) is an entity
formed under state law by filing articles of
organization as an LLC. Unlike a partnership,
none of the members of an LLC are
personally liable for its debts. An LLC may
be classified for federal income tax purposes
as a partnership, a corporation, or an entity
disregarded as an entity separate from its
owner by applying the rules in Regulations
section 301.7701-3. See Form 8832, Entity
Classification Election, for more details.

section 721(c) partnership under Temporary
Regulations section 1.721(c)-2T(b).

qualifies for either of the following two
exceptions.

Who Must File

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).

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.

DRAFT AS OF
October 4, 2018

A domestic LLC with at least two

TIP 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 or related
person bears the economic risk of loss.

Section 721(c) Partnership

A partnership (domestic or foreign) is a
section 721(c) partnership if there is a
contribution of section 721(c) property to the
partnership and, after the contribution (and
all transactions related to the contribution),
(1) a related foreign person with respect to
the U.S. transferor is a direct or indirect
partner in the partnership and (2) the U.S.
transferor and related persons own 80% or
more of the interests in partnership capital,
profits, deductions, or losses. See
Temporary Regulations section
1.721(c)-1T(b)(14).

U.S. Transferor

A U.S. transferor is a U.S. person other than
a domestic partnership. See Temporary
Regulations section 1.721(c)-1T(b)(18).

Section 721(c) Property

Section 721(c) property is property (other
than excluded property) with built-in gain that
is contributed to a partnership by a U.S.
transferor, including pursuant to a
contribution described in Temporary
Regulations section 1.721(c)-2T(d)
(partnership look-through rule). See
Temporary Regulations section
1.721(c)-1T(b)(15).

Gain Deferral Contribution

A gain deferral contribution is a contribution
of section 721(c) property to a section 721(c)
partnership with respect to which the
recognition of gain is deferred under the gain
deferral method. See Temporary
Regulations section 1.721(c)-1T(b)(7).

Gain Deferral Method

The gain deferral method is the method
described in Temporary Regulations section
1.721(c)-3T(b) applied to avoid the
immediate recognition of gain upon a
contribution of section 721(c) property to a

Entities formed as LLCs that are
classified as partnerships for federal income
tax purposes have the same filing
requirements as domestic partnerships.

A religious or apostolic organization
exempt from income tax under section
501(d) must file Form 1065 to report its
taxable income, which must be allocated to
its members as a dividend, whether
distributed or not. Such an organization must
figure its taxable income on an attached
statement to Form 1065 in the same manner
as a corporation. The organization may use
Form 1120, U.S. Corporation Income Tax
Return, for this purpose. Enter the
organization's taxable income, if any, on
line 6a of Schedule K and each member's
distributive share in box 6a of Schedule K-1.
Net operating losses aren't deductible by the
members but may be carried back or forward
by the organization under the rules of section
172. The religious or apostolic organization
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 attached
statements, except Schedules K-1. For more
details, see Regulations section
301.6104(d)-1.
A qualifying syndicate, pool, joint venture,
or similar organization may elect under
section 761(a) not to be treated as a
partnership for federal income tax purposes
and 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.

Real estate mortgage investment
conduits (REMICs) must file Form 1066, U.S.
Real Estate Mortgage Investment Conduit
(REMIC) Income Tax Return.
Certain publicly traded partnerships
treated as corporations under section 7704
must file Form 1120.

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 isn't required to file Form 1065 if it
-4-

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
section 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 1 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
doesn't already have one.

Termination of the
Partnership

A partnership terminates when all its
operations are discontinued and no part of
any business, financial operation, or venture
is continued by any of its partners in a
partnership.
The partnership’s tax year ends on the
date of termination which is the date the
partnership winds up its affairs. Special rules
apply in the case of a merger, consolidation,
or division of a partnership. See Regulations
sections 1.708-1(c) and (d) for details.

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.
See Rev. Proc. 2012-17, at www.irs.gov/
pub/irs-irbs/irb12-10.pdf, for the

Instructions for Form 1065 (2018)

Waiver requests can also be faxed to
1-877-477-0575.

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.
And the total assets at
If the partnership's principal the end of the tax year
business, office, or agency (Form 1065, page 1, item
is located in:
F) are:

Contact the e-Help Desk 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 3rd month
following the date its tax year ended as
shown at the top of Form 1065. For calendar
year partnerships, the due date is March 15,
2019.

DRAFT AS OF
October 4, 2018

Connecticut, Delaware, District
of Columbia, Georgia, Illinois,
Indiana, Kentucky, Maine,
Maryland, Massachusetts,
Michigan, New Hampshire,
New Jersey, New York, North
Carolina, Ohio, Pennsylvania,
Rhode Island, South Carolina,
Tennessee, Vermont, Virginia,
West Virginia, Wisconsin

Less than $10 million and
Schedule M-3 is not filed

Connecticut, Delaware, District
of Columbia, Georgia, Illinois,
Indiana, Kentucky, Maine,
Maryland, Massachusetts,
Michigan, New Hampshire,
New Jersey, New York, North
Carolina, Ohio, Pennsylvania,
Rhode Island, South Carolina,
Tennessee, Vermont, Virginia,
West Virginia, Wisconsin

$10 million or more or
less than $10 million and
Schedule M-3 is filed

Use the following address:

Department of the Treasury
Internal Revenue Service Center
Kansas City, MO 64999-0011

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

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
A foreign country or U.S.
possession

For the IRS mailing address to use if you
are using a PDS, go to IRS.gov/
PDSStreetAddresses.
A PDS can’t deliver items to P.O.
boxes. You must use the U.S. Postal
CAUTION Service to mail any item to an IRS
P.O. box address.

!

Any amount

Any amount

requirements for furnishing substitute
Schedule K-1 in electronic format.
The option to file electronically doesn't
apply to certain returns, including:
• Bankruptcy returns, and
• Returns with pre-computed penalty and
interest.
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;
• 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.

Instructions for Form 1065 (2018)

Department of the Treasury
Internal Revenue Service Center
Ogden, UT 84201-0011

Partnerships can use certain private delivery
services designated by the IRS to meet the
“timely mailing as timely filing/paying” rule for
tax returns. Go to IRS.gov/PDS for the
current list of designated services. The PDS
can tell you how to get written proof of the
mail date.

Department of the Treasury
Internal Revenue Service Center
Ogden, UT 84201-0011

Internal Revenue Service
P.O. Box 409101
Ogden, UT 84409

For More Information on Filing
Electronically

• Call the e-Help Desk at 1-866-255-0654,

or

• Visit IRS.gov/filing.

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.

-5-

Extension of Time To File

File Form 7004 to request an extension of
time to file. File Form 7004 by the regular
due date of the partnership return. Form
7004 can be electronically filed. See the
Instructions for Form 7004.

Period Covered

The 2018 Form 1065 is an information return
for calendar year 2018 and fiscal years that
begin in 2018 and end in 2019. 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.
The 2018 Form 1065 may also be used if:
1. The partnership has a tax year of less
than 12 months that begins and ends in
2019, and
2. The 2019 Form 1065 is not available
by the time the partnership is required to file
its return.
However, the partnership must show its
2019 tax year on the 2018 Form 1065 and
incorporate any tax law changes that are
effective for tax years beginning after 2018.

Who Must Sign
Any Partner or LLC Member

Form 1065 isn't considered to be a return
unless it is signed by a partner or LLC
member. When a return is made for a
partnership by a receiver, trustee, or
assignee, the fiduciary must sign the return,

instead of the partner or LLC member.
Returns and forms signed by a receiver or
trustee in bankruptcy on behalf of a
partnership must be accompanied by a copy
of the order or instructions of the court
authorizing signing of the return or form.

Paid Preparer's Information

If a partner, member, or employee of the
partnership completes Form 1065, the paid
preparer's space should remain blank. In
addition, anyone who prepares Form 1065
but doesn't charge the partnership should
not complete this section.

partnership return and it (a) fails to file the
return by the due date, including extensions,
or (b) files a return that fails to show all the
information required, unless such failure is
due to reasonable cause. The penalty is
$210 for each month or part of a month (for a
maximum of 12 months) the failure
continues, multiplied by the total number of
persons who were partners in the
partnership during any part of the
partnership's tax year for which the return is
due. If the partnership receives a notice
about a penalty after it files the return, the
partnership may send the IRS an explanation
and the Service will determine if the
explanation meets reasonable-cause criteria.
Do not attach an explanation when filing the
return.

cases, the method used must clearly reflect
income. Generally, the following rules apply.
For more information see Pub. 538,
Accounting Periods and Methods.
Permissible methods include:

• Cash,
• Accrual, or
• Any other method authorized by the

DRAFT AS OF
October 4, 2018

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.
A paid preparer may sign original or

TIP amended returns by rubber stamp,

mechanical device, or computer
software program.

Paid Preparer Authorization

If the partnership wants to allow the paid
preparer to discuss its 2018 Form 1065 with
the IRS, check the “Yes” box in the signature
area of the return. The authorization applies
only to the individual whose signature
appears in the “Paid Preparer Use Only”
section of its return. It doesn't apply to the
firm, if any, shown in the section.

If the “Yes” box is checked, the
partnership is authorizing the IRS to call the
paid preparer to answer any questions that
may arise during the processing of its return.
The partnership is also authorizing the paid
preparer to:
• 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 2018 return.

Penalties
Late Filing of Return

A penalty is assessed against the
partnership if it is required to file a

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 $270 penalty may be
imposed for each Schedule K-1 for which a
failure occurs. The maximum penalty is
$3,275,500 for all such failures during a
calendar year. If the requirement to report
correct information is intentionally
disregarded, each $270 penalty is increased
to $540 or, if greater, 10% of the aggregate
amount of items required to be reported.
There is no limit to the amount of the penalty.

Trust Fund Recovery Penalty

This penalty may apply if certain excise,
income, social security, and Medicare taxes
that must be collected or withheld aren't
collected or withheld, or these taxes 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;
• Form 944, Employer's ANNUAL Federal
Tax Return; and
• 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, or paying over
these taxes, and who acted willfully in not
doing so. The penalty is equal to the unpaid
trust fund tax. See the Instructions for Form
720; Pub. 15 (Circular E), Employer's Tax
Guide; or Pub. 51 (Circular A), Agricultural
Employer's Tax Guide, for more details,
including the definition of a responsible
person.

Accounting Methods

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
-6-

Internal Revenue Code.

Generally, a partnership may not use the
cash method of accounting if (a) it has at
least one corporate partner and it has
average annual gross receipts of more than
$25 million for the 3 prior tax years; 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.
However, effective for tax years beginning
after 2017, a small business taxpayer
(defined below) can adopt or change its
accounting method to account for inventories
(i) in the same manner as materials and
supplies that are non-incidental, or (ii) to
conform to the taxpayer's treatment of
inventories in an applicable financial
statement (as defined in section 451 (b)(3)),
or, if the taxpayer does not have an
applicable financial statement, the method of
accounting used in the taxpayer's books and
records prepared in accordance with the
taxpayer's accounting procedures. See
section 471(c)(1), and Change in Accounting
Method, later.
Small business taxpayer. A small
business taxpayer is a taxpayer that (a) has
average annual gross receipts of $25 million
or less for the prior 3 tax years and (b) is not
a tax shelter (as defined in section 448(d)
(3)). See section 471(c).
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.

Instructions for Form 1065 (2018)

See section 461(h) and the related
regulations for the rules for determining
when economic performance takes place.
Nonaccrual-experience method. Accrual
method partnerships aren't required to
accrue certain amounts to be received from
the performance of services that, on the
basis of their experience, 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 doesn’t exceed $25 million for all
prior tax years. For more details, see section
448(d)(5).
This provision doesn't 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.

used to report income (for income as a whole
or for any material item). To do so, the
partnership generally must file Form 3115,
Application for Change in Accounting
Method. See the Instructions for Form 3115
for more information and exceptions. Also
see Rev. Proc. 2018-31, 2018-22 I.R.B. 637
(or any successor guidance), and Pub. 538,
Accounting Periods and Methods.

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.

DRAFT AS OF
October 4, 2018

Percentage of completion method.
Long-term contracts (except for certain real
property construction contracts) must
generally be accounted for using the
percentage of completion method described
in section 460. See section 460 and the
underlying regulations for rules on long-term
contracts.
Mark-to-market accounting method.
Dealers in securities must use the
mark-to-market accounting method
described in section 475. Under this method,
any security that is inventory to the dealer
must be included in inventory at its fair
market value (FMV). Any security that isn't
inventory and that is held at the close of the
tax year is treated as sold at its FMV on the
last business day of the tax year, and any
gain or loss must be taken into account in
determining gross income. The gain or loss
taken into account is generally treated as
ordinary gain or loss. For details, including
exceptions, see section 475, the related
regulations, and Rev. Rul. 97-39, 1997-39
I.R.B. 4.
Dealers in commodities and traders in
securities and commodities can elect to use
the mark-to-market accounting method. To
make the election, the partnership must file a
statement describing the election, the first
tax year the election is to be effective, and, in
the case of an election for traders in
securities or commodities, the trade or
business for which the election is made.
Except for new taxpayers, the statement
must be filed by the due date (not including
extensions) of the return for the tax year
immediately preceding the election year and
attached to that return or, if applicable, to a
request for an extension of time to file that
return. For more details, see Rev. Proc.
99-17, 1999-7 I.R.B. 52, as superseded in
part by Rev. Proc. 99-49, and sections
475(e) and (f).
Change in accounting method.
Generally, the partnership must get IRS
consent to change its method of accounting

Instructions for Form 1065 (2018)

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, in some
instances, a partnership can elect to modify
the section 481(a) adjustment period. The
partnership must complete the appropriate
lines of Form 3115 to make the election. See
the Instructions for Form 3115.
Include any net positive section 481(a)
adjustment on page 1 of Form 1065, line 7. If
the net section 481(a) adjustment is
negative, report it on page 1, line 20.
There are some instances when the
partnership can obtain automatic consent
from the IRS to change to certain accounting
methods. See Rev. Proc. 2018-31, 2018-22
I.R.B. 637 (or any successor guidance), and
Pub. 538, Accounting Periods and Methods.

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
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
-7-

The tax year of a common trust fund

TIP 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. 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.
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

The procedures to follow when filing an
amended partnership return depend on
whether the amended return is filed
electronically or on paper. The rules for
determining when a return must be filed
electronically (see Electronic Filing, earlier)
also apply to amended returns.
Electronically filed amended returns. If
the amended return will be filed
electronically, complete Form 1065 and
check box G(5) to indicate that you are filing
an amended return. 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 reason(s)
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.

If the partnership has an imputed
underpayment, the partnership may elect to
have its partners take the adjustments into
account instead of paying the imputed
underpayment.
Paper-filed amended returns. If the
amended return will not be filed
electronically, complete Form 1065X,
Amended Return or Administrative
Adjustment Request (AAR), to file the
amended return or administrative adjustment
request. See Form 1065X and its separate
instructions for information on completing
and filing the form.

partnership-partner to attach a statement
and specify the audit control number, the
BBA partnership name and EIN, and the
reviewed year(s) under examination for
which the modification applies.
Partnership-partners who are filing
amended returns electronically as part of the
modification of the imputed underpayment
during examination under section 6225(c)(2)
will report the applicable payment of tax on
Form 1065, line 25. A payment made with an
amended Form 1065 should detail the
amount of the payment to be applied
separately to tax, interest, and penalties. The
partnership should consider all guidance
issued by the IRS when figuring the amount
due. Information to include on the payment is
the name of the partnership, Form 1065, the
tax identification number of the
partnership-partner, the tax year, and
"Partner Payment for BBA Modification."
Checks must be payable to the U.S.
Treasury and included with the amended
return. If making an electronic payment,
choose the payment description "Partner
Pymnt for BBA Modification" from the list of
payment types. The payment amount,
including interest and penalties, should be
reported on Form 1065, line 25.

DRAFT AS OF
October 4, 2018

Exception. A partnership that is subject
to the BBA centralized partnership audit
regime must file Form 8082, Notice of
Inconsistent Treatment or Administrative
Adjustment Request (AAR), to request an
administrative adjustment in the amount of
one or more partnership-related items rather
than an amended return.

AARs filed under the centralized
partnership audit regime. Partnerships
filing an AAR that have not made a valid
election out of the BBA centralized
partnership audit regime and have
adjustments that result in an imputed
underpayment and any interest or penalties
related to the imputed underpayment on
line 25 of page 1 of Form 1065. See the
Instructions for Form 8082 for information on
how to figure a BBA imputed underpayment
and what to do when an adjustment
requested by an AAR does not result in an
imputed underpayment. See section 6233
for information about interest and penalties
on the imputed underpayment. Include the
following information on your payment: name
of the partnership, Form 1065, tax
identification number, tax year, and BBA
AAR imputed underpayment. Checks must
be paid to the U.S. Treasury and mailed to
Ogden Service Center, Ogden, UT
84201-0011. Payments can be made by
check or electronically.

When a partnership's federal return

TIP is amended or changed for any

reason, it may affect the
partnership's state tax return. For more
information, contact the state tax agency for
the state in which the partnership return was
filed.

Partner amended return filed as part of
modification of the imputed underpayment during a BBA examination. IRC
Section 6225(c)(2) allows a BBA partnership
under examination to request specific types
of modifications of any imputed
underpayment proposed by the IRS. One
type of modification may be requested when
one or more partners, including
partnership-partners, file amended returns
for the tax years of the partners which
includes the end of the reviewed year of the
BBA partnership under examination and for
any tax year with respect to which tax
attributes are affected. If the amended return
is being filed during the examination of a
BBA partnership as part of modification of
the imputed underpayment, the BBA
partnership will be assigned a unique audit
control number that must be shown on the
amended return. Modification requires the

What if You Can’t Pay Now?
Payment options. Go to IRS.gov/Payments
for more information about your options.
• Apply for an online payment agreement
(IRS.gov/OPA) to meet your tax obligation in
monthly installments if you can’t pay your
taxes in full today. Once you complete the
online process, you will receive immediate
notification of whether your agreement has
been approved.
• Use the Offer in Compromise PreQualifier (IRS.gov/OIC) to see if you can
settle your tax debt for less than the full
amount you owe.

Other Forms, Returns, and Statements That May Be Required
Form, Return, or Statement

Use this to—

W-2 and W-3—Wage and Tax Statement; and Transmittal of Wage
and Tax Statements

Report wages, tips, other compensation, and withheld income, social security and Medicare taxes for
employees.

720—Quarterly Federal Excise Tax Return

Report and pay environmental excise taxes, communications and air transportation taxes, fuel taxes,
manufacturers taxes, ship passenger tax, and certain other excise taxes. Also see Trust Fund
Recovery Penalty, earlier.

940—Employer's Annual Federal Unemployment (FUTA) Tax Return Report and pay FUTA tax.
941—Employer's QUARTERLY Federal Tax Return

Report quarterly income tax withheld on wages and employer and employee social security and
Medicare taxes. Also see Trust Fund Recovery Penalty, earlier.

943—Employer's Annual Federal Tax Return for Agricultural
Employees

Report income tax withheld and employer and employee social security and Medicare taxes on
farmworkers. Also see Trust Fund Recovery Penalty, earlier.

944—Employer's ANNUAL Federal Tax Return

File annual Form 944 instead of filing quarterly Forms 941 if the IRS notified you in writing.

945—Annual Return of Withheld Federal Income Tax

Report income tax withheld from nonpayroll payments, including pensions, annuities, individual
retirement accounts (IRAs), gambling winnings, and backup withholding. Also see Trust Fund
Recovery Penalty, earlier.

965—Inclusion of Deferred Foreign Income Upon Transition to
Participation Exemption System

Report deferred foreign income upon transition to a participation exemption system of taxation if the
provisions of IRC 965 apply. Attach and submit with Form 1065.

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Instructions for Form 1065 (2018)

Form, Return, or Statement

Use this to—

1042 and 1042-S—Annual Withholding Tax Return for U.S. Source
Income of Foreign Persons; and Foreign Person's U.S. Source
Income Subject to Withholding

Report and send withheld tax on payments or distributions made to nonresident alien individuals,
foreign partnerships, or foreign corporations to the extent these payments or distributions constitute
gross income from sources within the United States that 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.

DRAFT AS OF
October 4, 2018

1042-T—Annual Summary and Transmittal of Forms 1042-S

Transmit paper Forms 1042-S to the IRS.

1065X—Amended Return or Administrative Adjustment Request
(AAR)

Use Form 1065X to correct a previously filed partnership return or to make an Administrative
Adjustment Request for a previously filed return.

1095-B and 1094-B—Health Coverage; and Transmittal of Forms
1095-B

Required to be filed by certain health insurance issuers and others who provide minimum essential
coverage to report information on the primary insured and other individuals covered under the plan.

1095-C and 1094-C—Employer-Provided Health Insurance Offer and Used by certain employers to report information about the health care coverage the employer offered
Coverage; and Transmittal of Forms 1095-C
with regard to each full-time employee.
1096—Annual Summary and Transmittal of U.S. Information Returns Transmit paper Forms 1097, 1098, 1099, 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.
• Proceeds from broker and barter exchange transactions.
• Cancellation of debts.
• Interest income.
• Payment card and third-party network transactions.
• Payments of long-term care and accelerated death benefits.
• Miscellaneous income.
• Original issue discount.
• Distributions from pensions, annuities, retirement or profit-sharing plans, IRAs, insurance
contracts, etc.
• Proceeds from real estate transactions.
• Distributions from an HSA, Archer MSA, or Medicare Advantage MSA.

Important. Every partnership must file Forms 1099-MISC if, in the
course of its trade or business, it makes payments of rents,
commissions, or other fixed or determinable income (see section
6041) totaling $600 or more to any one person during the calendar
year.

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 or owns 10% or more in value of the outstanding stock of a foreign corporation; or
• Disposes of sufficient stock to reduce its interest to less than 10% 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 Trade
or Business

Report the receipt of more than $10,000 in cash or foreign currency in one transaction or a 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.

8621—Information Return by a Shareholder of a Passive Foreign
Investment Company or Qualified Electing Fund

Report ownership interest in a passive foreign investment company or qualified electing fund.

Instructions for Form 1065 (2018)

-9-

Form, Return, or Statement

Use this to—

8697—Interest Computation Under the Look-Back Method for
Completed Long-Term Contracts

Figure the interest due or to be refunded under the look-back method of section 460(b)(2) on 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 for line 20c, Look-back interest—completed
long-term contracts (code J), later, 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 section 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 the information required under section 6038 (reporting with respect to controlled foreign
partnerships), section 6038B (reporting of transfers to foreign partnerships), or section 6046A
(reporting of acquisitions, dispositions, and changes in foreign partnership interests). See Form 8865
and its instructions for more details.

8866—Interest Computation Under the Look-Back Method for
Property Depreciated Under the Income Forecast Method

Figure the interest due or to be refunded under the look-back method of section 167(g)(2) for 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 for line 20c, Look-back interest—income forecast method (code K), later, 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 doesn't 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 of interest, which is a transaction that is the same as, or substantially similar
to, one of the types of transactions identified by the IRS by notice, regulation, or other published
guidance. See Notice 2009-55, 2009-31 I.R.B. 170.

DRAFT AS OF
October 4, 2018

See Regulations section 1.6011-4, the Instructions for Form 8886, and the instructions for line 20c,
Other information (code AH), later, for more information.
8918—Material Advisor Disclosure Statement

Material advisors to any reportable transaction must disclose certain information about the reportable
transaction by filing a Form 8918 with the IRS. See Form 8918 and its instructions for more details.

8925—Report of Employer-Owned Life Insurance Contracts

Report the number of employees covered by employer-owned life insurance contracts issued after
August 17, 2006, and the total amount of employer-owned life insurance in force on those employees
at the end of the tax year.

8990—Limitation on Business Interest Expense IRC 163(j)

Business interest expense includes any interest paid or accrued on indebtedness properly allocable to
a trade or business. This business interest expense is generally limited to the sum of business interest
income. Form 8990 is required unless an exception for filing is met. Use Form 8990 to figure the
amount of business interest that can be deducted and the amount to carry forward. For more
information, see the Instructions for Form 8990 and Notice 2018–28.

