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 the Tax Equity and Fiscal Responsibility Act (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).

Partnership

A partnership is the relationship between two or more persons who join to carry on a trade or business, with each person contributing money, property, labor, or skill and each expecting to share in the profits and losses of the business whether or not a formal partnership agreement is made.

The term “partnership” includes a limited partnership, syndicate, group, pool, joint venture, or other unincorporated organization, through or by which any business, financial operation, or venture is carried on, that isn't, within the meaning of regulations under section 7701, a corporation, trust, estate, or sole proprietorship.

A joint undertaking merely to share expenses isn't a partnership. Mere co-ownership of property that is maintained and leased or rented isn't a partnership. However, if the co-owners provide services to the tenants, a partnership exists.

Exception—qualified joint venture (QJV).

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 QJV instead of a partnership. By making the election, you won't 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 QJV 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 (because 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 (LLC).

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 (Form 1040), Profit or Loss From Business; or Schedule F (Form 1040), Profit or Loss From Farming. On each line of your separate Schedule C or F (Form 1040), you must enter your share of the applicable income, deduction, or loss. Each of you must also file a separate Schedule SE (Form 1040), Self-Employment Tax, 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 (Form 1040), Supplemental Income and Loss. Rental real estate income isn’t generally included in net earnings from self-employment subject to self-employment tax and is generally subject to the passive loss limitation rules. Electing QJV status doesn't alter the application of the self-employment tax or the passive loss limitation rules.

To make the QJV election for 2023, jointly file the 2023 Form 1040 or 1040-SR 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 wage base limitation.

Once made, the election can't 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 QJVs, go to IRS.gov/QJV.

Foreign Partnership

A foreign partnership is a partnership that isn't created or organized in the United States or under the law of the United States or of any state. In certain instances, a partnership created or organized in the United States can be treated as a foreign partnership. See, for example, Regulations section 1.958-1(d)(1).

In addition, if a domestic section 721(c) partnership is formed after January 17, 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. Persons With Respect to Certain Foreign Partnerships, with respect to the partnership. See Form 8865 and its instructions. See also Regulations section 1.721(c)-6(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 LLCs that are classified as partnerships, may be treated as limited partners for certain purposes.

However, whether a partner qualifies as a limited partner for purposes of self-employment tax depends on whether the partner meets the definition of a limited partner under section 1402(a)(13). See Self-Employment, later.

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 (LLP)

An 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 (LLC)

An 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.

A domestic LLC with at least two members that doesn't 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), (a) a related foreign person with respect to the U.S. transferor is a direct or indirect partner in the partnership; and (b) the U.S. transferor and related persons own 80% or more of the interests in partnership capital, profits, deductions, or losses. See Regulations section 1.721(c)-1(b)(14).

U.S. Transferor

A U.S. transferor is a U.S. person other than a domestic partnership. See Regulations section 1.721(c)-1(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 Regulations section 1.721(c)-2(d) (partnership look-through rule). See Regulations section 1.721(c)-1(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 Regulations section 1.721(c)-1(b)(7).

Gain Deferral Method

The gain deferral method is the method described in Regulations section 1.721(c)-3(b) applied to avoid the immediate recognition of gain on a contribution of section 721(c) property to a section 721(c) partnership under Regulations section 1.721(c)-2(b).

Domestic Partnerships

Except as provided below, every domestic partnership must file Form 1065, unless it neither receives income nor incurs any expenditures treated as deductions or credits for federal income tax purposes.

Entities formed as LLCs that are classified as partnerships for federal income tax purposes 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 Form 1065, Schedule K, line 6a, and each member's distributive share in box 6a of Schedule K-1 (Form 1065). 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 must also 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 won't 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 (PTPs) treated as corporations under section 7704 must file Form 1120.

Foreign Partnerships

Generally, a foreign partnership that has gross income that is (or is treated as) effectively connected with the conduct of a trade or business within the United States (effectively connected income) or has gross income derived from sources in the United States (U.S. source income) 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 must generally report all of its foreign and U.S. partnership items.

A foreign partnership with U.S. source income isn't required to file Form 1065 if it qualifies for either of the following two exceptions.

Exclusions From Electronic Filing Requirement

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.

All written requests for waivers should be mailed to:

Internal Revenue Service
Ogden Submission Processing Center
Attn: Form 1065 e-file Waiver Request, Stop 1057
Mail Stop 1057
Ogden, UT 84201

Use the following address if using an overnight delivery service.

Internal Revenue Service
Ogden Submission Processing Center
Attn: Form 1065 e-file Waiver Request
1973 N. Rulon White Blvd.
Ogden, UT 84404

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

Contact the e-Help Desk at 866-255-0654 for questions regarding the waiver procedures or process. For more information, go to Guidance on Waivers for Partnerships Unable to Meet e-file Requirements.

Religious.