8992—Global Intangible Low-Taxed Income (GILTI)

Report and attach to Form 1065 if the provisions of section 951A apply. That section requires each
person who is a U.S. shareholder of any controlled foreign corporation (CFC) for any tax year to
include in gross income the shareholder’s global intangible low-taxed income (GILTI) for such year.

8994—Employer Credit for Paid Family and Medical Leave Report

Complete Form 8994 and attach to Form 1065 if the partnership has a credit for paid family and
medical leave. See the Instructions for Form 8994 for more information.

8996—Qualified Opportunity Fund

This form is used by entities to certify that they fulfill the requirements to be a qualified opportunity fund
investing in qualified opportunity zone property, as defined in sections 1400Z-1 and 1400Z-2. For more
information, see the Instructions for Form 8996.

Assembling the Return

When submitting Form 1065, organize the
pages of the return in the following order.
• Pages 1–5.
• Schedule F (Form 1040), Profit or Loss
From Farming (if required).
• Form 8825, Rental Real Estate Income
and Expenses of a Partnership or an S
Corporation (if required).

• Form 1125-A, Cost of Goods Sold (if
required).
• Form 8941, Credit For Small Employer
Health Insurance Premiums (if required).
• Any other schedules in alphabetical order.
• 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
-10-

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

Instructions for Form 1065 (2018)

partnership's name and EIN on each
supporting statement.

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 doesn't provide limited liability to
at least one member. File Form 8832 only if
the entity doesn't want to be classified under
these default rules or if it wants to change its
classification.

• The name and address of the partnership,
and
• A declaration that the partnership elects
under section 754 to apply the provisions of
section 734(b) and section 743(b).
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.
To revoke a section 754 election, the
partnership must file the revocation request
at the same IRS Submission Processing
Center in which the partnership return is
filed. See Regulations section 1.754-1(c).
5. Section 743(e) (electing investment
partnership).
6. Regulations section 1.1411-10(g)
(section 1411 election regarding CFCs and
QEFs).
A domestic partnership that directly or
indirectly owns stock of a controlled foreign
corporation (CFC) (within the meaning of
section 953(c)(1)(B) or section 957(a)) or a
passive foreign investment company (within
the meaning of section 1297(a)) that the
domestic partnership treats as a qualified
electing fund (QEF) under section 1293 may
make the election provided in Regulations
section 1.1411-10(g). The election must be
made no later than the first tax year
beginning after 2013 during which the
partnership (i) includes an amount in gross
income for chapter 1 purposes under section
951(a) or section 1293(a) for the CFC or
QEF, and (ii) has a direct or indirect owner
that is subject to tax under section 1411 or
would have been if the election were made.
This election must be made on an
entity-by-entity basis, and applies only to the
particular CFCs and QEFs for which an
election is made. In general, for purposes of
section 1411, if an election is in effect for a
CFC or QEF, the amounts included in
income under section 951 and section 1293
derived from the CFC or QEF are included in
net investment income, and distributions
described in section 959(d) or section
1293(c) are excluded from net investment
income. An election that is made under
Regulations section 1.1411-10(g) cannot be
revoked. For more information regarding this
election, see Regulations section
1.1411-10(g).
The election must be made in a statement
that is filed with the partnership’s original or
amended return for the tax year in which the
election is made. An election can be made
on an amended return only if the tax year for
which the election is made, and all tax years
affected by the election, aren't closed by the

period of limitations on assessments under
section 6501. The statement must include:
• The name and EIN of the partnership
making the election;
• A declaration that the partnership elects
under Regulations section 1.1411-10(g) to
apply the rules in Regulations section
1.1411-10(g) to the CFCs and QEFs
identified in the statement; and
• The following information for each CFC
and QEF for which an election is made: (i)
the name of the CFC or QEF; and (ii) either
the EIN of the CFC or QEF, or, if the CFC or
QEF doesn't have an EIN, the reference ID
number of the CFC or QEF.
In addition, for each CFC or QEF held by
the partnership for which an election under
Regulations section 1.1411-10(g) has
already been made by the partnership, the
statement should include (i) the name of the
CFC or QEF; and (ii) either the EIN of the
CFC or QEF, or, if the CFC or QEF doesn't
have an EIN, the reference ID number of the
CFC or QEF.
7. Section 41(h) (payroll tax credit
election).

DRAFT AS OF
October 4, 2018

!

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 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 regarding a transfer of a
partnership interest (section 743(b)) and the
assets of the partnership constitute a trade
or business for purposes 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.
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:

Instructions for Form 1065 (2018)

-11-

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.
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).
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.

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.

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.

DRAFT AS OF
October 4, 2018

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 doesn't apply to any gain realized
on a transfer of property to a partnership that
would be treated as an investment company
(within the meaning of section 351(e)) if the
partnership were incorporated. If, as a result
of a transfer of property to a partnership,
there 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.
See Temporary Regulations sections
1.721(c)-1T(b)(7) and 1.721(c)-3T(b) for
more information on a gain deferral
contribution of section 721(c) property to a
section 721(c) partnership. See Section
721(c) Partnership, Section 721(c) Property,
and Gain Deferral Method under Definitions,
earlier.

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 fair market value (FMV) at the time of the
contribution. However, if the adjusted basis
of the contributed property exceeds its FMV
at the time of the contribution, the built-in
loss can only be taken into account by the
contributing partner. For all other partners,
the basis of the property in the hands of the
partnership is treated as equal to its FMV at
the time of the contribution (see section
704(c)(1)(C)).
For property contributed to the
partnership, the contributing partner must
recognize gain or loss on a distribution of the
property to another partner within 7 years of
being contributed. The gain or loss is equal
to the amount that the contributing partner
should have recognized if the property had
been sold for its FMV when distributed,
because of the difference between the

See Temporary Regulations sections
1.721(c)-4T and 1.721(c)-5T) for more
information on certain dispositions of
contributed 721(c) property to which the gain
deferral method applies. See Section 721(c)
Partnership, Section 721(c) Property, and
Gain Deferral Method under Definitions,
earlier.

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.
-12-

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, later,
explain the applicable passive activity
limitation rules and specify the type of
information the partnership must provide to
its partners for each activity. If the
partnership had more than one activity, it
must report information for each activity on
an attached statement to Schedules K and
K-1.
Generally, passive activities include (a)
activities that involve the conduct of a trade
or business if the partner doesn't materially
participate in the activity, and (b) all rental
activities (defined later) regardless of the
partner's participation. For exceptions, see
Activities That Are Not Passive Activities,
later. The level of each partner's participation
in an activity must be determined by the
partner.
The passive activity rules provide that
losses and credits from passive activities can
generally be applied only against income
and tax from passive activities. Thus,
passive losses and credits cannot be applied
against income from salaries, wages,
professional fees, or a business in which the
partner materially participates; against
“portfolio income” (defined later); or against
the tax related to any of these types of
income.
Special provisions apply to certain
activities. First, the passive activity limitations
must be applied separately for a net loss
from passive activities held through a
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

Instructions for Form 1065 (2018)

nonpassive income for purposes of the
passive activity limitations.
To allow each partner to correctly apply
the passive activity limitations, the
partnership must report income or loss and
credits separately by activity for each of the
following.
• Trade or business activities.
• Rental real estate activities.
• Rental activities other than real estate.
• Portfolio income.

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).

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.

DRAFT AS OF
October 4, 2018

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.
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 aren't 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 didn't 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

Instructions for Form 1065 (2018)

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 doesn't materially participate
in the activity, a trade or business activity
conducted through a partnership is generally
a passive activity of the partner.
Each partner must determine if the
partner materially participated in an activity.
As a result, while the partnership's ordinary
business income (loss) is reported on page 1
of Form 1065, the specific income and
deductions from each separate trade or
business activity must be reported on
attached statements to Form 1065. Similarly,
while each partner's 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 attached
statements to each Schedule K-1. See
Passive Activity Reporting Requirements,
later, 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 isn't 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
-13-

In addition, a guaranteed payment
described in section 707(c) is never income
from a rental activity.
Average period of customer use. Figure
the average period of customer use for a
class of property by dividing the total number
of days in all rental periods by the number of
rentals during the tax year. If the activity
involves renting more than one class of
property, multiply the average period of
customer use of each class by the ratio of
the gross rental income from that class to the
activity's total gross rental income. The
activity's average period of customer use
equals the sum of these class-by-class
average periods weighted by gross income.
See Regulations section 1.469-1(e)(3)(iii).

Significant personal services. Personal
services include only services performed by
individuals. To determine if personal services
are significant personal services, consider all
the relevant facts and circumstances.
Relevant facts and circumstances include:
• 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 aren't 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 isn't a rental activity if
the rental of the property is incidental to a
nonrental activity, such as the activity of
holding property for investment, a trade or
business activity, or the activity of dealing in
property.
Rental of property is incidental to an
activity of holding property for investment if
both of the following apply.
• 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
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.

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 for Line 3. Other Net
Rental Income (Loss), later, for reporting
other net rental income (loss) other than
rental real estate.

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

DRAFT AS OF
October 4, 2018

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.

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, later, for an
exception.

Solely for purposes of the preceding
paragraph, gross income derived in the
ordinary course of a trade or business
includes (and portfolio income, therefore,
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 as a result of 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.

-14-

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 don't
apply to a partner's interest in a partnership if
the partnership makes an election under
Regulations section 1.469-7(g) to avoid the
application of these rules. To make the
election, the partnership must attach to its
original or amended partnership return a
statement that includes the name, address,
and EIN of the partnership and a declaration
that the election is being made under
Regulations section 1.469-7(g). The election
will apply to the tax year in which it was
made and all subsequent tax years. Once
made, the election may only be revoked with
the consent of the IRS.
For more details on the self-charged
interest rules, see Regulations section
1.469-7.

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.

Instructions for Form 1065 (2018)

• 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.

deductions (current year deductions and
prior year unallowed losses).
Any net passive income recharacterized
as nonpassive income is treated as
investment income for purposes of figuring
investment interest expense limitations if it 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.

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 earlier under Rental
Activities (without regard to the partner's
level of participation) as income that may be
subject to recharacterization.

DRAFT AS OF
October 4, 2018

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 461(j)(4)) 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.

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

Instructions for Form 1065 (2018)

The amount of income from the activities
in the first three 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
Certain nondepreciable rental property
activities and Passive equity-financed
lending activities paragraphs as activities
that may be subject to recharacterization.
Income from the following six sources is
subject to recharacterization.

Significant participation passive activities. A significant participation passive
activity is any trade or business activity in
which the partner participated for more than
100 hours during the tax year but didn't
materially participate. Because each partner
must determine the partner's level of
participation, the partnership 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.
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 in
the property, (b) substantially all of the
-15-

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, the partnership must do the following.
1. If the partnership carries on more
than one activity, provide an attached
statement 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.
2. On the attached statement 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,
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) wasn't 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;
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 aren't
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. See
Recharacterization of Passive Income,
earlier.
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, earlier).

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.

DRAFT AS OF
October 4, 2018

-16-

Net Investment Income Tax
Reporting Requirements

The information described in this section
should be given directly to the partner and
should not be reported by the partnership to
the IRS.
To allow partners to correctly figure the
net investment income tax where a partner
disposes of an interest in the partnership
during the tax year, the partnership may be
required to provide the partner with certain
information. The net investment income tax
is a tax imposed on an individual’s, trust’s, or
estate’s net investment income. Net
investment income includes the net gains or
losses from the sale of an interest in the
partnership. A partner who is actively
involved in one or more of the partnership or
lower tier pass-through entities’ trades or
businesses (other than trading in financial
instruments or commodities) can reduce the
amount of the gain or loss from the sale of
the partnership or lower tier pass-through
entity interest included in its net investment
income. However, to figure its net investment
income, the active partner needs certain
information from the partnership.
Generally, the partnership must provide
certain information to the partner if the
partnership knows, or has reason to know,
the following.
1. The partner disposed of an interest in
the partnership.
2. The partner materially participates
(within the meaning of the passive activity
loss rules (section 469)) in one or more of
the trades or businesses (within the meaning
of section 162) of the partnership or a lower
tier pass-through entity (other than trading in
financial instruments or commodities).
3. The partner doesn't qualify for the
optional simplified reporting method for
figuring its net investment income associated
with the disposition of the interest. For more
information, see the Instructions for Form
8960, Line 5c.

Instructions for Form 1065 (2018)

Information to be provided to partner.
Generally, the partnership must provide the
partner with its distributive share of the net
gain and loss from the deemed sale for fair
market value of the partnership’s property,
other than property that relates to the trades
or businesses in which the partner materially
participates, as determined under the
passive activity loss rules applicable to the
transfer of an interest in a pass-through
entity. For more information see the
Instructions for Form 8960, Line 5c.
If a partner, who qualifies for the optional
simplified reporting method, prefers to
determine net gain or loss under the general
calculation, the partnership may, but isn't
obligated to, provide the information to the
partner at that partner’s request.

than one Form 8873, combine the exclusions
from line 52 and report a single exclusion
amount in box 16.
Upon request of a partner, the

TIP 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.

and ZIP or foreign postal code” in the
following order: city, province or state, and
the foreign country. Follow the foreign
country's practice in placing the postal code
in the address. Do not abbreviate the country
name.
If the partnership has changed its
address since it last filed a return (including a
change to an “in care of” address), check
box G(4) for “Address change.”

DRAFT AS OF
October 4, 2018

Extraterritorial Income
Exclusion

See 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
don't exceed $5 million and the partnership
doesn't 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.
• 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 S, 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 didn't 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 S).
Report each partner's distributive share of
foreign trading gross receipts from line 15 of
Form 8873 in box 16 using code S.
• Extraterritorial income exclusion (code T).
Report each partner's distributive share of
the extraterritorial income exclusion from
line 52 of Form 8873 in box 16 using code T
and identify on an attached statement the
activity to which the exclusion relates. If the
partnership is required to complete more

Instructions for Form 1065 (2018)

Specific Instructions

These instructions follow the line numbers on
the first page of Form 1065. The
accompanying schedules are discussed
separately. Specific instructions for most of
the lines are provided. Lines that aren't
discussed are self-explanatory.
Fill in all applicable lines and schedules.

Enter any items specially allocated to the
partners in the appropriate box of the
applicable partner's Schedule K-1. Enter the
total amount on the appropriate line of
Schedule K. Do not enter separately stated
amounts on the numbered lines on Form
1065, page 1, on Form 1125-A, or on
Schedule D.

If the partnership changes its mailing

TIP address or the responsible party

after filing its return, it can notify the
IRS by filing Form 8822-B, Change of
Address or Responsible Party—Business.

Items A and C

Enter the applicable activity name and the
code number from the list, Codes for
Principal Business Activity and Principal
Product or Service, near the end of the
instructions.

File all five pages of Form 1065.
However, if the answer to question 4 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.

For example, if, as its principal business
activity, the partnership (a) purchases raw
materials, (b) subcontracts out for labor to
make a finished product from the raw
materials, and (c) retains title to the goods,
the partnership is considered to be a
manufacturer and must enter “Manufacturer”
in item A and enter in item C one of the
codes (311110 through 339900) listed under
“Manufacturing” on the list, Codes for
Principal Business Activity and Principal
Product or Service, near the end of the
instructions.

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

Item D. Employer Identification
Number (EIN)

If a syndicate, pool, joint venture, or
similar group files Form 1065, it must attach
a copy of the agreement and all
amendments to the return, unless a copy has
previously been filed.
A foreign partnership required to file

TIP a return generally must report all of

its foreign and U.S. source income.
For rules regarding whether a foreign
partnership must file Form 1065, see Who
Must File, earlier.

Name and Address

Print or type the legal name of the
partnership, address, and EIN on the
appropriate lines. If the partnership has
changed its name, check box G(3). Include
the suite, room, or other unit number after the
street address. If the Post Office doesn't
deliver mail to the street address and the
partnership has a P.O. box, show the box
number instead.
If the partnership receives its mail in care
of a third party (such as an accountant or an
attorney), enter “C/O” on the street address
line, followed by the third party’s name and
street address or P.O. box.
If the partnership's address is outside the
United States or its possessions or
territories, enter the information on the line
for “City or town, state or province, country,
-17-

Show the correct EIN in item D. If the
partnership does not have an EIN, it must
apply for one in one of the following ways.
• Online—Go to IRS.gov/EIN. The EIN is
issued immediately once the application
information is validated.
• 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 application
date in the space for the EIN. For more
details, see the Instructions for Form SS-4.
Note. The online application process isn't
yet available for partnerships with addresses
in foreign countries. If you are located
outside the United States, please call
1-267-941-1099.
Do not request a new EIN for a
partnership that terminated because of a
sale or exchange of at least 50% of the total
interests in partnership capital and profits.

Item F. Total Assets

You aren't required to complete item F if the
answer to question 4 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 J. Schedule C and
Schedule M-3

real estate activities are also reported on
Form 8825.
Tax-exempt income. Do not include any
tax-exempt income on lines 1a through 8. A
partnership that receives any tax-exempt
income other than interest, or holds any
property or engages in any activity that
produces tax-exempt income, reports this
income on line 18b of Schedule K and in
box 18 of Schedule K-1 using code B.
Report tax-exempt interest income,
including exempt-interest dividends received
as a shareholder in a mutual fund or other
regulated investment company, on line 18a
of Schedule K and in box 18 of Schedule K-1
using code A.
See Deductions, after the instructions for
lines 1a through 8 and before the instructions
for lines 9 through 21, for information on how
to report expenses related to tax-exempt
income.

Line 1a. Gross Receipts or
Sales

Enter on line 1a gross receipts or sales from
all trade or business operations, except for
amounts that must be reported on lines 4
through 7.
Special rules apply to certain income, as
discussed below. For example, don't include
gross receipts from farming on line 1a.
Instead, show the net profit (loss) from
farming on line 5. Also, don't include on
line 1a rental activity income or portfolio
income.

DRAFT AS OF
October 4, 2018

A partnership must file Schedule M-3, Net
Income (Loss) Reconciliation for Certain
Partnerships, instead of Schedule M-1, if any
of the following apply.
1. The amount of total assets at the end
of the tax year reported on Schedule L,
line 14, column (d) is $10 million or more.
2. The amount of adjusted total assets
for the tax year is $10 million or more.
Adjusted total assets is defined in the
Instructions for Schedule M-3.
3. The amount of total receipts (as
defined later, in the instructions for
Schedule B, question 4) for the tax year is
$35 million or more.
4. An entity that is a reportable entity
partner of the partnership owns or is deemed
to own, directly or indirectly, an interest of
50% or more in the partnership's capital,
profit, or loss, on any day during the tax year
of the partnership. Reportable entity partner
is defined in the Instructions for
Schedule M-3.
A partnership filing Form 1065 that is not
required to file the Schedule M-3 may
voluntarily file Schedule M-3 instead of
Schedule M-1.
Any partnership that files Schedule M-3
must also complete and file Schedule C,
Additional Information for Schedule M-3
Filers. See Eased requirements, next.
Eased requirements. Partnerships that
(a) are required to file Schedule M-3 and
have less than $50 million in total assets at
tax-year-end, or (b) aren't required to file
Schedule M-3 and voluntarily file
Schedule M-3, must either (i) complete
Schedule M-3 entirely; or (ii) complete
Schedule M-3 through Part I and complete
Schedule M-1 instead of completing Parts II
and III of Schedule M-3. See Schedule M-3
for more information.
In addition, partnerships that meet the
requirements of (a) and (b) above aren't
required to file Schedule C (Form 1065) nor
Form 8916-A.
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, earlier, for definitions of
rental income and portfolio income. Rental
activity income and portfolio income are
reported on Schedules K and K-1. Rental

!

Election to defer income from canceled
debt. If the partnership elected to defer
cancellations of debt (COD) income under
section 108(i), the exclusions for COD under
sections 108(a)(1)(A), (B), (C), and (D) do
not apply to the income from the COD for the
tax year of the election and any later year. If
the partnership issued a debt instrument with
original issue discount (OID) that is subject
to section 108(i)(2) because of an election
under section 108(i) to defer COD income,
the deduction for all or a portion of the OID
that accrues prior to the first tax year the
COD is includible in income is deferred until
the COD is includible in income. The amount
of OID deferred is limited to the amount of
COD income subject to the section 108(i)
election. See section 108(i) and Rev. Proc.
2009-37, 2009-36 I.R.B. 309, for more
information. See also Regulations section
1.108(i)-2.
Section 108(i) election and reporting by
tiered partnerships. A partnership that
receives a Schedule K-1 from another
partnership containing information relating to
a section 108(i) election must report on the
Schedules K-1 to its partners certain
information relative to the section 108(i)
election. See Rev. Proc. 2009-37, 2009-36
I.R.B. 309, for details. See also Regulations
section 1.108(i)-2.
If the partnership is a section 721(c)
partnership and the gain deferral method is
applied, Schedule B must include any
remedial items with respect to section 721(c)
property, including an offsetting remedial
item relating to contributed section 197(f)(9)
property. See Regulations section 1.704-3(d)
and Temporary Regulations section
1.704-3T(d)(5)(iii). The total net amount of
remedial allocations should be included on
line 7, Other income (loss). See Temporary
Regulations section 1.721(c)-3T. See
Section 721(c) Partnership, Section 721(c)
Property, and Gain Deferral Method under
Definitions, earlier.

-18-

In general, advance payments are
reported in the year of receipt. To report
income from long-term contracts, see
section 460. For permissible methods for
reporting advance payments for goods and
services by an accrual method partnership,
see Rev. Proc. 2004-34, 2004-22 I.R.B. 991,
and Notice 2018-35, 2018-18 I.R.B. 520 (or
any successor guidance). For rules for the
deferral of advance payments from the sale
of certain gift cards and further explanation
of the tax treatments for advance payments
see Pub. 538, Accounting Periods and
Methods. For information on adopting or
changing to a permissible method for
reporting advance payments for goods and
services by an accrual method partnership,
see the Instructions for Form 3115.
Installment sales. Generally, the
installment method cannot be used for
dealer dispositions of property. A “dealer
disposition” is any disposition of:
1. Personal property by a person who
regularly sells or otherwise disposes of
personal property of the same type on the
installment plan, or
2. Real property held for sale to
customers in the ordinary course of the
taxpayer's trade or business.
Exception. These restrictions on using
the installment method do not apply to
dispositions of property used or produced in
a farming business or sales of timeshares
and residential lots. However, if the
partnership elects to report dealer
dispositions of timeshares and residential
lots on the installment method, each
partner's tax liability must be increased by
the partner's allocable share of the interest
payable under section 453(l)(3).
Include on line 1a the gross profit on
collections from installment sales for any of
the following.
• Dealer dispositions of property before
March 1, 1986.
• Dispositions of property used or produced
in the trade or business of farming.
• Certain dispositions of timeshares and
residential lots reported under the installment
method.
Attach a statement showing the following
information for the current year and the 3
preceding years.
• Gross sales.
• Cost of goods sold.
• Gross profits.

Instructions for Form 1065 (2018)

• Percentage of gross profits to gross sales.
• Amount collected.
• Gross profit on the amount collected.
Nonaccrual-experience method.
Partnerships that qualify to use the
nonaccrual-experience method (described
earlier) should attach a statement showing
total gross receipts, the amount not accrued
as a result of the application of section
448(d)(5), and the net amount accrued.
Include the net amount on line 1a.

Also report the partnership's fishing
income on this line.
For a special rule concerning the method
of accounting for a farming partnership with a
corporate partner and for other tax
information on farms, see Pub. 225, Farmer's
Tax Guide.
Because the partner, and not the

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. All section 481 income adjustments
resulting from changes in accounting
methods. Show the computation of the
section 481 adjustments on an attached
statement.
8. Part or all of the proceeds received
from certain employer-owned life insurance
contracts issued after August 17, 2006.
Partnerships that own one or more
employer-owned life insurance contracts
issued after that date must file Form 8925,
Report of Employer-Owned Life Insurance
Contracts. See section 101(j) for details.

DRAFT AS OF
October 4, 2018

Line 2. Cost of Goods Sold

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

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

TIP partnership, makes the election to

deduct the expenses of raising any
plant with a preproductive period of more
than 2 years, farm partnerships that aren't
required to use an accrual method should
not capitalize such expenses. Instead, state
them separately on an attached statement to
Schedule K, line 13d, and in box 13 of
Schedule K-1, using code P. See section
263A(d) for more information.

Line 6. Net Gain (Loss) From
Form 4797

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.

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.

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.

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.

Ordinary income (loss) from another
partnership that is a publicly traded
partnership isn't 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 I.
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 basis limitations as
appropriate.
If the tax year of your partnership doesn't
coincide with the tax year of the other
partnership, estate, or trust, include the
ordinary income (loss) from the other entity
in the tax year in which the other entity's tax
year ends.

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.

Instructions for Form 1065 (2018)

!

Partnerships should not use Form 4797 to
report the sale or other disposition of
property if a section 179 expense deduction
was previously passed through to any of its
partners for that property. Instead, report it in
box 20 of Schedule K-1 using code L. See
the instructions for Dispositions of property
with section 179 deductions (code L), later,
for details.

Line 7. Other Income (Loss)

Enter any other trade or business income
(loss) not included on lines 1a through 6. List
the type and amount of income on an
attached statement. Examples of other
income include the following.
1. Interest income derived in the
ordinary course of the partnership's trade or
business, such as interest charged on
receivable balances.
2. Recoveries of bad debts deducted in
prior years under the specific charge-off
method.
3. Taxable income from insurance
proceeds.
4. Any amount included in income from
line 2 of Form 6478, Biofuel Producer Credit,
if applicable.
5. Any amount included in income from
line 8 of Form 8864, Biodiesel and
Renewable Diesel Fuels Credit, if applicable.
-19-

Do not include items requiring separate
computations that must be reported on
Schedules K and K-1. See the instructions
for Schedules K and K-1, later.
Do not report portfolio or rental activity
income (loss) on this line.

Deductions

!

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

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 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 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 aren't deductible until the
property to which the costs relate is sold,
used, or otherwise disposed of by the
partnership.

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.

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.

DRAFT AS OF
October 4, 2018

Exceptions. Section 263A doesn't
apply to the following.
• Inventoriable items accounted for in the
same manner as materials and supplies that
aren't incidental. See Form 1125-A and its
instructions for details.
• Effective for tax years beginning after
2017, a small business taxpayer, defined
earlier, is not required to capitalize costs
under section 263A. A partnership that wants
to no longer capitalize costs under section
263A must change its method of accounting.
See section 263A(i) and Change in
Accounting Method, earlier.
• Timber.
• Most property produced under a
long-term contract.
• Certain property produced in a farming
business. See the note at the end of the
instructions for line 5, earlier.
• Geological and geophysical costs
amortized under section 167(h).
• Certain plants bearing fruits and nuts
under section 168(k)(5).
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.

Transactions between related taxpayers.
Generally, an accrual basis partnership can
deduct business expenses and interest
owed to a related party (including any
partner) only in the tax year of the
partnership that includes the day on which
the payment is includible in the income of the
related party. See section 267 for details.
Business interest. Business interest
expense is limited for tax years beginning
after 2017. See section 163(j) for limitations
on deductions for business interest.
Business start-up and organizational
costs. Generally, a partnership can elect to
deduct a limited amount of start-up or
organizational costs paid or incurred. Any
costs not deducted must be amortized as
explained below. See sections 195(b) and
709(b).

Time for making an election. The
partnership generally elects to deduct
start-up or organizational costs by claiming
the deduction on its return filed by the due
date (including extensions) for the tax year in
which the active trade or business begins.
However, for start-up or organizational costs
paid or incurred before September 9, 2008,
the partnership may be required to attach a
statement to its return to elect to deduct such
costs. See Temporary Regulations sections
1.195-1T and 1.709-1T (as in effect on July
7, 2008) for details. Also, see Regulations
sections 1.195-1 and 1.709-1. If the
partnership timely filed its return for the year
without making an election, it can still make
an election by filing an amended return
within 6 months of the due date of the return
(excluding extensions). Clearly indicate the
election on the amended return and write
“Filed pursuant to section 301.9100-2” at the
top of the amended return. File the amended
return at the same address the partnership
filed its original return. The election applies
when figuring income for the current tax year
and all subsequent years.
The partnership can choose to forgo the
above elections by clearly electing to
capitalize its start-up or organizational costs
on its return filed by the due date (including
extensions) for the tax year in which the
active trade or business begins.
The election to either amortize or
capitalize start-up or organizational costs is
irrevocable and applies to all start-up and
organizational costs that are related to the
trade or business.
-20-

Syndication costs. Costs for issuing and
marketing interests in the partnership, such
as commissions, professional fees, and
printing costs, must be capitalized. They
cannot be depreciated or amortized. See the
instructions for line 10, later, for the
treatment of syndication fees paid to a
partner.
Reducing certain expenses for which
credits are allowable. The partnership
may need to reduce the otherwise allowable
deductions for expenses used to figure
certain credits. The following are examples
of such credits. (Do not reduce the amount of
the allowable deduction for any portion of the
credit that was passed through to the
partnership from another pass-through
entity.)
1. Work opportunity credit.
2. Credit for increasing research
activities.
3. Disabled access credit.
4. Empowerment zone employment
credit, if applicable.
5. Indian employment credit, if
applicable.
6. Credit for employer social security
and Medicare taxes paid on certain
employee tips.
7. Orphan drug credit.
8. Credit for small employer pension
plan startup costs.
9. Credit for employer-provided
childcare facilities and services.
10. Low sulfur diesel fuel production
credit.
11. Mine rescue team training credit, if
applicable.
12. Credit for employer differential wage
payments.
13. Credit for small employer health
insurance premiums.
14. Employer credit for paid family and
medical leave (Form 8994).
If the partnership has any of these credits,
figure each current year credit before figuring
the deductions for expenses on which the
credit is based.

Line 9. Salaries and Wages

Enter the salaries and wages paid or
incurred for the tax year, reduced by the
amount of the following credit(s).
• Work Opportunity Credit (Form 5884).
• Empowerment Zone Employment Credit
(Form 8844), if applicable.

Instructions for Form 1065 (2018)

• Indian Employment Credit (Form 8845), if
applicable.
• Mine Rescue Team Training Credit (Form
8923), if applicable.
• Credit for Employer Differential Wage
Payments (Form 8932).
Do not reduce the amount of the
allowable deduction for any portion of the
credit that was passed through to the
partnership from another pass-through
entity. See the instructions for the credit form
for more information.

expenses must be capitalized and
depreciated or amortized. However,
amounts paid for routine maintenance on
property, including buildings, may be
deductible. See Regulations section
1.263(a)-3(i).

Line 12. Bad Debts

Enter the total debts that became worthless
in whole or in part during the year, but only to
the extent such debts relate to a trade or
business activity. Report deductible
nonbusiness bad debts as a short-term
capital loss on Form 8949.

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 16p
and on Schedule K-1, box 16, using codes P
and Q.
• 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 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.

DRAFT AS OF
October 4, 2018

Do not include salaries and wages
reported elsewhere on the return, such as
amounts included in cost of goods sold,
elective contributions to a section 401(k)
cash or deferred arrangement, or amounts
contributed under a salary reduction SEP
agreement or a SIMPLE IRA plan.

Line 10. Guaranteed Payments
to Partners

Deduct payments or credits to a partner for
services or for the use of capital if the
payments or credits are determined without
regard to partnership income and are
allocable to a trade or business activity. Also
include on line 10 amounts paid during the
tax year for insurance that constitutes
medical care for a partner, a partner's
spouse, a partner's dependents, or a
partner's children under age 27 who aren't
dependents.
For information on how to treat the
partnership's contribution to a partner's
Health Savings Account (HSA), see Notice
2005-8, 2005-4 I.R.B. 368.
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 aren't deductible on line 10. They are
capital expenditures. However, they should
be separately reported on Schedule K, line 4,
and on Schedule K-1, box 4.
Do not include distributive shares of
partnership profits.
Report the guaranteed payments to the
appropriate partners on Schedule K-1, box 4.

Line 11. Repairs and
Maintenance

Enter the costs of incidental repairs and
maintenance that do not add to the value of
the property or appreciably prolong its life,
but only to the extent that such costs relate
to a trade or business activity and aren't
claimed elsewhere on the return. See
Regulations section 1.162-4. The
partnership may elect to capitalize certain
repair and maintenance costs consistent with
its books and records. See Regulations
section 1.263(a)-3(n) for information on how
to make the election.
The cost of new buildings, machinery, or
permanent improvements that increase the
value of the property aren't deductible as
repairs and maintenance expense. These

Instructions for Form 1065 (2018)

!

CAUTION

income.

Cash method partnerships cannot
take a bad debt deduction unless the
amount was previously included in

Line 13. Rent

Enter rent paid on business property used in
a trade or business activity. Do not deduct
rent for a dwelling unit occupied by any
partner for personal use.

If the partnership rented or leased a
vehicle, enter the total annual rent or lease
expense paid or incurred in the trade or
business activities of the partnership. Also
complete Part V of Form 4562, Depreciation
and Amortization. If the partnership leased a
vehicle for a term of 30 days or more, the
deduction for vehicle lease expense may
have to be reduced by an amount called the
inclusion amount. The partnership may have
an inclusion amount if:
The lease term
began:

And the vehicle's FMV on
the first day of the lease
exceeded:

Automobiles other than trucks and
vans . . . . . . . . . . . . . . . . . . .
After 12/31/2017
but before
1/1/2019 . . .

. . . . . . . . . . . .

$50,000

After 12/31/12 and before 1/1/18

$19,000

After 12/31/09 but before 1/1/13

$18,500

Trucks and vans .

. . . . . . . . . . .

After 12/31/2017
but before
1/1/2019 . . .

. . . . . . . . . . . .

$50,000

After 12/31/13 and before 1/1/18

$19,500

After 12/31/09 and before 1/1/14

$19,000

The inclusion amount for lease terms beginning in
2019 will be published in the Internal Revenue
Bulletin in early 2019.

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.
-21-

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
isn't claimed elsewhere on the return.
Do not include interest expense on the
following.
• Debt used to purchase rental property or
debt used in a rental activity. Interest
allocable to a rental real estate activity is
reported on Form 8825 and is used in
arriving at net income (loss) from rental real
estate activities on line 2 of Schedule K and
in box 2 of Schedule K-1. Interest allocable
to a rental activity other than a rental real
estate activity is included on line 3b of
Schedule K and is used in arriving at net
income (loss) from a rental activity (other
than a rental real estate activity). This net
amount is reported on line 3c of Schedule K
and in box 3 of Schedule K-1.
• Debt used to buy property held for
investment. Interest that is clearly and
directly allocable to interest, dividend,
royalty, or annuity income not derived in the
ordinary course of a trade or business is
reported on line 13b of Schedule K and in
box 13 of Schedule K-1 using code H. See
the instructions for line 13b of Schedule K;
box 13, code H of Schedule K-1; and Form
4952, Investment Interest Expense
Deduction, for more information on
investment property.
• Debt proceeds allocated to distributions
made to partners during the tax year.

Instead, report such interest on line 13d of
Schedule K and in box 13 of Schedule K-1
using code W. To determine the amount to
allocate to distributions to partners, see
Notice 89-35, 1989-1 C.B. 675.
• Debt required to be allocated to the
production of designated property.
Designated property includes real property,
personal property that has a class life of 20
years or more, and other tangible property
requiring more than 2 years (1 year in the
case of property with a cost of more than $1
million) to produce or construct. Interest
allocable to designated property produced
by a partnership for its own use or for sale
must be capitalized. In addition, a
partnership must also capitalize to the basis
of the designated property any interest on
debt allocable to an asset used to produce
designated property. A partner may have to
capitalize interest that the partner incurs
during the tax year for the partnership's
production expenditures. Similarly, interest
incurred by a partnership may have to be
capitalized by a partner for the partner's own
production expenditures. The information
required by the partner to properly capitalize
interest for this purpose must be provided by
the partnership on an attached statement for
box 20 of Schedule K-1, using code R. See
section 263A(f) and Regulations sections
1.263A-8 through 1.263A-15.

million or less for the 3 prior tax years under
the gross receipts test of section 448(c).
Gross receipts include the aggregate gross
receipts from all persons treated as a single
employer such as a controlled group of
corporations, commonly controlled
partnerships or proprietorships, and affiliated
service groups. If the partnership fails to
meet the gross receipts test, Form 8990,
Limitation on Business Interest Expense
Under Section 163(j), is generally required.
Also see Schedule B, questions 23 and 24.

If the partnership contributes to an
individual retirement arrangement (IRA) for
employees, include the contribution in
salaries and wages on page 1, line 9, or
Form 1125-A, line 3, and not on line 18.
Employers who maintain a pension,
profit-sharing, or other funded deferred
compensation plan (other than a SEP or
SIMPLE IRA), whether or not the plan is
qualified under the Internal Revenue Code
and whether or not a deduction is claimed for
the current year, generally must file the
applicable form listed below.
• Form 5500, Annual Return/Report of
Employee Benefit Plan.
• Form 5500-SF, Short Form Annual
Return/Report of Small Employee Benefit
Plan (generally filed instead of Form 5500 if
there are under 100 participants at the
beginning of the plan year).

DRAFT AS OF
October 4, 2018

Special rules apply to the following.

• 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 sections
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.
Limitation on deduction. Business
interest expense is generally limited to the
sum of business interest income, 30% of the
adjusted taxable income, and floor plan
financing interest. Business interest expense
includes any interest paid or accrued on
indebtedness properly allocable to a trade or
business. A small business taxpayer that is
not a tax shelter (as defined in section 448(d)
(3)) and that meets the gross receipts test is
not required to limit business interest
expense under section 163(j). A taxpayer
meets the gross receipts test if the taxpayer
has average annual gross receipts of $25

Line 16. Depreciation

On line 16a, enter only the depreciation
claimed on assets used in a trade or
business activity. Enter on line 16b the
depreciation included elsewhere on the
return (for example, on page 1, line 2) that is
attributable to assets used in trade or
business activities. See the Instructions for
Form 4562, or Pub. 946, How To Depreciate
Property, to figure the amount of
depreciation to enter on this line.

Complete and attach Form 4562 only if
the partnership placed property in service
during the tax year or claims depreciation on
any car or other listed property.
Do not include any section 179 expense
deduction on this line. This amount isn't
deducted by the partnership. Instead, it is
passed through to the partners in box 12 of
Schedule K-1. Generally, the basis of a
partnership's section 179 property must be
reduced to reflect the amount of section 179
expense elected by the partnership. This
reduction must be made in the basis of
partnership property even if the limitations of
section 179(b) and Regulations section
1.179-2 prevent a partner from deducting all
or a portion of the amount of the section 179
expense allocated by the partnership.

Form 5500 and Form 5500-SF must

TIP 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 aren't part of a pension, profit-sharing,
etc., plan included on line 18.

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.

Do not include amounts paid during the
tax year for insurance that constitutes
medical care for a partner, a partner's
spouse, a partner's dependents, or a
partner's children under age 27 who aren't
dependents. Instead, include these amounts
on line 10 as guaranteed payments on
Schedule K, line 4, and Schedule K-1, box 4,
of each partner on whose behalf the
amounts were paid. Also report these
amounts on Schedule K, line 13d, and
Schedule K-1, box 13, using code M, of each
partner on whose behalf the amounts were
paid.

Line 18. Retirement Plans, etc.

Line 20. Other Deductions

Line 17. Depletion

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

!

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.
-22-

Enter the total allowable trade or business
deductions that aren't deductible elsewhere
on page 1 of Form 1065. Attach a statement
listing by type and amount each deduction
included on this line. Examples of other
deductions include the following.
• 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.

Instructions for Form 1065 (2018)

• Utilities.
• Certain business startup and

organizational costs. See Limitations on
Deductions, earlier, for more details.
• Deduction for certain energy efficient
commercial building property placed in
service before January 1, 2017. See section
179D, Notice 2006-52, 2006-26 I.R.B. 1175,
as amplified and clarified by Notice 2008-40,
2008-14 I.R.B. 725, and modified by Notice
2012-26.
• Any net negative section 481(a)
adjustment.

harassment or sexual abuse that is subject to
a nondisclosure agreement, as well as any
attorney’s fees related to the settlement or
payout. See section 162(q).

Special Rules
Commercial revitalization deduction. If
the partnership constructed, purchased, or
substantially rehabilitated a qualified building
in a renewal community, it may have
qualified for either (a) a deduction of 50% of
qualified capital expenditures in the year the
building was placed in service, or (b)
amortization of 100% of the qualified capital
expenditures over a 120-month period
beginning with the month the building was
placed in service. If the partnership elected
to amortize these expenditures, complete
and attach Form 4562. To qualify, the
building must be nonresidential (as defined
in section 168(e)(2)) and placed in service by
the partnership. The partnership must be the
original user of the building unless it is
substantially rehabilitated. The qualified
expenditures cannot exceed the lesser of
$10 million or the amount allocated to the
building by the commercial revitalization
agency of the state in which the building is
located. Any remaining expenditures are
depreciated over the regular depreciation
recovery period. See section 1400I, as in
effect before its repeal on March 23, 2018,
for details.

expenses paid or incurred in its trade or
business. Entertainment related meals are
generally disallowed. In addition (subject to
exceptions under section 274(k)(2)):
• Meals must not be lavish or extravagant,
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.

DRAFT AS OF
October 4, 2018

Also see Special Rules, later.

Do not deduct the following on line 20.

• Items that must be reported separately on

Schedules K and K-1.
• Fines and penalties. Generally, no
deduction is allowed for fines and penalties
paid to a government or specified
nongovernmental entity for the violation of
any law except amounts that constitute
restitution, amounts paid to come into
compliance with the law, amounts paid or
incurred as the result of certain court orders
in which no government or specified
nongovernmental agency is a party, and
amounts paid or incurred for taxes due.
Report nondeductible amounts on
Schedule K, line 18c. No deduction is
allowed for the restitution amount or amount
paid to come into compliance with the law
unless the amounts are specifically identified
in the settlement agreement or court order.
Also, any amount paid or incurred as
reimbursement to the government for the
costs of any investigation or litigation are not
eligible for the exceptions and are
nondeductible. See section 162(f).
• 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.
• Lobbying expenses. Generally, lobbying
expenses are not deductible. These
expenses include amounts paid or incurred
in connection with influencing federal, state,
or local legislation (but not amounts paid or
incurred before December 22, 2017, in
connection with local legislation); or amounts
paid or incurred in connection with any
communication with certain federal executive
branch officials in an attempt to influence the
official actions or positions of the officials.
See Regulations section 1.162-29 for the
definition of “influencing legislation.” Dues
and other similar amounts paid to certain
tax-exempt organizations may not be
deductible. If certain in-house lobbying
expenditures do not exceed $2,000, they are
deductible. See section 162(f).
• Amounts paid or incurred for any
settlement or payout related to sexual

Instructions for Form 1065 (2018)

The commercial revitalization
TIP deduction isn't 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
isn't 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 and
non-entertainment related meal expenses
paid or incurred in its trade or business.
Generally, entertainment expenses,
membership dues, and facilities used in
connection with these activities cannot be
deducted. Also, special rules apply to
deductions for gifts, luxury water travel, and
convention expenses. 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. Generally, the partnership can
deduct only 50% of the amount otherwise
allowable for non-entertainment meal
-23-

Membership dues. The partnership
may deduct amounts paid or incurred for
membership dues in civic or public service
organizations, professional organizations
(such as bar and medical associations),
business leagues, trade associations,
chambers of commerce, boards of trade,
and real estate boards. However, no
deduction is allowed if a principal purpose of
the organization is to entertain, or provide
entertainment facilities for, members or their
guests. In addition, the partnership may not
deduct membership dues in any club
organized for business, pleasure, recreation,
or other social purpose. This includes
country clubs, golf and athletic clubs, airline
and hotel clubs, and clubs operated to
provide meals under conditions favorable to
business discussion.
Entertainment facilities. The
partnership cannot deduct an expense paid
or incurred for a facility (such as a yacht or
hunting lodge) used for an activity usually
considered entertainment, amusement, or
recreation.
Amounts treated as compensation.
Generally, the partnership may be able to
deduct otherwise nondeductible
entertainment, amusement, or recreation
expenses if the amounts are treated as
compensation to the recipient and reported
on Form W-2 for an employee or on Form
1099-MISC for an independent contractor.
Reforestation expenditures. If the
partnership made an election to deduct a
portion of its reforestation expenditures on
line 13d of Schedule K, it must amortize over
an 84-month period the portion of these
expenditures in excess of the amount
deducted on Schedule K (see section 194).
Deduct on line 20 only the amortization of
these excess reforestation expenditures.
See Reforestation expense deduction (code
S), later.

Tax and Payment
Line 23. Interest due under the look-back
method for completed long-term contracts. For partnerships that aren't closely
held, attach Form 8697 and a check or
money order for the full amount, made
payable to "United States Treasury." Write
the partnership's employer identification
number (EIN), daytime phone number, and
"Form 8697 Interest'' on the check or money
order.

Line 24. Interest due under the look-back
method for property depreciated under
the income forecast method. For
partnerships that aren’t closely held, attach
Form 8866 and a check or money order for
the full amount, made payable to “United
States Treasury.” Write the partnership’s
employer identification number (EIN),
daytime phone number, and “Form 8866
Interest” on the check or money order.

interest in the partnership which is owned
directly or indirectly by or for another entity
(corporation, partnership, estate, trust, or
tax-exempt organization) is considered to be
owned proportionately by the owners
(shareholders, partners, or beneficiaries) of
the owning entity.
Also, under section 267(c), an individual
is considered to own an interest owned
directly or indirectly by or for his or her
family. The family of an individual includes
only that individual's spouse, brothers,
sisters, ancestors, and lineal descendants.
An interest will be attributed from an
individual under the family attribution rules
only if the person to whom the interest is
attributed owns a direct interest in the
partnership or an indirect interest under
section 267(c)(1) or (5). For purposes of
these instructions, an individual will not be
considered to own, under section 267(c)(2),
an interest in the partnership owned, directly
or indirectly, by a family member of the
individual unless the individual also owns an
interest in the partnership either directly or
indirectly through a corporation, partnership,
or trust.
For purposes of question 2, “foreign
government” has the same meaning as it
does under section 892. In determining a
foreign government's ownership interest in
the profit, loss, or capital of the partnership,
the constructive ownership rules of
Regulations section 1.892-5T(c)(1)(i) apply
to ownership of interests in the partnership
as well as corporate stock. An interest in the
partnership which is owned directly or
indirectly by an integral part or controlled
entity of a foreign sovereign (within the
meaning of Regulations section 1.892-2T(a))
is considered to be owned proportionately by
such foreign sovereign.
Constructive ownership examples for
questions 2 and 3 are included below. For
the purposes of questions 2 and 3, add an
owner's direct percentage ownership and
indirect percentage ownership in an entity to
determine if the owner owns, directly or
indirectly, 50% or more of the entity.

own, indirectly, any interest in X through any
entity (corporation, partnership, trust, or
estate). Because family attribution rules
apply only when an individual (in this
example, B) owns a direct interest in the
partnership or an indirect interest through
another entity, A's interest in Partnership X
isn't attributable to B. On Partnership X's
Form 1065, it must answer “Yes” to question
2b of Schedule B. See Example 2 in the
instructions for Schedule B-1 (Form 1065)
for guidance on providing the rest of the
information required of entities answering
“Yes” to this question.

DRAFT AS OF
October 4, 2018

Line 25. BBA AAR imputed underpayment. Use this line if the partnership is filing
an AAR electronically and chooses to pay
the imputed underpayment. For instructions
on how to figure the imputed underpayment,
see the Instructions for Form 8082. Write the
name of the partnership, tax identification
number, tax year, "Form 1065," and "BBA
AAR Imputed Underpayment" on the
payment. Checks must be payable to “United
States Treasury” and mailed to Ogden
Service Center, Ogden, UT 84201-0011.
Payments can be made by check or
electronically .
Line 26. Other taxes. In a few instances,
payments other than those listed above may
have to be made with Form 1065. Enter the
amount on this line and attach a statement
identifying the purpose of the payment.
Line 28. Payment. Enter any prepayments
related to lines 23–26 above.

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 2
and 3

To determine the maximum percentage
owned in the partnership's profit, loss, or
capital for the purposes of questions 2a, 2b,
and 3b, determine separately the partner's
percentage of interest in profit, loss, and
capital at the end of the partnership's tax
year. This determination must be based on
the partnership agreement and it must be
made using the constructive ownership rules
described below. The maximum percentage
is the highest of these three percentages
(determined at the end of the tax year).
See Item J. Partner's Profit, Loss, and
Capital, later, for more information on
ownership percentages.

Questions 2 and 3
Constructive ownership of the partnership. For purposes of question 2, except for
foreign governments within the meaning of
section 892, in determining an ownership
interest in the profit, loss, or capital of the
partnership, the constructive ownership rules
of section 267(c) (excluding section 267(c)
(3)) apply to ownership of interests in the
partnership as well as corporate stock. An

Example for question 2a. Corporation
A owns, directly, an interest of 50% in the
profit, loss, or capital of Partnership B.
Corporation A also owns, directly, an interest
of 15% in the profit, loss, or capital of
Partnership C. Partnership B owns, directly,
an interest of 70% in the profit, loss, or
capital of Partnership C. Therefore,
Corporation A owns, directly or indirectly, an
interest of 50% in the profit, loss, or capital of
Partnership C (15% directly and 35%
indirectly through Partnership B). On
Partnership C's Form 1065, it must answer
“Yes” to question 2a of Schedule B. See
Example 1 in the instructions for
Schedule B-1 (Form 1065) for guidance on
providing the rest of the information required
of entities answering “Yes” to this question.
Example for question 2b. A owns,
directly, 50% of the profit, loss, or capital of
Partnership X. B, the daughter of A, doesn't
own, directly, any interest in X and doesn't
-24-

Constructive ownership of other entities
by the partnership. For purposes of
determining the partnership's constructive
ownership of other entities, the constructive
ownership rules of section 267(c) (excluding
section 267(c)(3)) apply to ownership of
interests in partnerships and trusts as well as
corporate stock. Generally, if an entity (a
corporation, partnership, or trust) is owned,
directly or indirectly, by or for another entity
(corporation, partnership, estate, or trust),
the owned entity is considered to be owned
proportionally by or for the owners
(shareholders, partners, or beneficiaries) of
the owning entity.
Question 3a. List each corporation in
which the partnership, at the end of the tax
year, owns, directly, 20% or more, or owns,
directly or indirectly, 50% or more of the total
voting power of all classes of stock entitled to
vote. Indicate the name, EIN, country of
incorporation, and percentage interest
owned, directly or indirectly, in the total
voting power. List the parent corporation of
an affiliated group filing a consolidated tax
return rather than the subsidiary members
except for subsidiary members in which an
interest is owned, directly or indirectly,
independent of the interest owned, directly or
indirectly, in the parent corporation. If a
corporation is owned through a disregarded
entity, list the information for the corporation
rather than the disregarded entity.
Question 3b. 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.

Instructions for Form 1065 (2018)

Question 4

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.

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

Question 9

The partnership may be required to file Form
3520, Annual Return To Report Transactions
With Foreign Trusts and Receipt of Certain
Foreign Gifts, if any of the following apply.
• 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.

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 10c if there is a substantial built-in
loss related 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.

DRAFT AS OF
October 4, 2018

Question 5

Answer “Yes” if interests in the partnership
are traded on an established securities
market or are readily tradable on a
secondary market (or its substantial
equivalent).

Question 6

Generally, the partnership will have income if
debt is canceled 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 7

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 8. 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
2018, the partnership had an interest in or
signature or other authority over a bank
account, securities account, or other
financial account in a foreign country (see
FinCEN Form 114, Report of Foreign Bank
and Financial Accounts (FBAR); 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, do the following.
• Enter the name of the foreign country or
countries. Attach a separate sheet if more
space is needed.

Instructions for Form 1065 (2018)

For more information, see the Instructions
for Form 3520.
An owner of a foreign trust must ensure
that the trust files an annual information
return on Form 3520-A, Annual Information
Return of Foreign Trust With a U.S. Owner.

Questions 10a, 10b, and 10c
You must check “Yes” or “No” for
TIP each question.
Question 10a. 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 doesn't make a section 754
election for its first tax year, the section 754
election is considered “revoked” for
purposes of completing question 10a. For
information about the election, see item 4
under Elections Made by the Partnership,
earlier.
Question 10b. 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 occurs, 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 10c 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,
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Question 10c. 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
resulting from a transfer of a partnership
interest if the partnership's adjusted basis in
the partnership's property exceeds by more
than $250,000 the fair market value of the
property or the transferee partner would be
allocated a loss of more than $250,000 if the
partnership assets were sold for cash equal
to their fair market value immediately after
such transfer. Under section 734(d), there is
a substantial basis reduction resulting from 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)).
• 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:
• 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.
Section 734(b) basis adjustment. For
a section 734(b) basis adjustment, attach a
statement that includes:
• The computation of the adjustment,
• The class of property distributed (ordinary
income property or capital gain property),
and

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

Question 11

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.

partners, it may be required to withhold tax
under section 1446 on income allocable to
foreign partners (without regard to
distributions) and file Forms 8804, 8805, and
8813. See Regulations sections 1.1446-1
through 7 for more information.

Questions 16a and 16b

If the partnership made any payment in 2018
that would require the partnership to file any
Form(s) 1099, check the “Yes” box for
question 16a and answer question 16b.
Otherwise, check the “No” box for question
16a and skip question 16b. See Am I
Required to File a Form 1099 or Other
Information Return for more information.

specified exceptions. Certain businesses
subject to the business interest expense
limitation may elect out of the limitation.
Certain farming businesses and specified
agricultural or horticultural cooperatives (as
defined in section 199A(g)(4)) qualify to
make an election not to limit business
interest expense. This is an irrevocable
election. If you make this election, you are
required to use the alternative depreciation
system (ADS), to depreciate any property
with a recovery period of 10 years or more.
Also, you are not entitled to the special
depreciation allowance for that property. For
a partnership with more than one qualifying
business, the election is made with respect
to each business. Check “Yes” if the
partnership had an election in effect to
exclude a real property trade or business or
a farming business from section 163(j). If an
election is made to exclude a trade or
business from the business interest expense
limitation, once made, the election is
irrevocable. For more information, see the
Instructions for Form 8990.

DRAFT AS OF
October 4, 2018

Question 12

If a partnership distributed property to its
partners to be jointly owned, whether such
distribution is direct or through the formation
of an intermediate entity, the question must
be answered “Yes.” For purposes of
question 12, an “undivided interest in
partnership property” means property that
was owned by the partnership either directly
or through a 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
12.

Question 13

Enter the number of Form(s) 8858,
Information Return of U.S. Persons With
Respect To Foreign Disregarded Entities
(FDEs) and Foreign Branches (FBs), that are
attached to the return. Form 8858 and its
schedules are used by certain U.S. persons
(including domestic partnerships) that own 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 14. 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

Question 20. Annual
Information Reporting by
Specified Domestic Entities
Under Section 6038D

For tax years beginning after December 31,
2015, domestic partnerships that are formed
or availed of to hold specified foreign
financial assets (“specified domestic
entities”) must file Form 8938 with its Form
1065 for the tax year. Form 8938 must be
filed each year the value of the partnership’s
specified foreign financial assets meets or
exceeds the reporting threshold. For more
information on domestic partnerships that
are specified domestic entities and the types
of foreign financial assets that must be
reported, see the Instructions for Form 8938,
generally, and in particular, Who Must File,
Specified Domestic Entity, Reporting
Thresholds, Specified Foreign Financial
Assets, Interests in Specified Foreign
Financial Assets, Assets Not Required To Be
Reported, and Exceptions to Reporting.
A domestic partnership required to file
Form 8938 with its Form 1065 for the tax
year should check “Yes” to question 20 of
Schedule B, Form 1065.

Question 22. Section 267A

Section 267A disallows deductions for
certain interest and royalty payments or
accruals. In general, section 267A applies
when the interest or royalty is paid or
accrued to a related party which, under its
tax laws, either does not include the full
amount in income, or is allowed a deduction
with respect to the amount; and the amount
is paid or accrued pursuant to a hybrid
transaction or by, or to, a hybnd entity. When
section 267A applies, the deduction is
generally disallowed to the extent the related
party does not include the amount in income
or is allowed a deduction with respect to the
amount. However, the deduction is not
disallowed to the extent the amount is
included in the gross income of a U.S.
shareholder under section 951(a). For
definitions of terms, see section 267A

Question 23. Business Interest
Expense Election

For tax years beginning after 2017, the
limitation on business interest expense
applies to every taxpayer with a trade or
business, unless the taxpayer meets certain
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Question 24. Conditions for
Filing Form 8990

Generally, a taxpayer with a trade or
business must file Form 8990 to claim a
deduction for business interest. In addition,
Form 8990 must be filed by any taxpayer that
owns an interest in a partnership with current
year, or prior year carryover, excess
business interest expense allocated from the
partnership.

Exceptions. A taxpayer is not required to
file Form 8990 if the taxpayer only has
business interest expense from the following.
• A small business (defined later),
• An electing real property trade or
business,
• An electing farming business, or
• Certain utility businesses.
Small business. A small business taxpayer
is not subject to the business interest
expense limitation and is not required to file
Form 8990. A small business taxpayer is a
taxpayer that is not a tax shelter (as defined
in section 448(d)(3)) and meets the gross
receipts test of section 448(c), discussed
next.
Gross receipts test. A taxpayer meets the
gross receipts test if the taxpayer has
average annual gross receipts of $25 million
or less for the 3 prior tax years. A taxpayer's
average annual gross receipts for the 3 prior
tax years is determined by adding the gross
receipts for the 3 prior tax years and dividing
the total by 3. Gross receipts include the
aggregate gross receipts from all persons
treated as a single employer, such as a
controlled group of corporations, commonly
controlled partnerships, or proprietorships,
and affiliated service groups. See section
448(c).

Question 25. Election Out of
BBA

Answer "Yes" if an eligible partnership
chooses to elect out of the centralized

Instructions for Form 1065 (2018)

partnership audit regime for the tax year and
enter the total from Schedule B-2, Part Ill,
line 3. If making the election, attach a
completed Schedule B-2 to Form 1065. A
partnership is an eligible partnership for the
tax year if it has 100 or fewer eligible
partners in that year. The determination as to
whether the partnership has 100 or fewer
partners is made by adding the number of
Schedules K-1 required to be issued by the
partnership for the tax year to the number of
Schedules K-1 required to be issued by any
partner that is an S corporation to its
shareholders for the tax year of the S
corporation ending with or within the
partnership tax year. A partnership is not
eligible to elect out of the centralized
partnership audit regime if it is required to
issue a Schedule K-1 to any of the following
partners.
• A partnership.
• A trust.
• A foreign entity that would not be treated
as a C corporation if it were a domestic
entity.
• A disregarded entity described in
Regulations 301.7701-2(c)(2)(i).
• An estate of an individual other than a
deceased partner.
• Any person that holds an interest in the
partnership on behalf of another person.

Substantial presence. In order for
either a partnership representative or a
designated individual to have substantial
presence, they must make themselves
available to meet in person with the IRS in
the United States at a reasonable time and
place, as necessary and appropriate as
determined by the IRS, and must have a
street address in the United States, a
telephone number with a U.S. area code,
and a U.S. taxpayer identification number.

Internal Revenue Service
Attention: Substitute Forms Program
5000 Ellin Road, C6-440
Lanham, MD 20706
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.

DRAFT AS OF
October 4, 2018

Designated partnership representative.
Section 6223 provides that unless the
partnership has made a valid election out of
the centralized partnership audit regime,
each partnership must designate in the
manner prescribed by the Secretary a
partner or other person with a substantial
presence in the United States as the
partnership representative who shall have
the sole authority to act on behalf of the
partnership. If an entity is designated as
partnership representative, the partnership
must also appoint an individual to act on the
entity's behalf (a designated individual). To
be a designated individual, the appointed
person must also have a substantial
presence in the United States.
How to designate. An original
designation of a partnership representative
must be made on the partnership’s Form
1065 filed for each respective partnership tax
year.
Partnership representative authority.
Under section 6223 the partnership and all
its partners (and any other person whose tax
liability is determined in whole or in part by
taking into account directly or indirectly
adjustments determined under the
centralized partnership audit regime) are
bound by the actions of the partnership
representative in dealings with the IRS. A
designation for a partnership tax year
remains in effect until the designation is
terminated by (a) a valid resignation of the
partnership representative, (b) a valid
revocation of the partnership representative
(with designation of successor partnership
representative) or (c) a determination by the
IRS that the designation is not in effect.

Instructions for Form 1065 (2018)

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

Although the partnership isn't subject to
income tax, the partners are liable for tax on
their shares of the partnership income,
whether or not distributed, and must include
their shares on their tax returns.
Schedule K. Schedule K is a summary
schedule of all the partners' shares of the
partnership's income, credits, deductions,
etc. All partnerships must complete
Schedule K. Rental activity income (loss)
and portfolio income aren't reported on
page 1 of Form 1065. These amounts aren't
combined with 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 doesn't need IRS approval
to use a substitute Schedule K-1 if it is an
exact copy of the IRS schedule. The boxes
must use the same numbers and titles and
must be in the same order and format as on
the comparable IRS Schedule K-1. The
substitute schedule must include the OMB
number. The partnership must provide each
partner with the Partner's Instructions for
Schedule K-1 (Form 1065) or other prepared
specific instructions for each item reported
on the partner's Schedule K-1.
The partnership must request IRS
approval to use other substitute Schedules
K-1. To request approval, write to

-27-

The partnership may be subject to a
penalty if it files Schedules K-1 that do not
conform to the specifications discussed in
Pub. 1167, General Rules and Specifications
for Substitute Forms and Schedules.

How Income Is Shared Among
Partners

Allocate shares of income, gain, loss,
deduction, or credit among the partners
according to the partnership agreement for
sharing income or loss generally. Partners
may agree to allocate specific items in a ratio
different from the ratio for sharing income or
loss. For instance, if the net income
exclusive of specially allocated items is
divided evenly among three partners but
some special items are allocated 50% to
one, 30% to another, and 20% to the third
partner, report the specially allocated items
on the appropriate line of the applicable
partner's Schedule K-1 and the total on the
appropriate line of Schedule K, instead of on
the numbered lines on page 1 of Form 1065,
Form 1125-A, or Schedule D.
If a partner's interest changed during the
year (such as the entrance of a new partner,
the exit of a partner, an increase to a
partner's interest through an additional
capital contribution, or a decrease in a
partner's interest through a distribution), see
section 706(d) and Regulations section
1.706-4 before determining each partner's
distributive share of any item of income,
gain, loss, deduction, and other items.
Partnership items are allocated to a partner
only for the part of the year in which that
person is a member of the partnership.
Generally, for each change in a partner’s
interest, the partnership will either allocate its
items using a pro-ration method or a
closing-of-the-books method. Special rules
apply to certain partnerships, certain
variations, and certain items. See
Regulations section 1.706-4 for additional
rules and procedures for making elections. In
addition, special rules in section 706(d)(2)
apply to certain items of partnerships that
report their income on the cash basis and
special rules in section 706(d)(3) apply to
tiered partnerships.
Special rules on the allocation of income,
gain, loss, and deductions generally apply if
a partner contributes property to the
partnership and the FMV of that property at
the time of contribution differs from the
contributing partner's adjusted tax basis.
Under these rules, the partnership must use
a reasonable method of making allocations
of income, gain, loss, and deductions from
the property so that the contributing partner
receives the tax burdens and benefits of any

built-in gain or loss (that is, precontribution
appreciation or diminution of value of the
contributed property). See Regulations
section 1.704-3 for details on how to make
these allocations, including a description of
specific allocation methods that are generally
reasonable.
See Dispositions of Contributed Property,
earlier, for special rules on the allocation of
income, gain, loss, and deductions on the
disposition of property contributed to the
partnership by a partner.

satisfied by the withholding of tax at the
source.
• The partnership isn't a withholding foreign
partnership as defined in Temporary
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.

left column and enter “STMT” in the entry
space to the right. Report the additional
items on an attached statement and provide
the box number, code, description, and
dollar amount or information for each
additional item. For example: “Box 15, Code
J—Work opportunity credit—$1,000.”

Part I. Information About
the Partnership

DRAFT AS OF
October 4, 2018

If the partnership agreement doesn't
provide for the partner's share of income,
gain, loss, deduction, or credit, or if the
allocation under the agreement doesn't have
substantial economic effect, the partner's
share is determined according to the
partner's interest in the partnership. See
Regulations section 1.704-1 for more
information.

Specific Instructions
(Schedule K-1 Only)
General Information

Generally, the partnership is required to
prepare and give a Schedule K-1 to each
person who was a partner in the partnership
at any time during the year. Schedule K-1
must be provided to each partner on or
before the day on which the partnership
return is required to be filed.
When the gain deferral method, as
described in Treasury Regulations section
1.721(c)-3T, is being applied, a partnership
that is a section 721(c) partnership will attach
to the Schedule K-1 provided to a U.S.
transferor the information required under
Temporary Regulations sections
1.721(c)-6T(b)(2) and (3). A partnership that
is a section 721(c) partnership will also
attach to its Form 1065 a Schedule K-1 for
each partner that is a related foreign person
with respect to the U.S. transferor. For an
indirect partner that is a related foreign
person with respect to the U.S. transferor,
the Schedule K-1 will only include relevant
information with respect to section 721(c)
property. See Temporary Regulations
section 1.721(c)-1T for definitions.
However, if a foreign partnership meets
each of the following four requirements, it
isn't required to file or provide Schedules K-1
for foreign partners (unless the foreign
partner is a pass-through entity through
which a U.S. person holds an interest in the
foreign partnership).
• 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
section 1.1461-1(b) and (c) has been fully

If a married couple each had an interest in
the partnership, prepare a separate
Schedule K-1 for each of them.

How To Complete Schedule K-1

In order to enable accurate scanning
and processing of Schedule(s) K-1,
CAUTION please use a 10-point Helvetica
Light Standard font for all entries on
Schedules K-1 if the entries are typed or
made using a computer.

!

If the return is for a fiscal year or a short tax
year, fill in the tax year space at the top of
each Schedule K-1. On each Schedule K-1,
enter the information about the partnership
and the partner in Parts I and II (items A
through 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 C—Fuel tax
credit information” (followed by the
information the partner needs).
For electronically filed returns, the
partnership must follow the
CAUTION instructions for attached statements
as described in Pub. 4164 when reporting
the additional information that may be
required for each respective box. See Pub.
4164 for more information.

!

Too few entry spaces on Schedule K-1?
If the partnership has more coded items than
the number of spaces in box 11 or boxes 13
through 20, do not enter a code or dollar
amount in the last entry space of the box. In
the last entry space, enter an asterisk in the
-28-

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

Item C. If the partnership is filing its return
electronically, enter "e-file." Otherwise, enter
the name of the IRS service center where the
partnership will file its return. See Where To
File, earlier.

Part II. Information About
the Partner

Complete a Schedule K-1 for each partner.
On each Schedule K-1, enter the partner's
name, address, identifying number, and
distributive share items.

Items E and F

For an individual partner, enter the partner's
social security number (SSN) or individual
taxpayer identification number (ITIN). For all
other partners, enter the partner's EIN.
However, if a partner is an individual
retirement arrangement (IRA), enter the
identifying number of the custodian of the
IRA. Do not enter the identification number of
the person for whom the IRA is maintained.
Foreign partners without a U.S.
identifying number should be notified by the
partnership of the necessity of obtaining a
U.S. identifying number. Certain aliens who
aren't eligible to obtain SSNs can apply for
an ITIN on Form W-7, Application for IRS
Individual Taxpayer Identification Number.
If a single-member limited liability
company (LLC) owns an interest in the
partnership, and the LLC is treated as a
disregarded entity for federal income tax
purposes, enter the owner's identifying
number in item E and the owner's name and
address in item F.
Truncating recipient's taxpayer identification number on Schedule K-1. The
partnership can truncate a partner's
identifying number on the Schedule K-1 the
partnership sends to the partner. Truncation
isn't allowed on the Schedule K-1 the
partnership files with the IRS. Also, the
partnership cannot truncate its own
identification number on any form.
To truncate, where allowed, replace the
first five digits of the nine-digit number with
asterisks (*) or Xs (for example, an SSN
xxx-xx-xxxx would appear as ***-**-xxxx or
XXX-XX-xxxx). For more information, see
Regulations section 301.6109-4.
Foreign address. If the partner has a
foreign address, enter the information in the
following order: City or town, state or
province, country, and ZIP or foreign postal

Instructions for Form 1065 (2018)

code. Follow the country's practice for
entering the postal code. Do not abbreviate
the country name.

Item G

Complete item G on all Schedules K-1. If a
partner holds interests as both a general and
limited partner, check both boxes and attach
a statement for each activity that shows the
amounts allocable to the partner's interest as
a limited partner.

100%, do not include the beginning
percentage for a partner that wasn't a partner
at the beginning of the partnership's tax year
or the ending percentage for a partner that
left the partnership before the end of the
partnership's tax year. If the partnership
agreement doesn't express the partner's
share of profit, loss, and capital as fixed
percentages, the partnership may use a
reasonable method in arriving at each
percentage for purposes of completing the
items required by item J, as long as such
method is consistent with the partnership
agreement and is applied consistently from
year to year. Maintain records to support the
share of profits, share of losses, and share of
capital reported for each partner.

property), give each partner his or her share
of the total pre-1976 losses from that activity
for which there existed a corresponding
amount of nonrecourse liability at the end of
each year in which the losses occurred. See
Form 6198, At-Risk Limitations, and related
instructions for more information.
Qualified nonrecourse financing secured
by real property used in an activity of holding
real property that is subject to the at-risk
rules is treated as an amount at risk.
“Qualified nonrecourse financing” generally
includes financing for which no one is
personally liable for repayment that is
borrowed for use in an activity of holding real
property and that is loaned or guaranteed by
a federal, state, or local government or that is
borrowed from a “qualified” person. Qualified
persons include any person actively and
regularly engaged in the business of lending
money, such as a bank or savings and loan
association. Qualified persons generally do
not include related parties (unless the
nonrecourse financing is commercially
reasonable and on substantially the same
terms as loans involving unrelated persons),
the seller of the property, or a person who
receives a fee for the partnership's
investment in the real property. See section
465(b)(6) for more information on qualified
nonrecourse financing.

DRAFT AS OF
October 4, 2018

Item H. Domestic/Foreign
Partner

Check the foreign partner box if the partner is
a nonresident alien individual, foreign
partnership, foreign corporation, foreign
estate, foreign trust, or foreign government.
Otherwise, check the domestic partner box.

Item I1. What Type of Entity Is
This Partner?

State whether the partner is an individual, a
corporation, an estate, a trust, a partnership,
a disregarded entity, an exempt
organization, a foreign government, or a
nominee (custodian). If the entity is a limited
liability company (LLC) and it is treated as
other than a disregarded entity for federal
income tax purposes, the partnership must
enter the LLC's classification for federal
income tax purposes (that is, a corporation
or partnership). If the partner is a nominee,
use one of the following codes after the word
“nominee” to indicate the type of entity the
nominee represents: I—Individual;
C—Corporation; F—Estate or Trust;
P—Partnership; DE—Disregarded Entity;
E—Exempt Organization; IRA—Individual
Retirement Arrangement; or FGOV—Foreign
Government.

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

On each line, enter the partner's percentage
share of the partnership's profit, loss, and
capital as of the beginning and end of the
partnership's tax year, as determined under
the partnership agreement. If a partner's
interest commences after the beginning of
the partnership's tax year, enter in the
Beginning column the percentages that
existed for the partner immediately after
admission. If a partner's interest terminates
before the end of the partnership's tax year,
enter in the Ending column the percentages
that existed immediately before termination.
On the line for Capital, enter the
percentage share of the capital that the
partner would receive if the partnership was
liquidated by the distribution of undivided
interests in partnership assets and liabilities.
If the partner's capital account is negative or
zero, express the percentage ownership of
capital as zero.
The partner's percentage share of each
category must be expressed as a
percentage. The percentage must not be
negative. The total percentage interest in
each category must total 100% for all
partners. To determine whether the total
beginning and ending percentages are

Instructions for Form 1065 (2018)

Item K. Partner's Share of
Liabilities

Enter each partner's share of nonrecourse
liabilities, partnership-level qualified
nonrecourse financing, and other recourse
liabilities at the end of the year.

“Nonrecourse liabilities” are those
liabilities of the partnership for which no
partner (or related person) bears the
economic risk of loss. The extent to which a
partner bears the economic risk of loss is
determined under the rules of Regulations
section 1.752-2. Do not include
partnership-level qualified nonrecourse
financing (defined below) on the line for
nonrecourse liabilities.
If the partner terminated his or her interest
in the partnership during the year, enter the
share that existed immediately before the
total disposition. In all other cases, enter it as
of the end of the year.
If the partnership is engaged in two or
more different types of at-risk activities, or a
combination of at-risk activities and any other
activity, attach a statement showing the
partner's share of nonrecourse liabilities,
partnership-level qualified nonrecourse
financing, and other recourse liabilities for
each activity. See Pub. 925 to determine if
the partnership is engaged in more than one
at-risk activity.
The at-risk rules of section 465 generally
apply to any activity carried on by the
partnership as a trade or business or for the
production of income. These rules generally
limit the amount of loss and other deductions
a partner can claim from any partnership
activity to the amount for which that partner
is considered at risk. However, for partners
who acquired their partnership interests
before 1987, the at-risk rules do not apply to
losses from an activity of holding real
property the partnership placed in service
before 1987. The activity of holding mineral
property doesn't qualify for this exception.
Identify on an attached statement to
Schedule K-1 the amount of any losses that
aren't subject to the at-risk rules.
If a partnership is engaged in an activity
subject to the limitations of section 465(c)(1)
(such as films or videotapes, leasing section
1245 property, farming, or oil and gas
-29-

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 aren't required to complete item L if the
answer to question 4 of Schedule B is “Yes.”
If you are required to complete this item, see
the instructions for Schedule M-2, later.
Check the appropriate box that describes the
method of accounting used to figure the
partner's capital account.
• Check the “Tax basis” box if the method of
accounting used to figure 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 figure the partner's capital account
and attach a statement describing the
method and showing how the partner's
capital account was figured.
If a partnership reports other than tax
basis capital accounts to its partners on
Schedule K-1 in Item L (that is, GAAP,
704(b) book, or other), and tax basis capital,
if reported on any partner's Schedule K-1 at
the beginning or end of the tax year would be
negative, the partnership must report on
line 20 of Schedule K-1, using code AH,

such partner's beginning and ending shares
of tax basis capital. This is in addition to the
required reporting in Item L of Schedule K-1.
For these purposes, the term “tax basis
capital” means (i) the amount of cash plus
the tax basis of property contributed to a
partnership by a partner minus the amount of
cash plus the tax basis of property
distributed to a partner by the partnership net
of any liabilities assumed or taken subject to
in connection with such contribution or
distribution, plus (ii) the partner's cumulative
share of partnership taxable income and
tax-exempt income, minus (iii) the partner's
cumulative share of taxable loss and
nondeductible, noncapital expenditures.

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).

each separate activity. See Passive Activity
Reporting Requirements, earlier.

Line 2. Net Rental Real Estate
Income (Loss)
Enter the net income (loss) from rental real
estate activities of the partnership from Form
8825. Attach this form to Form 1065.

DRAFT AS OF
October 4, 2018

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 isn't required to provide
the required information separately for each
property contributed for that date. Instead,
the partnership can report the (a) number of
properties contributed on that date, (b) total
amount of built-in gain, and (c) total amount
of built-in loss. 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 related to property contributed to
the partnership by a partner must be shared
among the partners so as to take account of
the variation between the basis of the
property to the partnership and its 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

Specific Instructions
(Schedules K and K-1, Part
III, Except as Noted)
These instructions refer to the lines on
Schedule K and the boxes on Schedule K-1.

Special Allocations

An item is specially allocated if it is allocated
to a partner in a ratio different from the ratio
for sharing income or loss generally.

Report specially allocated ordinary gain
(loss) on Schedule K, line 11, and on
Schedule K-1, box 11. Report other specially
allocated items in the applicable boxes of the
partner's Schedule K-1, with the total amount
on the applicable line of Schedule K. See
How Income Is Shared Among Partners,
earlier.
Example. A partnership has a long-term
capital gain that is specially allocated to a
partner and a net long-term capital gain
reported on line 15 of Schedule D that must
be reported on line 9a of Schedule K.
Because specially allocated gains or losses
aren't reported on Schedule D, the
partnership must report both the net
long-term capital gain from Schedule D and
the specially allocated gain on line 9a of
Schedule K. Box 9a of the Schedule K-1 for
the partner must include both the specially
allocated gain and the partner's distributive
share of the net long-term capital gain from
Schedule D.

Income (Loss)
Line 1. Ordinary Business Income
(Loss)
Enter the amount from page 1, line 22. Enter
the income (loss) without reference to (a) the
basis of the partners' interests in the
partnership, (b) the partners' at-risk
limitations, or (c) the passive activity
limitations. These limitations, if applicable,
are determined at the partner level.
Line 1 should not include rental activity
income (loss) or portfolio income (loss).
Schedule K-1. Enter each partner's
distributive share of ordinary business
income (loss) in box 1 of Schedule K-1.
Identify on statements attached to
Schedule K-1 any additional information the
partner needs to correctly apply the passive
activity limitations. For example, if the
partnership has more than one trade or
business activity, identify on an attached
statement to Schedule K-1 the amount from
-30-

Schedule K-1. Enter each partner's
distributive share of net rental real estate
income (loss) in box 2 of Schedule K-1.
Identify on statements attached to
Schedule K-1 any additional information the
partner needs to correctly apply the passive
activity limitations. For example, if the
partnership has more than one rental real
estate activity, identify the amount
attributable to each activity. Also, for
example, identify certain items from any
rental real estate activities that may be
subject to the recharacterization rules. See
Passive Activity Reporting Requirements,
earlier.

Line 3. Other Net Rental Income
(Loss)
Enter on line 3a gross income from rental
activities other than those reported on Form
8825. Include on line 3a gain (loss) from
line 17 of Form 4797 that is attributable to the
sale, exchange, or involuntary conversion of
an asset used in a rental activity other than a
rental real estate activity.
Enter on line 3b the deductible expenses
of the activity. Attach a statement of these
expenses to Form 1065.
Enter on line 3c the net income (loss).
See Rental Activities, earlier, and Pub.
925 for more information on rental activities.
Schedule K-1. Enter each partner's
distributive share of net income (loss) from
rental activities other than rental real estate
activities in box 3 of Schedule K-1. Identify
on statements attached to Schedule K-1 any
additional information the partner needs to
correctly apply the passive activity
limitations. For example, if the partnership
has more than one rental activity reported in
box 3, identify on an attached statement to
Schedule K-1 the amount from each activity.
See Passive Activity Reporting
Requirements, earlier.

Line 4. Guaranteed Payments to
Partners
Guaranteed payments to partners include:
• Payments for salaries, health insurance,
and interest deducted by the partnership and
reported on Form 1065, page 1, line 10;
Form 8825; or on Schedule K, line 3b;
• Compensation deferred under a section
409A nonqualified deferred compensation
plan that doesn't meet the requirements of
section 409A reported on line 20c of
Schedule K; and

Instructions for Form 1065 (2018)

• Payments the partnership must capitalize.
See the Instructions for Form 1065, line 10.
Generally, amounts reported on line 4
aren't 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 isn't passive
activity income.

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.

program. See Notice 2011-64, 2011-37
I.R.B. 231, for details.
If the foreign corporation doesn't 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.

DRAFT AS OF
October 4, 2018

A partnership must treat and report a

TIP transfer of partnership property to a

partner in satisfaction of a
guaranteed payment as a sale or exchange,
and not a distribution. See Rev. Rul.
2007-40, 2007-25 I.R.B. 1426, for more
details.
Schedule K-1. Enter each partner's
guaranteed payments in box 4 of
Schedule K-1.

Portfolio Income
See Portfolio Income, earlier, for a definition
of portfolio income.
Do not reduce portfolio income by
deductions allocated to it. Report such
deductions (other than interest expense) on
line 13d of Schedule K. Report each
partner's distributive share of deductions
(other than interest) allocable to portfolio
income in box 13 of Schedule K-1, using
codes I or 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, attach a statement
to Schedule K-1 that shows each partner's
distributive share of interest income from this
credit. 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. Do not include any
dividend equivalents reported on line 6c.

Instructions for Form 1065 (2018)

Exceptions. The following dividends aren't
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, don't 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 isn't 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 because of
short sales or positions in substantially
similar or related property.
• Dividends paid by a regulated investment
company that aren't treated as qualified
dividend income under section 854.
• Dividends paid by a real estate
investment trust that aren't treated as
qualified dividend income under section
857(c).
• Dividends from a corporation which first
became a surrogate foreign corporation (as
defined in section 7874(a)(2)(B) after
December 22, 2017) other than a foreign
corporation which is treated as a domestic
corporation under section 7874(b). See
section 1(h)(11)(C)(iii)(II).
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

-31-

Schedule K-1. Enter each partner's
distributive share of qualified dividends in
box 6b of Schedule K-1.
Attach a statement to the K-1 identifying
the dividends included in box 6a or box 6b
that are eligible for the deduction for
dividends received under section 243(a), (b),
or (c); section 245; section 245A; or are
hybrid dividends as defined in section
245A(e)(4).
If any amounts from line 6b are from
foreign sources, see the instructions
CAUTION for lines 16d–h, later, for additional
statements required.

!

Line 6c. Dividend equivalents
Information on dividend equivalents, as
described in new section 871(m), is provided
for persons that are not U.S. persons, who
generally are required to treat dividend
equivalents as U.S. source dividends, and
domestic partnerships with partners who
may need this information. Enter the amount
of dividend equivalents as defined in section
871(m). See Regulations section 1.871-15
for additional information. For purposes of
line 6c, include all amounts that would be
included as a dividend equivalent if the
amount were paid to a person subject to tax
under section 871 or 881, even if the partner
is a U.S. person.

Line 7. Royalties
Enter the royalties received by the
partnership.
Schedule K-1. Enter each partner's
distributive share of royalties in box 7 of
Schedule K-1.

Line 8. Net Short-Term Capital
Gain (Loss)
Enter the gain (loss) that is portfolio income
(loss) from Schedule D (Form 1065), line 7.
Schedule K-1. Enter each partner's
distributive share of net short-term capital
gain (loss) in box 8 of Schedule K-1.

Line 9a. Net Long-Term Capital
Gain (Loss)
Enter the gain or loss that is portfolio income
(loss) from Schedule D (Form 1065), line 15.
Schedule K-1. Enter each partner's
distributive share of net long-term capital
gain (loss) in box 9a of Schedule K-1.

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

!

Line 10. Net Section 1231 Gain
(Loss)

DRAFT AS OF
October 4, 2018

If any gain or loss from line 7 or 15 of
Schedule D is from the disposition of
CAUTION 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 I.

!

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

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

Figure the amount attributable to collectibles
from the amount reported on Schedule D
(Form 1065), line 15. A collectibles gain
(loss) is any long-term gain or deductible
long-term loss from the sale or exchange of a
collectible that is a capital asset.
Collectibles include works of art, rugs,
antiques, metal (such as gold, silver, or
platinum bullion), gems, stamps, coins,
alcoholic beverages, and certain other
tangible property.
Also, include gain (but not loss) from the
sale or exchange of an interest in a
partnership or trust held for more than 1 year
and attributable to unrealized appreciation of
collectibles. For details, see Regulations
section 1.1(h)-1. Also attach the statement
required under Regulations section
1.1(h)-1(e).
Schedule K-1. Report each partner's
distributive share of the collectibles (28%)
gain (loss) in box 9b of Schedule K-1.

Line 9c. Unrecaptured Section
1250 Gain
The three types of unrecaptured section
1250 gain must be reported separately on an
attached statement to Form 1065.
From the sale or exchange of the partnership's business assets. Figure this
amount in Part III of Form 4797 for each
section 1250 property (except property for
which gain is reported using the installment
method on Form 6252) for which you had an
entry in Part I of Form 4797. Subtract
line 26g of Form 4797 from the smaller of
line 22 or line 24. Figure the total of these
amounts for all section 1250 properties.
Generally, the result is the partnership's
unrecaptured section 1250 gain. However, if
the partnership is reporting gain on the
installment method for a section 1250
property held more than 1 year, see the next
paragraph.
The total unrecaptured section 1250 gain
for an installment sale of section 1250
property held more than 1 year is figured in a

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

!

From the sale or exchange of an interest
in a partnership. Also report as a separate
amount any gain from the sale or exchange
of an interest in a partnership attributable to
unrecaptured section 1250 gain. See
Regulations section 1.1(h)-1 and attach the
statement required under Regulations
section 1.1(h)-1(e).
From an estate, trust, REIT, or RIC. If the
partnership received a Schedule K-1 or Form
1099-DIV from an estate, a trust, a real
estate investment trust (REIT), or a regulated
investment company (RIC) reporting
“unrecaptured section 1250 gain,” do not
add it to the partnership's own unrecaptured
section 1250 gain. Instead, report it as a
separate amount. For example, if the
partnership received a Form 1099-DIV from
a REIT with unrecaptured section 1250 gain,
report it as “Unrecaptured section 1250 gain
from a REIT.”
Schedule K-1. Report each partner's
distributive share of unrecaptured section
1250 gain from the sale or exchange of the
partnership's business assets in box 9c of
Schedule K-1. If the partnership is reporting
unrecaptured section 1250 gain from an
estate, trust, REIT, or RIC, or from the
partnership's sale or exchange of an interest
in another partnership (as explained above),
enter “STMT” in box 9c and an asterisk (*) in
the left column of the box and attach a
statement that separately identifies the
amount of unrecaptured section 1250 gain
from the following.
• 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.

-32-

Enter the net section 1231 gain (loss) from
Form 4797, line 7.
Do not include net gain or loss from
involuntary conversions due to casualty or
theft. Report net gain or loss from involuntary
conversions due to casualty or theft on
line 11 of Schedule K (box 11, code B, of
Schedule K-1). See the instructions for
line 11 on how to report net gain (loss) due to
a casualty or theft.

Schedule K-1. Report each partner's
distributive share of net section 1231 gain
(loss) in box 10 of Schedule K-1. If the
partnership has more than one rental, trade,
or business activity, identify on an attached
statement to Schedule K-1 the amount of
section 1231 gain (loss) from each separate
activity. See Passive Activity Reporting
Requirements, earlier.
If any amounts from line 10 are from
foreign sources, see the instructions
CAUTION for lines 16d–h, later, for additional
statements required.

!

Line 11. Other Income (Loss)
Enter any other item of income or loss not
included on lines 1 through 10. On the line to
the left of the entry space for line 11, identify
the type of income. If there is more than one
type of income, attach a statement to Form
1065 that separately identifies each type and
amount of income for each of the following
categories. The codes needed for
Schedule K-1 reporting are provided for each
category.
Other portfolio income (loss) (code A).
Portfolio income not reported on lines 5
through 10.
Report and identify other portfolio income
or loss on an attached statement for line 11.
For example, income reported to the
partnership from a real estate mortgage
investment conduit (REMIC), in which the
partnership is a residual interest holder,
would be reported on an attached statement
for line 11. If the partnership holds a residual
interest in a REMIC, report on the attached
statement for box 11 of Schedule K-1 the
partner's share of the following.
• Taxable income (net loss) from the
REMIC (line 1b of Schedules Q (Form
1066)).
• Excess inclusion (line 2c of Schedules Q
(Form 1066)).
• Section 212 expenses (line 3b of
Schedules Q (Form 1066)). Do not report
these section 212 expense deductions
related to portfolio income on Schedules K
and K-1.

Instructions for Form 1065 (2018)

Because Schedule Q (Form 1066) is a
quarterly statement, the partnership must
follow the Schedule Q instructions to figure
the amounts to report to partners for the
partnership's tax year.
Involuntary conversions (code B). Net
gain (loss) from involuntary conversions due
to casualty or theft. The amount for this line
is shown on Form 4684, Casualties and
Thefts, line 38a, 38b, or 39.
Each partner's share must be entered on
Schedule K-1. Give each partner a schedule
that shows the amounts to be reported on
the partner's Form 4684, line 34, columns (b)
(i), (b)(ii), and (c).
If there was a gain (loss) from a casualty
or theft to property not used in a trade or
business or for income-producing purposes,
notify the partner. The partnership should not
complete Form 4684 for this type of casualty
or theft. Instead, each partner will complete
his or her own Form 4684.

inclusion attributable to the sale or exchange
by a controlled foreign corporation (CFC) of
stock in another foreign corporation
described in section 964(e)(4) or attributable
to hybrid dividends of tiered corporations
under section 245A(e)(2).
Other income (loss) (code I). Include any
other type of income, such as the following.
• The partner's distributive share of the
partnership's gain or loss attributable to the
sale or exchange of qualified preferred stock
of the Federal National Mortgage
Association (Fannie Mae) and the Federal
Home Loan Mortgage Corporation (Freddie
Mac). On an attached statement, show (a)
the gain or loss attributable to the sale or
exchange of the qualified preferred stock,
(b) the date the stock was acquired by the
partnership, and (c) the date the stock was
sold or exchanged by the partnership. See
Rev. Proc. 2008-64, 2008-47 I.R.B. 1195, for
more information.
• Recoveries of tax benefit items (section
111).
• Gambling gains and losses subject to the
limitations in section 165(d). Indicate on an
attached statement whether or not the
partnership is in the trade or business of
gambling.
• Disposition of an interest in oil, gas,
geothermal, or other mineral properties.
Report the following information on an
attached statement to Schedule K-1:
(a) Description of the property;
(b) The partner's share of the amount
realized on the sale, exchange, or
involuntary conversion of each property (fair
market value of the property for any other
disposition, such as a distribution);
(c) The partner's share of the partnership's
adjusted basis in the property (except for oil
or gas properties); and
(d) Total intangible drilling costs,
development costs, and mining exploration
costs (section 59(e) expenditures) passed
through to the partner for the property.
See Regulations section 1.1254-5 for more
information.
• Gains from the disposition of farm
recapture property (see Form 4797) and
other items to which section 1252 applies.
• Any income, gain, or loss to the
partnership under section 751(b).
• Specially allocated ordinary gain (loss).
• Any gain or loss from line 7 or 15 of
Schedule D that isn't 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 canceled debt, earlier.
Special rule for filers of Form 8865. Filers
of Form 8865, Return of U.S. Persons With
Respect to Certain Foreign Partnerships,
cannot defer recognizing and reporting
canceled 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 to
make the section 108(i) election. These
foreign partnerships also have an annual
reporting requirement on Form 1065 for each
tax year after the election until all items
deferred under section 108(i) have been
recognized. See Rev. Proc. 2009-37,
2009-36 I.R.B. 309, for details.
• Gain from the sale or exchange of
qualified small business (QSB) stock (as
defined in the Instructions for Schedule D)
that is eligible for the section 1202 exclusion.
The section 1202 exclusion applies only to
QSB stock held by the partnership for more
than 5 years. Corporate partners aren't
eligible for the section 1202 exclusion.
Additional limitations apply at the partner
level. Report each partner's share of section
1202 gain on Schedule K-1. Each partner will
determine if he or she qualifies for the
section 1202 exclusion. Report on an
attached statement to Schedule K-1 for each
sale or exchange (a) the name of the
corporation that issued the QSB stock, (b)
the partner's share of the partnership's
adjusted basis and sales price of the QSB
stock, and (c) the dates the QSB stock was
bought and sold.
• Gain eligible for section 1045 rollover
(replacement stock purchased by the
partnership). Include only gain from the sale
or exchange of qualified small business
(QSB) stock (as defined in the Instructions
for Schedule D) that was deferred by the
partnership under section 1045 and reported
on Form 8949/Schedule D. See the
Instructions for Schedule D, and the
Instructions for Form 8949 for more details.
The partnership makes the election for
section 1045 rollover on a timely filed
(including extensions) return for the year in
which the sale occurred. Corporate partners
aren't eligible for the section 1045 rollover.
Additional limitations apply at the partner
level. Each partner will determine if he or she
qualifies for the rollover. Report on an
attached statement to Schedule K-1 for each
sale or exchange (a) the name of the
corporation that issued the QSB stock, (b)
the partner's share of the partnership's
adjusted basis and sales price of the QSB
stock, (c) the dates the QSB stock was
bought and sold, (d) the partner's distributive
share of gain from the sale of the QSB stock,
and (e) the partner's distributive share of the
gain that was deferred by the partnership
under section 1045. Do not include these
amounts on line 11 of Schedule K.
• Gain eligible for section 1045 rollover
(replacement stock not purchased by the
partnership). Include only gain from the sale
or exchange of qualified small business
(QSB) stock (as defined in the Instructions
for Schedule D) the partnership held for
more than 6 months but that wasn't 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

DRAFT AS OF
October 4, 2018

Section 1256 contracts and straddles
(code C). Report any net gain or loss from
section 1256 contracts from Form 6781,
Gains and Losses From Section 1256
Contracts and Straddles.
Mining exploration costs recapture (code
D). Provide the information partners need to
recapture certain mining exploration
expenditures. See Regulations section
1.617-3.
Cancellation of debt (code E). If
cancellation of debt is reported to the
partnership on Form 1099-C, report each
partner's distributive share in box 11 using
code E.
Include the amount of income the

TIP 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 canceled debt income
deferred under section 108(i) using
CAUTION code E. Instead, report the deferred
income using code I. For information on the
section 108(i) election, see Election to defer
income from canceled debt, earlier.

!

Section 951A income (code F). Provide
the information partners need to figure the
section 951A income. See the Instructions
for Form 8992 for details.
Section 965 inclusion (code G). Enter the
section 965(a) inclusion amount from Form
965, line 3, on Schedule K, line 11. You must
also complete and attach Form 965,
Inclusion of Deferred Foreign Income Upon
Transition to Participation Exemption
System, and applicable schedules.
Subpart F income (other than section
951A and 965 inclusions) (code H).
Provide the information the partners need to
figure the subpart F income other than
sections 951A and 965 inclusion. Attach a
statement to the K-1 identifying the subpart F

Instructions for Form 1065 (2018)

-33-

she purchases other QSB stock during the
60-day period that began on the date the
QSB stock was sold by the partnership.
Additional limitations apply at the partner
level. Report on an attached statement to
Schedule K-1 for each sale or exchange (a)
the name of the corporation that issued the
QSB stock, (b) the partner's share of the
partnership's adjusted basis and sales price
of the QSB stock, (c) the dates the QSB
stock was bought and sold, and (d) the
partner's distributive share of gain from the
sale of the QSB stock.
For more information, see Regulations
section 1.1045-1. Do not include these
amounts on line 11 of Schedule K.

Deductions
Line 12. Section 179 Deduction
A partnership can elect to expense part or all
of the cost of certain property the partnership
purchased during the tax year for use in its
trade or business or certain rental activities.
See Pub. 946 for a definition of what kind of
property qualifies for the section 179
expense deduction and the Instructions for
Form 4562 for limitations on the amount of
the section 179 expense deduction.

partnership return or, if earlier, the date the
partnership files its return. Do not attach the
acknowledgment to the partnership return,
but keep it with the partnership's records.
These rules apply in addition to the filing
requirements for Form 8283, Noncash
Charitable Contributions, described below.
Cash contributions of any amount must
be supported by a dated bank record or
receipt.

DRAFT AS OF
October 4, 2018

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

Schedule K-1. Enter each partner's
distributive share of the other income
categories listed earlier in box 11 of
Schedule K-1. Enter the applicable code A,
B, C, D, E, F, G, H, or I (as shown earlier).
If you are reporting each partner's
distributive share of only one type of income
under code I, enter the code with an asterisk
(I*) and the dollar amount in the entry space
in box 11 and attach a statement that shows
“Box 11, Code I,” and the type of income. If
you are reporting multiple types of income
under code I, enter the code with an asterisk
(I*) and enter “STMT” in the entry space in
box 11 and attach a statement that shows
“Box 11, Code I,” 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 I), identify on an attached statement
to Schedule K-1 the amount from each
separate activity. See Passive Activity
Reporting Requirements, earlier.

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

The partnership must reduce the basis of
the asset by the amount of the section 179
expense elected by the partnership, even if a
portion of that amount cannot be passed
through to its partners that year and must be
carried forward because of limitations at the
partnership level. Do not reduce the
partnership's basis in section 179 property to
reflect any portion of the section 179
expense that is allocable to a partner that is a
trust or estate.
Identify on an attached statement to
Schedules K and K-1 the cost of section 179
property placed in service during the year
that is qualified enterprise zone. See the
Instructions for Form 4562 for more details.
See the instructions for line 20c of
Schedule K for sales or other dispositions of
property for which a section 179 deduction
has passed through to partners and for the
recapture rules if the business use of the
property dropped to 50% or less.
Schedule K-1. Report each partner's
distributive share of the section 179 expense
deduction in box 12 of Schedule K-1. If the
partnership has more than one rental, trade,
or business activity, identify on an attached
statement to Schedule K-1 the amount of
section 179 deduction from each separate
activity. See Passive Activity Reporting
Requirements, earlier.
Do not complete box 12 of Schedule K-1
for any partner that is an estate or trust;
estates and trusts aren't 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
-34-

Enter charitable contributions made
during the tax year. Attach a statement to
Form 1065 that separately identifies the
partnership's contributions for each of the
following categories. See Limits on
Deductions in Pub. 526, Charitable
Contributions, for information on adjusted
gross income (AGI) limitations on deductions
for charitable contributions.
The codes needed for Schedule K-1
reporting are provided for each category.

Cash contributions (60%) (code A).
Enter cash contributions subject to the 60%
AGI limitation. Do not include in the amount
reported using code A the cash contributions
reported on Schedule K-1 using code G.
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 following.
• The deduction for charitable contributions
made 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

Instructions for Form 1065 (2018)

donated food. A partnership that does not
account for inventories and is not required to
capitalize indirect costs under section 263A
may elect to treat the basis of the donated
food as equal to 25% of the fair market value
of the 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.

Cash contributions for relief efforts in
certain disaster areas. Show each
partner's distributive share of qualified cash
contributions made for relief efforts in certain
disaster areas that were before January 1,
2019. Partners can elect to use the 100%
AGI limitation for these contributions. To
qualify, the contributions must meet the
following conditions.
• The contributions must be made in cash
to qualified charitable organizations (other
than certain private foundations described in
section 509(a)(3) or donor advised funds
described in section 4966(d)(2)) for certain
relief efforts.
• The partnership must obtain
contemporaneous written acknowledgment
(within the meaning of section 170(f)(8)) from
the qualified charitable organization that the
contribution was used or is to be used for
relief efforts.
Any excess qualified contributions are
carried over to the next 5 years. See Pub.
976, Disaster Relief.

limitation (see Form 4952, Investment
Interest Expense Deduction, for details).
Schedule K-1. Report each partner's
distributive share of investment interest
expense in box 13 of Schedule K-1 using
code H.

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

DRAFT AS OF
October 4, 2018

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.

!

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.

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

Capital gain property to a 50% organization (30%) (code E). Enter capital gain
property contributions subject to the 30%
AGI limitation.
Capital gain property (20%) (code F).
Enter capital gain property contributions
subject to the 20% AGI limitation.

Contributions of property. See
Contributions of Property in Pub. 526, and
Pub. 561, Determining the Value of Donated
Property, for information on noncash
contributions and contributions of capital
gain property. If the deduction claimed for
noncash contributions exceeds $500,
complete Form 8283 and attach it to Form
1065.
If the partnership made a qualified
conservation contribution under section
170(h), also include the fair market value of
the underlying property before and after the
donation, as well as the type of legal interest
contributed, and describe the conservation
purpose furthered by the donation. Give a
copy of this information to each partner.
Nondeductible contributions. Certain
contributions made to an organization
conducting lobbying activities are not
deductible. See section 170(f)(9) for more
details. Also, see Contributions You Cannot
Deduct in Pub. 526 for more examples of
nondeductible contributions.
Contributions (100%) (code G). On an
attached statement, provide the following
information.
Qualified conservation contributions
of property used in agriculture or
livestock production. 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)(1)(E)(iv) for
details.
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

Instructions for Form 1065 (2018)

Schedule K-1. Report each partner's
distributive share of charitable contributions
in box 13 of Schedule K-1 using codes A
through F for each of the contribution
categories shown above. For code G items,
report them by entering code G with an
asterisk (G*) and entering "STMT" in the
dollar amount entry space for box 13 and
attach a statement that shows "Box 13, Code
G" and the dollar amount of each type of
deduction. 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 doesn't
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
-35-

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 aren't treated as alternative minimum
tax (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.

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. Identify the following
information on an attached statement.
• The type of expenditure.
• The property for which the expenditures
are paid or incurred.
• 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.

447 or is prohibited from using the cash
method under 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.

DRAFT AS OF
October 4, 2018

Line 13d. Other Deductions

Enter deductions not included on lines 12,
13a, 13b, 13c(2), and 16p. 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.
Deductions—royalty income (code I).
Enter deductions related to royalty income.
Schedule K-1. Report each partner’s
distributive share of deductions related to
royalty income.
Deductions—section 59(e)(2) expenditures (code J). 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
aren't treated as alternative minimum tax
(AMT) tax preference items. Because the
partners make this election, the partnership
can't 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 a
partner may make an election under section
59(e). 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 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

Excess business interest expense (code
K). Enter the amount from Form 8990, Part
II, line 32, for excess business interest
expense.
Schedule K-1. Provide the information
the partners need to figure excess business
interest expenses. In box 13, report the
partner’s distributive share of excess
business expense. See the Instructions for
Form 8990 for additional information.
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 aren't deductible by partners, the
partnership doesn't 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 code I (for
deductions related to royalty income), or L
(for other deductions related to portfolio
income).
Amounts paid for medical insurance
(code M). Enter amounts paid during the
tax year for insurance that constitutes
medical care for the partner (including the
partner's spouse, dependents, and children
under age 27 who aren't 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
-36-

Commercial revitalization deduction
from rental real estate activities (code
Q). Enter the commercial revitalization
deduction on line 13d only if it is for a rental
real estate activity. If the deduction is for a
nonrental building, enter it on line 20 of Form
1065. See the instructions for line 20, earlier,
for more information.
Pensions and IRAs (code R). Enter the
payments for a partner to an IRA, qualified
plan, or simplified employee pension (SEP)
or SIMPLE IRA plan. If a qualified plan is a
defined benefit plan, a partner's distributive
share of payments is determined in the same
manner as his or her distributive share of
partnership taxable income. For a defined
benefit plan, attach to the Schedule K-1 for
each partner a statement showing the
amount of benefit accrued for the tax year.
Reforestation expense deduction (code
S). The partnership can elect to deduct a
limited amount of its reforestation
expenditures paid or incurred during the tax
year. The amount the partnership can elect
to deduct is limited to $10,000 for each
qualified timber property. See section 194(c)
for a definition of reforestation expenditures
and qualified timber property. The
partnership must amortize over 84 months
any amount not deducted. See the
instructions for line 20, earlier. See Notice
2006-47, 2006-20 I.R.B. 892, for details on
making the election.
Schedule K-1. Enter the partner's
distributive share of the allowable
reforestation expenses in box 13 of
Schedule K-1 using code S and attach a
statement that provides a description of the
qualified timber property. If the partnership is
electing to deduct amounts from more than
one qualified timber property, provide a
description and the amount for each
property.
Codes T through V. These codes are
reserved for future use.

Other deductions (code W). Include any
other deductions, such as the following.
• 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 aren't
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.

Instructions for Form 1065 (2018)

• 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, television, and theatrical production
expenses. The partnership can elect to
deduct certain costs of a qualified film,
television, or live theatrical production
commencing before January 1, 2018 (after
December 31, 2015, and before January 1,
2018, for a live theatrical production) if the
aggregate cost of the production doesn't
exceed $15 million. There is a higher dollar
limitation for productions in certain areas.
Provide a description of the film, television,
or theatrical production on an attached
statement. If the partnership makes the
election for more than one film, television, or
theatrical production, attach a statement to
Schedule K-1 that shows each partner's
distributive share of the qualified
expenditures separately for each production.
The deduction is subject to recapture under
section 1245 if the election is voluntarily
revoked or the production fails to meet the
requirements for the deduction. See section
181 and the related regulations for details.
• Interest expense allocated to
debt-financed distributions. See Notice
89-35, 1989-1 C.B. 675, or Pub. 535 for
more information.
• Interest paid or accrued on debt properly
allocable to each general partner's share of a
working interest in any oil or gas property (if
the partner's liability isn't limited). General
partners that didn't 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 5-year period the
deferred COD income is includible in income
under section 108(i). For more information,
see Election to defer income from canceled
debt, earlier.
Special rule for filers of Form 8865. Filers
of Form 8865, Return of U.S. Persons With
Respect to Certain Foreign Partnerships,
cannot report a section 108(i) OID deduction
on Form 8865, in accordance with the
section 108(i) election, unless the foreign
partnership filed a U.S. partnership return
and made the election. A foreign partnership
must file Form 1065 or Form 1065X to make
the section 108(i) election. These foreign
partnerships also have an annual reporting
requirement on Form 1065 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.
• Domestic production activities deduction
(DPAD). If the partnership is a recipient of
the DPAD from a flow-through entity
(partnership, estate, trust, or cooperative)
with a tax year beginning before January 1,
2018, the DPAD can be taken by partners in
limited circumstances. See Form 8903 and
its instructions for details.

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)
isn't 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.

DRAFT AS OF
October 4, 2018

Instructions for Form 1065 (2018)

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, 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 dollar amount of each
type of deduction.
If the partnership has more than one trade
or business activity, identify on an attached
statement to Schedule K-1 the amount for
each separate activity. See Passive Activity
Reporting Requirements, earlier.
Section 965(c) deduction (code X). Enter
the amount of the secton 965(c) deduction
from Form 965, line 17.
Schedule K-1. Enter the partner’s
distributive share of the section 965(c)
deduction amount from Form 965, line 17.

Self-Employment
If the partnership is an options dealer

TIP or a commodities dealer, see section

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

General partners. General partners' net
earnings (loss) from self-employment do not
include the following.
• Dividends on any shares of stock and
interest on any bonds, debentures, notes,
etc., unless the 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.
-37-

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., aren't

Worksheet for Figuring Net Earnings (Loss) From Self-Employment
1a Ordinary business income (loss) (Schedule K, line 1)

. . . . . . . . . . . . . . . . . . . . . . . . . . . . .

b Net income (loss) from certain rental real estate activities (see instructions)
c Other net rental income (loss) (Schedule K, line 3c)

. . . . . . . . . . . . . . . . .

1b

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1c

d Net loss from Form 4797, Part II, line 17, included on line 1a, above. Enter as a positive amount

. . . . . .

1d

DRAFT AS OF
October 4, 2018

e Combine lines 1a through 1d
2

1a

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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

1e
2

. . . . .

3a

b Part of line 3a allocated to limited partners, estates, trusts, corporations, exempt organizations, and
IRAs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3b

c Subtract line 3b from line 3a. If line 3a is a loss, reduce the loss on line 3a by the amount on line 3b. Include each individual general
partner's share in box 14 of Schedule K-1, using code A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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

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
Do not attach Form 3800, General

TIP Business Credit, to Form 1065.

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

Line 15a. Low-Income Housing
Credit (Section 42(j)(5))
Enter on line 15a the total low-income
housing credit for property which a

partnership is to be treated under section
42(j)(5) as the taxpayer to which the
low-income housing credit was allowed.
If the partnership invested in another
partnership to which the provisions of section
42(j)(5) apply, report on line 15a the credit
reported to the partnership on Schedule K-1
(Form 1065), box 15, code A and code C.
Schedule K-1. Report in box 15 of
Schedule K-1 each partner's distributive
share of the low-income housing credit
reported on line 15a of Schedule K. Use
code A to report credits attributable to
buildings placed in service before 2008. Use
code C to report credits attributable to
buildings placed in service after 2007. If the
partnership has credits from more than one
rental activity, identify on an attached
statement to Schedule K-1 the amount for
each separate activity. See Passive Activity
Reporting Requirements, earlier.

Line 15b. Low-Income Housing
Credit (Other)
Enter on line 15b any low-income housing
credit not reported on line 15a. This includes
any credit reported to the partnership on
Schedule K-1 (Form 1065), box 15, using
code B and code D.
Schedule K-1. Report in box 15 of
Schedule K-1 each partner's distributive
share of the low-income housing credit
reported on line 15b of Schedule K. Use
code B to report credits attributable to
buildings placed in service before 2008. Use
code D to report credits attributable to
buildings placed in service after 2007. If the
partnership has credits from more than one
rental activity, identify on an attached
statement to Schedule K-1 the amount for
each separate activity. See Passive Activity
Reporting Requirements, earlier.
-38-

. . . . . . . . . . . . . .

3c

4c
5

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 11g and line 11j of Form 3468. See
the Instructions for Form 3468 for details. If
the partnership has expenditures from more
than one rental real estate activity, identify on
an attached statement to Schedule K-1 the
amount for each separate activity. See
Passive Activity Reporting Requirements,
earlier.
Qualified rehabilitation expenditures
for property not related to rental real
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

Instructions for Form 1065 (2018)

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

undistributed capital gains by a regulated
investment company (RIC) or a real estate
investment trust (REIT). As a shareholder of
a RIC or beneficiary of a REIT, the
partnership will receive notice of the amount
of tax paid on undistributed capital gains on
Form 2439, Notice to Shareholder of
Undistributed Long-Term Capital Gains.
Biofuel producer credit (code I).
Complete Form 6478, if applicable, to figure
the credit. Attach it to Form 1065. Include
any amount shown on line 2 of Form 6478 in
the partnership's income on line 7. See
section 40(f) for an election the partnership
can make to not have the credit apply.

for wind energy production. Complete Form
8835 to figure the credit. Attach a statement
to Form 1065 and Schedule K-1 showing the
allocation of the credit for production during
the 4-year period beginning on the date the
facility was placed in service and for
production after that period. 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, if applicable, to
figure the credit, and attach it to Form 1065.
If this credit includes the small agri-biodiesel
producer credit, identify on a statement
attached to Schedule K-1 (a) each partner's
distributive share of the small agri-biodiesel
producer credit included in the total credit
allocated to the partner, (b) the number of
gallons for which the partnership claimed the
small agri-biodiesel producer credit, and (c)
the partnership's productive capacity for
agri-biodiesel.
• Low sulfur diesel fuel production credit.
Complete Form 8896 to figure the credit, and
attach it to Form 1065.
• General credits from an electing large
partnership.
• Distilled spirits credit (Form 8906).
• Energy efficient home credit (Form 8908).
• 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.
• New clean renewable energy bond credit
(Form 8912). The amount of this credit
(excluding any credits from other
partnerships, estates, and trusts) must also
be reported as interest income on line 5 of
Schedule K. In addition, the amount of this
credit must also be reported as a cash
distribution on line 19a of Schedule K.
• Qualified energy conservation bond credit
(Form 8912). The amount of this credit
(excluding any credits from other
partnerships, estates, and trusts) must also
be reported as interest income on line 5 of
Schedule K. In addition, the amount of this
credit must also be reported as a cash
distribution on line 19a of Schedule K.
• Qualified zone academy bond credit
(Form 8912). The amount of this credit
(excluding any credits from other
partnerships, estates, and trusts) must also
be reported as interest income on line 5 of
Schedule K. In addition, the amount of this

DRAFT AS OF
October 4, 2018

Line 15e. Other Rental Credits

Enter on line 15e any other credit (other than
credits reported on lines 15a through 15d)
related to rental activities. On the dotted line
to the left of the entry space for line 15e,
identify the type of credit. If there is more
than one type of credit, attach a statement to
Form 1065 that identifies the type and
amount for each credit. These credits may
include any type of credit listed in the
instructions for line 15f.
Schedule K-1. Report in box 15 of
Schedule K-1 each partner's distributive
share of other rental credits using code G. If
you are reporting each partner's distributive
share of only one type of rental credit under
code G, enter the code with an asterisk (G*)
and the dollar amount in the entry space in
box 15 and attach a statement that shows
“Box 15, Code G,” and type of credit. If you
are reporting multiple types of rental credit
under code G, enter the code with an
asterisk (G*) and enter “STMT” in the entry
space in box 15 and attach a statement that
shows “Box 15, Code G,” and the type and
dollar amount of the credits. If the
partnership has credits from more than one
rental activity, identify on the attached
statement the amount of each type of credit
for each separate activity. See Passive
Activity Reporting Requirements, earlier.

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

Instructions for Form 1065 (2018)

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

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

Empowerment zone employment credit
(code L). Complete Form 8844 to figure
the credit. Attach it to Form 1065.
Credit for increasing research activities
(code M). Complete Form 6765 to figure
the credit. Attach it to Form 1065.
Note. 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)(A). If the partner and the partnership
meet the requirements of section 38(c)(5)(A),
the research credit may be treated as a
specified credit.
Credit for employer social security and
Medicare taxes paid on certain employee
tips (code N). Complete Form 8846 to
figure the credit. Attach it to Form 1065.
Backup withholding (code O). This credit
is for backup withholding on dividends,
interest, and other types of income of the
partnership.
Other credits (code P). Attach a
statement to Form 1065 that identifies the
type and amount of any other credits not
reported elsewhere, such as the following.
• New markets credit. Complete Form 8874
to figure the credit. Attach it to Form 1065.
• Qualified railroad track maintenance
credit. Complete Form 8900 to figure the
credit, and attach it to Form 1065.
• Unused investment credit from the
qualifying advanced coal project credit,
qualifying gasification project credit, or
qualifying advanced energy project credit
allocated from cooperatives.
• Enhanced oil recovery credit. Complete
Form 8830 to figure the credit, and attach it
to Form 1065.
• 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
-39-

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).
• Credit for employer differential wage
payments (Form 8932).
• Carbon oxide sequestration credit (Form
8933).
• Qualified two-wheeled plug-in electric
drive motor vehicle credit (Form 8936).
• Credit for small employer health insurance
premiums (Form 8941).
• Employee retention credit (Form 5884-A).
• Credit for oil and gas production from
marginal wells (Form 8904).
• Employer credit for paid family and
medical leave (Form 8994).

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 16r
(codes A through R and code X 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 R and code X.

Lines 16d–16h. 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 and the
Instructions for Form 1116 for more
information on the categories of income.

DRAFT AS OF
October 4, 2018

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

Foreign Transactions

Lines 16a through 16r 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 instructions for line 16a,
below. See Pub. 514, Foreign Tax Credit for

RIC pass-through amounts. Aggregate all
income passed through from regulated
investment companies (RICs) and report the
total on a single line. Enter “RIC” on line 16a
and report the total on line 16b. Note that the
totals are being reported on a single line
because it isn't necessary to report the RIC
pass-through amounts on a per-country
basis.

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.

!

CAUTION

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

• The amount of this gross income (without
regard to its source) in each category
identified in the instructions for lines 16d
through 16h including each of the listed
categories.
• Specifically identify gains on the sale of
personal property other than inventory,
depreciable property, and certain intangible
property on which a foreign tax of 10% or
more was paid or accrued. Also list losses on
the sale of such property if the foreign
country would have imposed a 10% or higher
tax had the sale resulted in a gain. In
addition, separately identify the amounts of
such gains or losses within each separate
limitation category that are long-term capital
gains and losses or collectibles (28%) gains
and losses. See Determining the Source of
Income From the Sales or Exchanges of
Certain Personal Property in Pub. 514 and
section 865.
-40-

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

!

Line 16d. Section 951A category (code
D). Section 951A category foreign source
income includes any amount included in
gross income under 951A (other than
passive category income). Section 951A
defines global low-taxed income.
Line 16e. Foreign branch category (code
E). Foreign branch category foreign source
income is defined under section 904(d)(2)(J)
(i) as the business profits of a U.S. person
which are attributable to one or more
qualified business units (as defined in
section 989(a)) in one or more foreign
countries.

Line 16f. Passive category (code F).
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 16h. Other (code H) for exceptions.

!

Passive income doesn't include
export financing interest.

CAUTION

Line 16g. General category (code G).
General category foreign source income.
Include all foreign income sourced at the
partnership level that isn't passive category
income or section 951A category income or
foreign branch category income.
Line 16h. Other (code H). Attach a
statement separately showing the amount of
foreign source income included in the
following categories.
• Section 901(j) income.
• Certain income re-sourced by treaty.

Lines 16i–16j. Deductions
Allocated and Apportioned at
Partner Level
Line 16i. Interest expense (code I). Enter
on line 16i 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 16k through 16o.

Instructions for Form 1065 (2018)

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

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

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

reported on line 11 that is treated under
section 964(e)(4) as a dividend that is
eligible for a deduction under section 245A.

Line 16r. Other Foreign Tax
Information
• Foreign trading gross receipts (code

S). Report the partner's distributive share of
foreign trading gross receipts from line 15 of
Form 8873 using code S. See Extraterritorial
Income Exclusion, earlier.
• Extraterritorial income exclusion
(code T). If the partnership isn't 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.
• Section 951A tested income (code U).
Report tested income as defined in section
951A(c)(1)(A).
• Tested foreign income tax (code V).
Reported tested foreign income tax as
defined in section 960(d)(3).
• Section 965 information (code W).
Report foreign income tax information for the
calculation of creditable foreign income
taxes related to the section 965(a) inclusion.
Attach Form 965, including its Schedules F,
G, and H, to the Schedule K-1 (Form 1065).
• Other foreign transactions (code X).
Enter in box 16 of Schedule K-1 any other
foreign transaction information the partners
need to prepare their tax returns using code
X. Attach a statement that separately
identifies any arrangement, along with the
taxes paid or accrued in connection with the
arrangement, in which the partnership
participates that would qualify as a splitter
arrangement under section 909 if one or
more partners are covered persons with
respect to an entity that took into account
related income from the arrangement. Also
indicate whether the partnership has taken
into account any related income from any
such splitter arrangement. (See section 909
and the related regulations.)

DRAFT AS OF
October 4, 2018

Separately report partnership deductions
that are allocated and apportioned at the
partnership level by category of income as
follows. See Pub. 514 and the Instructions
for Form 1116 for more information.
Creditable foreign expenditures

TIP generally must be allocated in

accordance with each partner's
interest in the partnership. See Treasury
Decision 9292, 2006-47 I.R.B. 914, for
details.

Line 16k. Section 951A category (code
K). Enter the amount of deductions
allocated and apportioned at the partnership
level to section 951A category foreign source
income.
Line 16l. Foreign branch category (code
L). Enter the amount of deductions allocated
and apportioned at the partnership level to
foreign branch category foreign source
income.
Line 16m. Passive category (code M).
This category includes the following income:
passive income, dividends from a domestic
international sales corporation (DISC) or a
former DISC, and distributions from a former
foreign sales corporation.
Line 16n. General category (code N).
Enter the amount of deductions allocated
and apportioned at the partnership level to
general category foreign source income
(defined in the instructions for line 16g).
Line 16o. Other (code O). 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.
• Certain income re-sourced by treaty.

Lines 16p–16x. Other information
Line 16p. 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 16p. Translate these amounts into U.S.
dollars by using the applicable exchange
rate (see Pub. 514).
Foreign taxes paid (code P). If the
partnership uses the cash method of

Instructions for Form 1065 (2018)

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 16p 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 the instructions for lines 16d–
16h).
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 the following.
• Taxes withheld at source on interest.
• Taxes withheld at source on dividends.
• Taxes withheld at source on rents and
royalties.
• Other foreign taxes paid or accrued.

Line 16q. Reduction in Taxes
Available for Credit (Code R)
Enter the total reduction in taxes available for
credit. Attach a statement showing the
reductions for the following.
• Taxes on foreign mineral income (section
901(e)).
• Taxes on foreign oil and gas extraction
income and foreign oil-related income
(section 907(a)).
• Taxes attributable to boycott operations
(section 908).
• Failure to timely file (or furnish all of the
information required on) Forms 5471 and
8865.
• Foreign income taxes paid or accrued
during the current tax year that have been
suspended under section 909.
• Taxes related to any dividends included in
box 6a or 6b that have been identified as a
hybrid dividend.
• Taxes related to the subpart F inclusions
reported on line 11 which is identified as
being derived from hybrid dividends of tiered
corporations.
• Any other items (specify).
Attach a statement to the K-1 indicating
the taxes related to any part of a dividend
included in box 6a or 6b as eligible for a
deduction under section 245A. Also identify
the taxes related to any subpart F inclusion
-41-

Section 965(g) disallowance of
foreign tax credit. Enter the partner's
distributive share of the section 965(g)
disallowance of foreign tax credit from
Schedule H (Form 965), line 14.

Alternative Minimum Tax (AMT)
Items

Lines 17a through 17f must be completed for
all partners.
Enter items of income and deductions
that are adjustments or tax preference items
for the AMT. See Form 6251, Alternative
Minimum Tax—Individuals; or Schedule I
(Form 1041), Alternative Minimum
Tax—Estates and Trusts, to determine the
amounts to enter and for other information.
Do not include as a tax preference item
any qualified expenditures to which an
election under section 59(e) may apply.
Instead, report these expenditures on

line 13c(2). Because these expenditures are
subject to an election by each partner, the
partnership cannot figure the amount of any
tax preference related to them. Instead, the
partnership must pass through to each
partner in box 13, code J, of Schedule K-1
the information needed to figure the
deduction.
Schedule K-1. Report each partner's
distributive share of amounts reported on
lines 17a through 17f (concerning alternative
minimum tax items) in box 17 of
Schedule K-1 using codes A through F,
respectively. If the partnership is reporting
items of income or deduction for oil, gas, and
geothermal properties, you may be required
to identify these items on a statement
attached to Schedule K-1 (see the
instructions for Oil, Gas, and Geothermal
Properties—Gross Income and Deductions,
later, for details). Also see the requirement
for an attached statement in the instructions
for line 17f.

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.

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).

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.

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

DRAFT AS OF
October 4, 2018

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.
See Pub. 946 for a table of class
TIP lives.
For property placed in service after 1998,
refigure depreciation for the AMT only for
property depreciated for the regular tax using

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).

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 in box 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
aren't 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

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

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 17c. Depletion (Other Than Oil
and Gas)

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

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
-42-

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.

Instructions for Form 1065 (2018)

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.

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 doesn't
include the distributee partner's share of the
gain on the securities distributed to that
partner. See section 731(c)(3)(B) for details.
If the amount on line 19a includes
marketable securities treated as money,
state separately on an attached statement to
Schedules K and K-1 (a) the partnership's
adjusted basis of those securities
immediately before the distribution, and (b)
the FMV of those securities on the date of
distribution (excluding the distributee
partner's share of the gain on the securities
distributed to that partner).

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.

DRAFT AS OF
October 4, 2018

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

Tax-Exempt Income and
Nondeductible Expenses
Line 18a. Tax-exempt interest income.
Enter on line 18a tax-exempt interest
income, including any exempt-interest
dividends received from a mutual fund or
other regulated investment company.
Line 18b. Other tax-exempt income.
Enter on line 18b all income of the
partnership exempt from tax other than
tax-exempt interest.
Line 18c. Nondeductible expenses.
Enter on line 18c nondeductible expenses
paid or incurred by the partnership.
Do not include separately stated
deductions shown elsewhere on Schedules
K and K-1, capital expenditures, or items the
deduction for which is deferred to a later tax
year.
Schedule K-1. Report in box 18 of
Schedule K-1 each partner's distributive
share of amounts reported on lines 18a, 18b,
and 18c of Schedule K (concerning items
affecting partners' basis) using codes A
through C, respectively. Attach a statement
to Schedule K-1 for the amounts included in
line 18b that are exempt by reason of section
892, and describe the nature of the income.

Distributions
Line 19a. Distributions of cash and marketable securities. Enter on line 19a the
total distributions to each partner of cash and
marketable securities that are treated as
money under section 731(c)(1). Also include
the amount of the credits to holders of tax
credit bonds that are treated as cash
distributions under section 54A(g) and
54AA(f)(2). The instructions for the separate
credits (see Other Credits (Code P) under
Line 15f. Other Credits) state when the

Instructions for Form 1065 (2018)

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

Distributions subject to section 737
(code B). If a partner contributed section
704(c) built-in gain property within the last 7
years and the partnership made a
distribution of property to that partner other
than the previously contributed built-in gain
property, attach a statement to the
distributee partner's Schedule K-1 that
provides the following information.
• The fair market value of the distributed
property (other than money).
• The amount of money received in the
distribution.
• The net precontribution gain of the
partner. This is the net gain (if any) that
would have been recognized by the
distributee partner under section 704(c)(1)
(B) if all the following property had been
distributed by the partnership to another
partner. This property includes all property
contributed by the distributee partner during
the 7 years prior to the distribution and that is
still held by the partnership at the time of the
distribution (see section 737).
For more information, see Recognition of
Precontribution Gain on Certain Partnership
Distributions, earlier.
Other property (code C). Include all
distributions of property not included on
line 19a that aren't section 737 property. In
figuring the amount of the distribution, use
the adjusted basis of the property to the
partnership immediately before the
distribution. In addition, attach a statement
showing the adjusted basis and fair market
value of each property distributed.
Schedule K-1. Report in box 19 each
partner's distributive share of the amount on
line 19a using code A. If a statement is
attached, enter an asterisk after the code
(A*) and “STMT” in the entry space, and
-43-

Other Information

Lines 20a and 20b. Investment
Income and Expenses
Enter on line 20a the investment income
included on lines 5, 6a, 7, and 11 of
Schedule K. Do not include other portfolio
gains or losses on this line.
Investment income includes gross
income from property held for investment,
the excess of net gain attributable to the
disposition of property held for investment
over net capital gain from the disposition of
property held for investment, any net capital
gain from the disposition of property held for
investment that each partner elects to
include in investment income under section
163(d)(4)(B)(iii), and any qualified dividend
income that the partner elects to include in
investment income. Generally, investment
income and investment expenses do not
include any income or expenses from a
passive activity. See Regulations section
1.469-2(f)(10) for exceptions.
Property subject to a net lease isn't
treated as investment property because it is
subject to the passive loss rules. Do not
reduce investment income by losses from
passive activities.
Enter investment expenses on line 20b.
Investment expenses are deductible
expenses (other than interest) directly
connected with the production of investment
income. See the Instructions for Form 4952
for more information.

Schedule K-1. Report each partner's
distributive share of amounts reported on
lines 20a and 20b (investment income and
expenses) in box 20 of Schedule K-1 using
codes A and B, respectively.
If there are other items of investment
income or expense included in the amounts
that are required to be passed through
separately to the partners on Schedule K-1,
such as net short-term capital gain or loss,
net long-term capital gain or loss, and other
portfolio gains or losses, give each partner a
statement identifying these amounts.

Line 20c. Other Items and
Amounts
Report the following information on a
statement attached to Form 1065. On
Schedule K-1, enter the appropriate code in
box 20 for each information item followed by
an asterisk in the left-hand column of the
entry space (for example,“C*”). In the

right-hand column, enter “STMT.” The codes
are provided for each information category.
Fuel tax credit information (code C).
Report the number of gallons of each fuel
sold or used during the tax year for a
nontaxable use qualifying for the credit for
taxes paid on fuel, type of use, and the
applicable credit per gallon. See Form 4136,
Credit for Federal Tax Paid on Fuels, for
details.

If a partner's ownership interest in a

TIP 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.

!

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.

DRAFT AS OF
October 4, 2018

Qualified rehabilitation expenditures
(other than rental real estate) (code D).
Enter total qualified rehabilitation
expenditures from activities other than rental
real estate activities. See the Instructions for
Form 3468 for details on qualified
rehabilitation expenditures.
Note. Report qualified rehabilitation
expenditures related to rental real estate
activities on line 15c.

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

Basis of energy property (code E). See
the Instructions for Form 3468 for details on
basis of energy property. In box 20 of
Schedule K-1, enter code E followed by an
asterisk and enter “STMT” in the entry space
for the dollar amount. Attach a statement to
Schedule K-1 that provides the information
and the partner's distributive share of the
amounts the partner will need to figure the
amounts to report on lines 12a–12d, 12f,
12g, 12i, 12j, 12l, 12m, 12o, and 12q–12v of
Form 3468. See the Instructions for Form
3468 for details.
Recapture of low-income housing credit
(codes F and G). If recapture of part or all
of the low-income housing credit is required
because (a) the prior year qualified basis of
a building decreased or (b) the partnership
disposed of a building or part of its interest in
a building, see Form 8611, Recapture of
Low-Income Housing Credit. Complete lines
1 through 7 of Form 8611 to determine the
amount of credit to recapture. Use code F on
Schedule K-1 to report recapture of the
low-income housing credit from a section
42(j)(5) partnership. Use code G to report
recapture of any other low-income housing
credit. See the instructions for lines 15a and
15b, earlier, for more information.

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

Recapture of investment credit (code H).
Complete and attach Form 4255, Recapture
of Investment Credit, when investment credit
property is disposed of, or it no longer
qualifies for the credit, before the end of the
recapture period or the useful life applicable
to the property. State the type of property at
the top of Form 4255, and complete lines 2,
3, 4, 10, and 11, whether or not any partner
is subject to recapture of the credit.
Attach to each Schedule K-1 a separate
statement providing the information the
partnership is required to show on Form
4255, but list only the partner's distributive
share of the cost of the property subject to
recapture. Also indicate the lines of Form
4255 on which the partners should report
these amounts.

Recapture of other credits (code I). On
an attached statement to Schedule K-1,
provide any information partners will need to
report recapture of credits (other than
recapture of low-income housing and
investment credit reported on Schedule K-1
using codes F, G, and H). Examples of
credits reported using code I when subject to
recapture include the following.
• The new markets credit. See Form 8874
and Form 8874-B, Notice of Recapture
Event for New Markets Credit, for details.
• The Indian employment credit. See
section 45A(d) for details.
• The credit for employer-provided
childcare facilities and services. See section
45F(d).
• The alternative motor vehicle credit. See
section 30B(h)(8).
• The alternative fuel vehicle refueling
property credit. See section 30C(e)(5).
• The 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
-44-

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 related to such
dispositions (see the instructions for line 6,
earlier).
• Description of the property.
• Date the property was acquired and
placed in service.
• Date of the sale or other disposition of the
property.
• The partner's share of the gross sales
price or amount realized.
• The partner's share of the cost or other
basis plus expense of sale (reduced as
explained in the instructions for Form 4797,
line 21).
• The partner's share of the depreciation
allowed or allowable, determined as
described in the instructions for Form 4797,
line 22, but excluding the section 179
deduction.
• The partner's share of the section 179
deduction (if any) passed through for the
property and the partnership's tax year(s) in
which the amount was passed through.
• If the disposition is due to a casualty or
theft, a statement indicating so, and any
additional information needed by the partner.
• For an installment sale made during the
partnership's tax year, any information the
partner needs to complete Form 6252. The
partnership also must separately report the
partner's share of all payments received for
the property in future tax years. (Installment
payments received for sales made in prior
tax years should be reported in the same
manner used in prior tax years.) See the
Instructions for Form 6252 for details.
Recapture of section 179 deduction
(code M). This amount represents
recapture of section 179 deduction if
business use of the property dropped to 50%
or less before the end of the recapture
period. If the business use of any property
(placed in service after 1986) for which a
section 179 deduction was passed through
to partners dropped to 50% or less (for a
reason other than disposition), the
partnership must provide all the following
information.
• The partner's distributive share of the
original basis and depreciation allowed or

Instructions for Form 1065 (2018)

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.

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.
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.

• For the deferred section 752(b)
distribution, report the partner's deferred
section 752 amount remaining as of the end
of the current tax year.
Net investment income (code Y). Use
code Y to report any information that may be
relevant for partners to figure their net
investment income tax when the information
isn't otherwise identifiable elsewhere on
Schedule K-1. Attach a statement that shows
a description and dollar amount of each
relevant item.
Examples of items reported using code Y
may include the following.
• Net rental real estate income reported on
Form 1065, Schedule K, line 2, and other net
rental income reported on Form 1065,
Schedule K, line 3c, derived from a section
212 for-profit activity (and not from a section
162 trade or business).
• Gains and losses from dispositions of
assets attributable to a section 212 for-profit
activity (and not from a section 162 trade or
business).
• Gain reported on the installment sale
basis (or attributable to a private annuity) that
is attributable to the disposition of property
held in a trade or business.
• Gain or loss from the disposition of a
partnership interest, but only if such
partnership was engaged, directly or
indirectly, in one or more trades or
businesses, and at least one of those trades
or businesses wasn't trading in financial
instruments or commodities.
• The partner’s distributive share of interest
income, or interest expense, which is
attributable to a loan between the
partnership and the partner (self-charged
interest).
• If the partnership received a Form 1065,
Schedule K-1, the detail and amounts
reported to the partnership on code Y.
• If the partnership received a Form 1065-B,
Schedule K-1, the detail and amounts
reported to the partnership.
• If the partnership received a Form 1041,
Schedule K-1, the amount of the adjustment
reported.
• Guaranteed payments (reported on Form
1065, Schedule K, line 4) unrelated to
services, such as for the use of capital or
attributable to section 736(a)(2) payments for
unrealized receivables or goodwill.
• In the case of a common trust fund, any
items of income or loss that may be taken
into account in figuring the participant’s net
investment income (other than qualified
dividends, and short-term and long-term
capital gains).
In addition, Regulations section 1.1411-10
provides special rules for stock of controlled
foreign corporations (CFCs) and passive
foreign investment companies (PFICs)
owned by the partnership. If the partnership
owns directly or indirectly stock of a CFC or
PFIC, then additional reporting may be
required under code Y.

DRAFT AS OF
October 4, 2018

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 figure 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 figure the interest due under section
453A(c). If an obligation arising from the
disposition of property to which section 453A
applies is outstanding at the close of the
year, each partner's tax liability must be
increased by the tax due under section
453A(c) on the partner's distributive share of
the tax deferred under the installment
method.
Section 1260(b) information (code Q).
Supply any information needed by a partner
to figure the interest due under section
1260(b). If the partnership had gain from
certain constructive ownership transactions,
each partner's tax liability must be increased
by the partner's distributive share of interest
due on any deferral of gain recognition. See
section 1260(b) for details, including how to
figure the interest.
Interest allocable to production expenditures (code R). Supply any information
needed by a partner to properly capitalize
interest as required by section 263A(f). See
Section 263A uniform capitalization rules,
earlier, for more information.
CCF nonqualified withdrawal (code S).
Report nonqualified withdrawals by the
partnership from a capital construction fund
to partners. See Pub. 595.

Depletion information—oil and gas (code
T). Report gross income and other
information relating to oil and gas well
properties to partners to allow them to figure
the depletion deduction for oil and gas well
properties. Allocate to each partner a
proportionate share of the adjusted basis of

Instructions for Form 1065 (2018)

Precontribution gain (loss) (code W). If
the partnership distributed any section
704(c) property to any partner other than
the contributing partner, and the date of the
distribution was within 7 years of the date the
section 704(c) property was contributed to
the partnership, the distribution must be
treated as if it were a sale by the contributing
partner taking place on the date of the
distribution. Section 704(c) property is
property that had a fair market value which
was either greater or less than the
contributing partner's adjusted basis at the
time the property was contributed to the
partnership. See Dispositions of Contributed
Property, earlier, for more information. If the
partnership made such a distribution during
its tax year, attach a statement to the
contributing partner's Schedule K-1 that
provides the following information.
• The amount of the gain or loss that would
have been allocated to the contributing
partner if the partnership had sold the
section 704(c) property at its fair market
value at the time of the distribution. See
section 704(c)(1)(B) for details.
• The character of the gain or loss which
would have resulted if the partnership had
sold the section 704(c) property to the
distributee partner.
Enter code W in box 20 of Schedule K-1
with an asterisk (W*) and enter “STMT,” and
attach the required statement.

Section 108(i) information (code X).
Report the following.
• For the deferred cancellation of debt
(COD) income, report the partner's deferred
amount that has not been included in income
in the current or prior tax years.
• For the deferred original issue discount
(OID) deduction, report the partner's share of
the partnership's OID deduction deferred
under section 108(i)(2)(A)(i) that has not
been deducted in the current or prior tax
years.
• For the section 752(b) distribution, report
the partner's share of the deferred section
752 amount that is treated as a distribution of
money to the partner under section 752 in
the current tax year.

-45-

CFCs and QEFs. In the case of stock of
CFCs and QEFs directly or indirectly owned
by the partnership, the partnership must
provide the name and EIN (if one has been

issued) for each CFC and QEF the stock of
which is owned by the partnership for which
an election under Regulations section
1.1411-10(g) is not in effect and for which
the partnership is not engaged in a trade or
business described in section 1411(c)(2).
For each of these entities, the partnership
must provide the following information on an
entity-by-entity basis (to the extent such
information isn't otherwise identifiable
elsewhere on Schedule K-1).
• Section 951(a) inclusions.
• Section 951A inclusions.
• Section 1293(a)(1)(A) inclusions.
• Section 1293(a)(1)(B) inclusions.
• Section 959(d) distributions subject to
section 1411.
• Section 1293(c) distributions subject to
section 1411.
• Amount of gain or loss derived from
dispositions of the stock of CFCs and QEFs
that is taken into account for section 1411
purposes.
• Amounts that are derived from the
disposition of the stock of CFCs and QEFs
and included in income as a dividend under
section 1248 for section 1411 purposes.
In the case of stock of CFCs and QEFs
directly or indirectly owned by the
partnership for which an election under
Regulations section 1.1411-10(g) is in effect,
the partnership must provide the following
information (to the extent such information
isn't otherwise identifiable elsewhere on
Schedule K-1) on either an aggregate basis
or an entity-by-entity basis.
• Section 951(a) inclusions.
• Section 951A inclusions.
• Section 1293(a)(1)(A) inclusions.
• Section 1293(a)(1)(B) inclusions.
In the case of stock of CFCs and QEFs
directly or indirectly owned by the
partnership with respect to which the
partnership is engaged in a trade or business
described in section 1411(c)(2), the
partnership must provide the following
information (to the extent such information
isn't otherwise identifiable elsewhere on the
Schedule K-1) on either an aggregate or an
entity-by-entity basis, or may aggregate this
information with other income derived by the
partnership that is net investment income
under section 1411(c)(1)(A)(ii).
• Section 951(a) inclusions.
• Section 951A inclusions.
• Section 1293(a)(1)(A) inclusions.
• Section 1293(a)(1)(B) inclusions.

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

▶ Foreign income that is not effectively
connected with the conduct of business
within the United States (for more
information go to IRS.gov and type in the key
word “effectively connected income.”
▶ Commodities transaction or foreign
currency gains or losses described in section
954(c)(1)(C) or (D).
▶ Income, loss, or deductions from notional
principal contracts under section 954(c)(1)
(F).
▶ Annuities (unless received in connection
with the trade or business).
▶ Guaranteed payments received by the
entity.
▶ Payments received by the entity for
services rendered to a partnership under
section 707(a).
▶ Qualified REIT dividends.
▶ Qualified PTP income.
• W-2 wages from qualified trade or
business (code AA). The W-2 wages
include amounts paid to employees under
section 6051(a)(3) and (8). If the partnership
conducts more than one trade or business, it
must allocate the W-2 wages among its
trades or business. See Notice 2018-64 for
more information.
• Unadjusted basis on acquisition of
qualified property (code AB). The
unadjusted basis of qualified property is
figured by adding unadjusted basis of all
qualified assets immediately after
acquisition. Qualified property includes all
tangible property subject to depreciation
under section 167 that is held and used by
the trade or business during the taxable
year, for which the depreciable period has
not ended. The depreciable period ends on
the later of 10 years after the property is
placed in service or the last day of the full
year for the applicable recovery period under
section 168.
• Section 199A REIT dividends (code
AC). Qualified REIT dividends include any
dividend the partnership receives from a real
estate investment trust that is not capital gain
dividend under section 857(b)(3) and is not a
qualified dividend under section 1(h)(11).
• Qualified publicly traded partnership
(PTP) income (code AD). Qualified PTP
income includes the partnership's share of
qualified items of income, gain, deduction,
and loss from a publicly traded partnership. It
also may include gain or loss recognized on
the disposition of the partnership interest that
is not treated as a capital gain or loss.
If the partnership has only one trade or
business, the partnership enters each
partner’s allocable share directly on that
partner’s Schedule K-1 for codes Z through
AD.
If the partnership has more than one trade
or business, enter an asterisk (*) on each
partner's Schedule K-1 next to code Z and
enter “STMT” in the right column to indicate
that the information is provided on an
attached statement. Do not sum the amounts
from multiple trades or businesses into a
single number on Schedule K-1 for reporting
purposes.

DRAFT AS OF
October 4, 2018

Section 1296 Mark-to-market PFICs. In
the case of stock of PFICs directly or
indirectly owned by the partnership for which
an election under section 1296 is in effect,
the partnership must provide the following
information (to the extent such information
isn't otherwise identifiable elsewhere on
Schedule K-1) on either an aggregate basis
or an entity-by-entity basis (except as
provided below).
• Amounts included in income under
section 1296(a)(1).
• Amounts deducted from income under
section 1296(a)(2).

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

Qualified Business Income
Deduction
For tax years beginning after 2017,
individuals, estates, and trusts may be
entitled to a deduction of up to 20% of their
qualified business income from a trade or
business, including income from a
pass-through entity, but not from a C
corporation, plus 20% of qualified real estate
investment trust (REIT) dividends and
qualified publicly traded partnership (PTP)
income. The deduction is subject to multiple
limitations such as the type of trade or
business, the taxpayer's taxable income, the
amount of W-2 wages paid with respect to
the trade or business, and the unadjusted
basis immediately after acquisition of
qualified property held by the trade or
business. The deduction can be taken in
addition to the standard or itemized
deductions. For more information, see
section 199A and Pub. 535, Business
Expenses.
Schedule K-1—Qualified business income deduction (codes Z through AD).
In the case of a partnership, the qualified
business income deduction is determined at
the partner level. To allow partners to
correctly figure qualified business income
deduction, the partnership must attach a
statement to its Schedules K-1, separately
identifying each trade or business and
identifying any specified service trade or
business. For each trade or business, the
partnership must state, using the same box
numbers as shown on Schedule K-1, the
amount of the following.
• Section 199A qualified business
income (code Z). The qualified business
income includes items of income, gain,
deduction, and loss from the partnership's
trades or businesses. However, the qualified
business income doesn't include any of the
following.
▶ Investment items such as capital gains or
losses, dividends or interest income.
▶ Wage income
-46-

Instructions for Form 1065 (2018)

Determining the partnership's
qualified trades or businesses. The
partnership's qualified trades and
businesses include its section 162 trades or
businesses, except for specified service
trades or businesses. A section 162 trade or
business generally includes any activity
carried on to make a profit. For more
information on what qualifies as a trade or
business, see the heading “Trade or
Business” in Pub. 334, Tax Guide for Small
Business. For information on whether a real
estate professional’s real property rentals
rise to the level of a trade or business, see
the heading “Real Property Trade or
Business” in Pub. 527, Residential Rental
Property.

the United States shall be taken into
account.
Other information (code AH). Report the
following to each partner.
• Any information a partner that is a publicly
traded partnership may need to determine if
it meets the 90% qualifying income test of
section 7704(c)(2). Partners are required to
notify the partnership of their status as a
publicly traded partnership.
• If a partner that is a corporation elected
under section 168(k)(4) to accelerate the
corporation's pre-2006 AMT credit
carryforward in lieu of bonus depreciation, it
is required to notify the partnership in writing
of this election so the partnership can adjust
the electing corporate partner's distributive
share of partnership items that include bonus
depreciation. See Rev. Proc. 2009-16,
2009-6 I.R.B. 449, as modified by Rev. Proc.
2009-33, 2009-29 I.R.B. 150, for more
information about the written notification that
the electing corporate partner must provide
the partnership. The partnership is required
to refigure 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
refigured depreciation and elimination of the
bonus depreciation. See section 168(k)(4)
for more information.
• If the partnership participates in a
transaction that must be disclosed on Form
8886, both the partnership and its partners
may be required to file Form 8886. The
partnership must determine if any of its
partners are required to disclose the
transaction and provide those partners with
information they will need to file Form 8886.
This determination is based on the
category(s) under which a transaction
qualified for disclosures. See Form 8886 and
its instructions for details.
• Compensation to partners deferred under
a section 409A nonqualified deferred
compensation plan that doesn't 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 AH.
Attach a statement to Schedule K-1 that
shows the partner's distributive share of the
amount of each type of income or gain
included in the inversion gain.
• Qualifying advanced coal project
property. Attach a statement to Schedule K-1
showing the partner's distributive share of
the amounts that the partner will use when
figuring the amounts to report on lines 5a
through 5c of the partner's Form 3468. See
the Instructions for Form 3468 for details.
• Qualifying gasification project property.
Attach a statement to Schedule K-1 showing
the partner's distributive share of the
amounts that the partner will use when
figuring the amounts to report on lines 6a
and 6b of the partner's Form 3468. See the
Instructions for Form 3468 for details.
• Qualified advanced energy project credit.
Attach a statement to Schedule K-1 showing
the partner's distributive share of the
amounts that the partner will use when
figuring the amount to report on line 7 of the
partner's Form 3468. See the Instructions for
Form 3468 for details.
• The information needed to complete
Schedule P (Form 1120-F), List of Foreign
Partner Interests in Partnerships, on an
attached statement for a partner that is (a) a
corporation (identified as a foreign partner
under Regulations section 1.1446-1(c)(3));
or (b) a partnership (domestic or foreign) if
you know, or have reason to know, that one
or more of the partners is a foreign
corporation.
If the partnership allocates effectively
connected income to the partner, provide the
information needed to complete lines 1
through 10, 13, 14, 15b, 17a, 17b, and 18 of
Schedule P (Form 1120-F). If the partnership
doesn't allocate effectively connected
income to the partner, provide the
information needed to complete lines 13, 14,
and 18 of Schedule P (Form 1120-F). The
information must be provided in a format
which references the specific line numbers
on Schedule P for which the information is
provided. For more information, see the
Instructions for Schedule P (Form 1120-F).
Exceptions. The statement isn't required in
the following situations.
1. The direct or indirect foreign corporate
partner provides the partnership with a valid
Form W-8BEN or Form W-8BEN-E (within
the meaning of Regulations section
1.1446-2(b)(2)(iii)) on which the corporation
claims an exemption from U.S. tax by
operation of an income tax treaty or
reciprocal agreement on the grounds that
none of the income is attributable to a
permanent establishment of the partner.
2. The partnership doesn't allocate any
effectively connected income to the partner
(foreign corporation or partnership) and the
partnership receives a written statement from

DRAFT AS OF
October 4, 2018

Specified service trades or
businesses excluded from qualified
trades or businesses. Specified service
trades or businesses are generally excluded
from the definition of a qualified trade or
business. Specified service trade or
business is any trade or business providing
services in the fields of health, law,
accounting, actuarial science, performing
arts, consulting, athletics, financial services,
brokerage services, or any other trade or
business where the principal asset is the
reputation or skill of one or more of its
employees. In addition, the trade or business
of investing and investment management,
trading or dealing in securities, partnership
interests, or commodities is a specified trade
or business.
Exceptions. If the partner's taxable
income is less than the threshold of
$157,500 ($315,000 if married filing jointly),
the specified service items are treated as a
qualified trade or business. If the partner's
taxable income is between $157,500 and
$207,500 ($315,000 and $415,000 if married
filing jointly), an applicable percentage of the
specified service trade or business is treated
as a qualified trade or business. Therefore,
the Schedule K-1 issued to each partner
must separately identify each trade or
business and identify any specified service
trade or business.

Limitation on Business Interest
Expense, Section 163(j) (codes AE
and AF)
If the partnership is required to file Form
8990, Limitation on Business Interest
Expense IRC 163(j), it may determine it has
excess taxable income. See the Instructions
for Form 8990 for additional information.
Excess taxable income (code AE). Enter
the partner’s amount of excess taxable
income.
Excess business interest income (code
AF). Enter the partner’s amount of excess
business interest income.
Gross receipts for section 59A(e) (code
AG). Provide the partner's share of gross
receipts. If the partner is a foreign person,
only gross receipts effectively connected
with the conduct of a trade or business within

Instructions for Form 1065 (2018)

-47-

the partner (corporation or partnership)
indicating that the information isn't needed to
determine its (or its direct or indirect
partner(s)) U.S. federal income tax liabilities.
• The partner's distributive share of any
conservation reserve program payments
made to the partnership.
• If the partnership has deductions
attributable to a farming business and
receives an applicable subsidy, report the
aggregate gross income or gain and the
aggregate deductions from the farming
business and any information the partners
need to comply with the limitation on excess
farm losses of certain taxpayers under
section 461(j).
• If a partnership is a trader in securities,
commodities, or both, and has properly
elected under section 475(f) to mark to
market the securities, the commodities, or
both, the partnership should report ordinary
gain or loss from the securities or
commodities (or both securities and
commodities) trading activities separately
from any other ordinary gain or loss.
• Transfer of the partnership interest by a
foreign partner. If a partner that is a
nonresident alien or foreign corporation has
gain or loss from the sale, exchange, or other
disposition of its partnership interest,
provide, on an attached statement, any
information that the partner may need to
determine effectively connected gain or loss
under section 864(c)(8).
• • If the partnership is a section 721(c)
partnership, line 20c must include the
amounts relating to any remedial items made
under the remedial allocation method
(described in Regulations section 1.704-3(d)
and Temporary Regulations section
1.704-3T(d)(5)(iii)) with respect to section
721(c) property. Enter a separate code AH
on Schedule K-1 line 20 for each amount for
items allocated to the partner. For the U.S.
transferor, enter a separate code AH, if any,
for the total remedial income allocated to the
U.S. Transferor, total gain recognized due to
an acceleration event and/or total gain
recognized due to a section 367 transfer
reflected on Form 8865, Schedule G, Part II,
columns (c), (d), and (e), respectively. For all
other partners of the section 721(c)
partnership, enter a separate code AH for
the total amount of remedial items allocated
to such partner relating to section 721(c)
property. See Temporary Regulations
sections 1.721(c)-3T and 1.721(c)-6T.
• Any other information the partners need to
prepare their tax returns.

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 of Analysis of Income (Loss) must
equal the amount in column (d) of line 26,
Part II of Schedule M-3.

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.

In classifying partners who are individuals
as “active” or “passive,” the partnership
should apply the rules below. In applying
these rules, a partnership should classify
each partner to the best of its knowledge and
belief. It is assumed that in most cases the
level of a particular partner's participation in
an activity will be apparent.
1. If the partnership's principal activity is
a trade or business, classify a general
partner as “active” if the partner materially
participated in all partnership trade or
business activities; otherwise, classify a
general partner as “passive.”
2. If the partnership's principal activity
consists of a working interest in an oil or gas
well, classify a general partner as “active.”
3. If the partnership's principal activity is
a rental real estate activity, classify a general
partner as “active” if the partner actively
participated in all of the partnership's rental
real estate activities; otherwise, classify a
general partner as “passive.”
4. Classify as “passive” all partners in a
partnership whose principal activity is a
rental activity other than a rental real estate
activity.
5. If the partnership's principal activity is
a portfolio activity, classify all partners as
“active.”
6. Classify as “passive” all limited
partners in a partnership whose principal
activity is a trade or business or rental
activity.
7. If the partnership cannot make a
reasonable determination whether a
partner's participation in a trade or business
activity is material or whether a partner's
participation in a rental real estate activity is
active, classify the partner as “passive.”

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).

DRAFT AS OF
October 4, 2018

Analysis of Net Income
(Loss)

For each type of partner shown, enter the
portion of the amount shown on line 1 that
was allocated to that type of partner. Foreign
government partners are treated as
corporate partners. Report all amounts for
LLC members on the line for limited partners.
The sum of the amounts shown on line 2
must equal the amount shown on line 1. In
addition, the amount on line 1 of Analysis of
Income (Loss) must equal the amount on

Schedule L. Balance
Sheets per Books
Schedules L, M-1, and M-2 aren't
TIP required to be completed if the
partnership answered “Yes” to
question 4 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,
-48-

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

Partnerships Required To File
Schedule M-3

For partnerships required to file
Schedule M-3, the amounts reported on
Schedule L must be amounts from financial
statements used to complete Schedule M-3.
If the partnership prepares non-tax-basis
financial statements, Schedule M-3 and
Schedule L must report non-tax-basis
financial statement amounts. If the
partnership doesn't 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's books and
records reflect only tax-basis amounts.

Line 5. Tax-Exempt Securities

Include on this line:
1. State and local government
obligations, the interest on which is
excludable from gross income under section
103(a); and
2. Stock in a mutual fund or other
regulated investment company that
distributed exempt-interest dividends during
the tax year of the partnership.

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

Include on this line loans to partners or
persons related to partners. Persons are
related if they have a relationship specified in
section 267(b) or 707(b). Amounts included
here should not be included elsewhere on
lines 1 through 13.

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

Instructions for Form 1065 (2018)

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

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

• 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.

DRAFT AS OF
October 4, 2018

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

Line 18. All Nonrecourse Loans

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

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

Include on this line loans from partners or
persons related to partners. Persons are
related if they have a relationship specified in
section 267(b) or 707(b). Amounts included
here should not be included elsewhere on
lines 15 through 21.

Line 20. Other Liabilities

A partnership that is a partner in a tiered
partnership must include as a liability on

Instructions for Form 1065 (2018)

Schedule M-3 may be required

TIP instead of Schedule M-1. See Item J.

Schedule C and Schedule M-3,
earlier. See the Instructions for
Schedule M-3 for more information.

Line 2

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

Line 3. Guaranteed Payments

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

Line 4b. Travel and
Entertainment

Include the following on this line.
• Entertainment expenses not deductible
under section 274(a).
• Non-entertainment related meal expenses
not deductible under section 274(n).
• Entertainment related meals.
• 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 of
non-tangible property or tangible property
over $400 ($1,600 if part of a qualified plan).
See section 274(j).
• The cost of skyboxes.
• 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).

-49-

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.

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.

DRAFT AS OF
October 4, 2018

Estimates of Taxpayer Burden. The following tables show burden estimates based on current statutory requirements as of December
2018, for taxpayers filing 2018 Forms 1065, 1066, 1120, 1120-C, 1120-F, 1120-H, 1120-ND, 1120S, 1120-SF, 1120-FSC, 1120-L, 1120-PC,
1120-REIT, 1120-RIC, 1120-POL, and related attachments. Time spent and out-of-pocket costs are presented separately. Time burden is
broken out by taxpayer activity, with reporting representing the largest component. Out-of-pocket costs include any expenses incurred by
taxpayers to prepare and submit their tax returns. Examples include tax return preparation and submission fees, postage and photocopying
costs, and tax preparation software costs. While these estimates do not include burden associated with post-filing activities, IRS operational
data indicate that electronically prepared and filed returns have fewer arithmetic errors, implying lower post-filing burden.
Reported time and cost burdens are national averages and do not necessarily reflect a “typical” case. Most taxpayers experience lower
than average burden, with taxpayer burden varying considerably by taxpayer type. For instance, the estimated average time burden for all
taxpayers filing Forms 1065, 1066, or 1120 and related forms is 275 hours, with an average cost of $4,700 per return. This average includes
all associated forms and schedules, across all preparation methods and taxpayer activities.
The average burden for taxpayers filing Forms 1065, 1066, and related attachments is about 388 hours and $13,000; the average burden
for taxpayers filing Form 1120 and associated forms is about 610 hours and $26,233; and the average for Forms 1120-REIT, 1120-RIC,
1120S, and all related attachments is 363 hours and $12,467. Within each of these estimates there is significant variation in taxpayer activity.
Tax preparation fees and other out-of-pocket costs vary extensively depending on the tax situation of the taxpayer, the type of software or
professional preparer used, and the geographic location. Third-party burden hours are not included in these estimates.

Table 1—Taxpayer Burden for Entities Taxed as Partnerships
Forms 1065, 1066, and all attachments
Primary Form Filed or Type of Taxpayer

Number of Returns (millions)

Average Time per Taxpayer (hours)

Average Cost per Taxpayer

3.9

290

$5,700

Small

3.7

270

$4,400

Large*

0.2

610

$29,000

All Partnerships

*A large business is defined as one having end-of-year assets greater than $10 million. A large business is defined the same way for partnerships, taxable corporations, and pass-through
corporations. A small business is any business that does not meet the definition of a large business.

Table 2—Taxpayer Burden for Entities Taxed as Taxable Corporations
Forms 1120, 1120-C, 1120-F, 1120-H, 1120-ND, 1120-SF, 1120-FSC, 1120-L, 1120-PC, 1120-POL, and all attachments
Primary Form Filed or Type of Taxpayer

Number of Returns (millions)

Average Time per Taxpayer (hours)

Average Cost per Taxpayer
$6,300

All Taxable Corporations

2.1

315

Small

2.0

280

$4,000

Large*

0.1

1,250

$68,900

*A large business is defined as one having end-of-year assets greater than $10 million. A large business is defined the same way for partnerships, taxable corporations, and pass-through
corporations. A small business is any business that does not meet the definition of a large business.

Table 3—Taxpayer Burden for Entities Taxed as Pass-Through Corporations
Forms 1120-REIT, 1120-RIC, 1120S, and all attachments
Primary Form Filed or Type of Taxpayer

Number of Returns (millions)

Average Time per Taxpayer (hours)

Average Cost per Taxpayer

4.9

245

$3,500

Small

4.8

240

$3,100

Large*

0.1

610

$30,800

All Pass-Through Corporations

*A large business is defined as one having end-of-year assets greater than $10 million. A large business is defined the same way for partnerships, taxable corporations, and pass-through
corporations. A small business is any business that does not meet the definition of a large business.

Comments. 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 send us comments from IRS.gov/formspubs. Click on “More Information” and then on “Give us
feedback.” Or you can write to the Internal Revenue Service, Tax Forms and Publications, 1111 Constitution Ave. NW, IR-6526, Washington,
DC 20224. Do not send the tax form to this address. Instead, see Where To File, earlier, near the beginning of the instructions.

-50-

Instructions for Form 1065 (2018)

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.

Agriculture, Forestry, Fishing
and Hunting

238900

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 supplies
them to a subcontractor to produce the finished product,
but retains title to the product, the business is considered a
Other Specialty Trade Contractors
(including site preparation)

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.

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
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 Major 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

423500

Metal & Mineral (except
Petroleum)
Household Appliances & 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

DRAFT AS OF
October 4, 2018

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
211120
211130
212110
212200
212310
212320
212390
213110

Crude Petroleum Extraction
Natural Gas Extraction
Coal Mining
Metal Ore Mining
Stone Mining & Quarrying
Sand, Gravel, Clay, & Ceramic &
Refractory Minerals Mining &
Quarrying
Other Nonmetallic Mineral Mining
& Quarrying
Support Activities for Mining

Utilities
221100
221210
221300
221500

Electric Power Generation,
Transmission & Distribution
Natural Gas Distribution
Water, Sewage & Other Systems
Combination Gas & Electric

Construction

Construction of Buildings
236110 Residential Building Construction
236200 Nonresidential Building
Construction
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)

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 & Processing
311710 Seafood Product Preparation &
Packaging
311800 Bakeries, Tortilla & Dry Pasta 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
315240 Women's, Girls' & Infants' Cut &
Sew Apparel Mfg
315280 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
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

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

-51-

423600

Retail Trade

Motor Vehicle and Parts Dealers
441110 New Car Dealers
441120 Used Car Dealers
441210 Recreational Vehicle Dealers
441222 Boat Dealers
441228 Motorcycle, ATV, & 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
443141 Household Appliance Stores
443142 Electronics Stores (including
Audio, Video, Computer, &
Camera 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 & Other Grocery
(except Convenience) Stores
445120 Convenience Stores
445210 Meat Markets
445220 Fish & Seafood Markets
445230 Fruit & Vegetable Markets
445291 Baked Goods Stores
445292 Confectionery & Nut Stores
445299 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

Codes for Principal Business Activity and Principal Product or Service (Continued)
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
General Merchandise Stores
452200 Department Stores
452300 General Merchandise Stores, incl.
Warehouse Clubs and
Supercenters
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
454310 Fuel Dealers (including Heating Oil
& Liquefied Petroleum)
454390 Other Direct Selling
Establishments (including
door-to-door retailing, frozen food
plan providers, party plan
merchandisers, & coffee-break
service providers)

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)

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)
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
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
532281 Formal Wear & Costume Rental
532282 Video Tape & Disc Rental
532283 Home Health Equipment Rental
532284 Recreational Goods Rental
532289 All 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)

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

DRAFT AS OF
October 4, 2018

Transportation and
Warehousing

Air, Rail, and Water Transportation
481000 Air Transportation
482110 Rail Transportation
483000 Water Transportation
Truck Transportation
484110 General Freight Trucking, Local
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

Finance and Insurance

Depository Credit Intermediation
522110 Commercial Banking
522120 Savings Institutions
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 & 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

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
541940 Veterinary Services
541990 All Other Professional, Scientific, &
Technical Services

Management of Companies
(Holding Companies)
551111
551112

-52-

Offices of Bank Holding
Companies
Offices of Other Holding
Companies

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
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)

Codes for Principal Business Activity and Principal Product or Service (Continued)
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)

721120
721191
721199
721210

Casino Hotels
Bed & Breakfast Inns
All Other Traveler Accommodation
RV (Recreational Vehicle) Parks &
Recreational Camps
721310 Rooming & Boarding Houses,
Dormitories, & Workers’ Camps
Food Services and Drinking Places
722300 Special Food Services (including
food service contractors &
caterers)
722410 Drinking Places (Alcoholic
Beverages)
722511 Full-Service Restaurants
722513 Limited Service Restaurants
722514 Cafeterias & Buffets
722515 Snack & Non-alcoholic Beverage
Bars

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
812310

Cemeteries & Crematories
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 & homeowners
associations)

DRAFT AS OF
October 4, 2018

Accommodation and Food
Services

Accommodation
721110 Hotels (except Casino Hotels) &
Motels

Other Services

Repair and Maintenance
811110 Automotive Mechanical &
Electrical Repair & Maintenance

-53-

Index
A
Accounting methods 6
Accrual method 6
Change in accounting
method 7
Mark-to-market accounting
method 7
Nonaccrual experience
method 19
Nonaccrual-experience
method 7
Percentage of completion
method 7
Accounting periods 7
Adjusting deductions for certain
credits 20
Administrative adjustment
request 7
Allocation of partnership items:
Contributed property 27
Liabilities 29
Nonrecourse liabilities 29
Partnership agreement 27
Special allocations 30
Alternative minimum tax 41
Adjusted gain (loss) 42
Depletion (other than oil and
gas) 42
Depreciation adjustment on
property placed in service
after 1986 42
Oil, gas, and geothermal
properties 42
Amended return 7
Analysis of net income (loss) 48
Analysis of partner's capital
account 29
Analysis of partners' capital
accounts 49
Assembling the return 10
At-risk activities 29
Attached statements 28

Credits 38
Low-income housing 38
Rehabilitation 38, 44
Rental activities 38

Guaranteed payments 30, 49
I
Inclusion amount 21
Income:
Gross receipts or sales 18
Tax-exempt income 18
Trade or business 18
Installment sales 18
Interest income 31
Interest on production
expenditures 22
Investment:
Income and expenses 43
Interest expense 35

Section 179 deduction 44
Reconciliation of income (loss) per
books with income (loss) per
return 49
Recordkeeping 7
Reforestation costs 36
Rental activities 13
Rounding off to whole dollars 7
Royalties 31

DRAFT AS OF
October 4, 2018

B
Balance sheets per books 48
Bipartisan Budget Act of 2015
(BBA) 3
Business start-up expenses 20
C
Capital gain:
Net long-term 32
Net short-term 31
Change of address 17
Charitable contribution 34
Codes:
Partner 29
Principal business activity 51
Schedule K-1 reporting 28
Collectibles (28%) gain (loss) 32
Commercial revitalization
deduction 23
Consolidated audit procedures 7
Contributions to the
partnership 12
Cost of goods sold 19

D
Deductions:
Bad debts 21
Depletion 22
Depreciation 22
Employee benefit programs 22
Entertainment facilities 23
Guaranteed payments 21
How to report 19
Interest 21
Limitations 19
Meals and entertainment 23
Membership dues 23
Reforestation expenditures 23
Rent 21
Repairs and maintenance 21
Retirement plans 22
Salaries and wages 20, 30
Taxes and licenses 21
Transactions between related
taxpayers 20
Travel 23
Wages 20
Definitions 3
Depreciation 22
Dispositions of contributed
property 12
Distributions:
Cash and marketable
securities 43
Other property 43
Recognition of precontribution
gain 12
Dividends 31

E
Elections:
By each partner 11
By the partnership 11
Electronic filing 4
Entity classification election 11
Extensions 5
Extraterritorial income
exclusion 17, 41
F
Foreign accounts 25
Foreign partners, withholding 26
Foreign partnership 3
Foreign taxes 40
Foreign trusts, transactions 25
Forms:
How to get 3
That may be required 8
Future Developments 1
G
General partner 3
General partnership 3

L
Limited liability company 4
Limited liability partnership 3
Limited partner 3
Limited partnership 3

N
Net section 1231 gain (loss) 32
Nondeductible expenses 43
Nonrecourse liabilities 29
Nonrecourse loans 4, 29
(See also Nonrecourse liabilities)
Notice of inconsistent treatment 7
O
Ordinary business income
(loss) 30
P
Paid preparer authorization 6
Partner contributing property with a
built-in gain or loss 30
Passive activity limitations:
Grouping activities 14
Passive activities defined 12
Recharacterization of passive
income 15
Rental activities 13
Reporting requirements 15
Trade or business activities 13
Penalties 6
Failure to furnish information
timely 6
Late filing 6
Trust fund recovery 6
Period covered 5
Portfolio income 14, 31
Private delivery services 5
Publicly traded partnerships 4,
12, 19
R
Recapture:
Investment credit 44
Low-income housing credit 44
Mining exploration costs 33

-54-

S
Sale of partnership interests 12
Sale of small business stock:
Exclusion 33
Rollover 33
Schedule:
B 24
K 27, 30
K-1 27, 30
L 48
M-1 49
M-2 49
M-3 49
Section 108(i) 18, 33, 37, 45
Section 179 expense
deduction 34
Recapture 44
Section 481(a) adjustment 7
Section 59(e) expenditures 11,
19, 20, 35
Self-charged interest 14
Self-employment 37
Signatures:
General partner or LLC
member manager 5
Paid preparer 6
Special allocations 30
Substitute forms 27
Syndication costs 20

T
Tax-exempt income 43
Tax shelter:
Registration 25
Termination of partnership 4
Travel and entertainment 23, 49
U
Uniform capitalization rules 19
Unrealized receivables and
inventory:
Sale of partnership
interests 12
Unrecaptured section 1250
gain 32
Unrelated business taxable
income 45
W
When to file 5
Where to file 5
Who must file 4