If using the technology required to file electronically conflicts with the religious beliefs of the partners, the partnership is exempt from the requirement and may file using paper forms. Enter “Religious Exemption” at the top of page 1 of Form 1065 filed in paper form. Also, most filers claiming the religious exemption who file information returns subject to the general electronic filing requirements prescribed by Regulations section 301.6011-2 (for example, Forms 1099 and Forms W-2) have the option to notify the IRS that they qualify for a religious exemption in advance of filing returns and other documents. Filers are encouraged to notify the IRS in advance that they're claiming a religious exemption by filing Form 8508, Application for a Waiver from Electronic Filing of Information Returns, in accordance with the form's instructions. For additional information, see Notice 2024-18.

For More Information on Filing Electronically

Private Delivery Services (PDSs)

Partnerships can use certain PDSs 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.

For the IRS mailing address to use if you're 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 Service to mail any item to an IRS P.O. box address.

Extension of Time To File

File Form 7004, Application for Automatic Extension of Time To File Certain Business Income Tax, Information, and Other Returns, 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 2023 Form 1065 is an information return for calendar year 2023 and fiscal years that begin in 2023 and end in 2024. 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 and Schedules K-2 and K-3, if applicable.

The 2023 Form 1065 may also be used if:

However, the partnership must show its 2024 tax year on the 2023 Form 1065 and incorporate any tax law changes that are effective for tax years beginning after 2023.

Any Partner or LLC Member

Form 1065 isn't considered to be a return unless it's 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. Only paid preparers with a valid preparer tax identification number (PTIN) should complete this section.

Generally, anyone who is paid to prepare the partnership return must do the following.

Paid Preparer Authorization

If the partnership wants to allow the paid preparer to discuss its 2023 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:

The partnership isn't 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 can't be revoked. However, the authorization will automatically end no later than the due date (excluding extensions) for filing the 2024 return.

Late Filing of Return

A penalty is assessed against the partnership if it's required to file a partnership return and it (a) fails to file the return by the due date, including extensions; or (b) files a return that fails to show all the information required, unless such failure is due to reasonable cause. The penalty is $235 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 IRS will determine if the explanation meets reasonable-cause criteria. Don’t attach an explanation when filing the return.

Failure To Furnish Information Timely

For each failure to furnish Schedule K-1 (and K-3, if applicable) to a partner when due and each failure to include on Schedule K-1 (and K-3, if applicable) all the information required to be shown (or the inclusion of incorrect information), a $310 penalty may be imposed for each Schedule K-1 (and K-3, if applicable) for which a failure occurs. For all such failures during a calendar year, the maximum penalty for entities with gross receipts over $5,000,000 is $3,783,000; and $1,261,000 for entities with gross receipts at or below $5,000,000. If the requirement to report correct information is intentionally disregarded, each $310 penalty is increased to $630 or, if greater, 10% of the aggregate amount of items required to be reported. There's no limit to the amount of the penalty in the case of intentional disregard.

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 aren't paid. These taxes are generally reported on:

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; Pub. 51 (Circular A), Agricultural Employer's Tax Guide; or Pub. 15-T, Federal Income Tax Withholding Methods, for more details, including the definition of a responsible person.

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.

What if You Can’t Pay Now?

Go to IRS.gov/Payments for more information about your options.

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 sections 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, line 20c, code U. See the instructions for Schedule K, line 20. 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.

Electing Out of the Centralized Partnership Audit Regime

A partnership can elect out of the centralized partnership audit regime for a tax year if the partnership is an eligible partnership that year. See Question 31 under Schedule B, later.

Activities That Aren’t Passive Activities

The following aren't passive activities.

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:

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 distributive share of the partnership's ordinary business income (loss) is reported in box 1 of Schedule K-1, each partner's distributive 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.

In addition, a guaranteed payment described in section 707(c) is never income from a rental activity.

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 (REIT), a regulated investment company (RIC), a REMIC, a common trust fund, a CFC, a QEF, 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, doesn't include) the following types of income.

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.

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:

Recharacterization of Passive Income

Under Temporary Regulations section 1.469-2T(f) and Regulations section 1.469-2(f), net passive income from certain passive activities must be treated as nonpassive income. Net passive income is the excess of an activity's passive activity gross income over its passive activity deductions (current year deductions and prior year unallowed losses).

Any net passive income recharacterized as nonpassive income is treated as investment income for purposes of figuring investment interest expense limitations if it's 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.

The amount of income from the activities in the first three paragraphs, below, 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 won't have information regarding all of a partner's activities, it must identify all partnership activities meeting the definitions underCertain nondepreciable rental property activities and Passive equity-financed lending activities below as activities that may be subject to recharacterization.

Income from the following six sources is subject to recharacterization.

Passive Activity Reporting Requirements

To allow partners to correctly apply the passive activity loss and credit limitation rules, the partnership must do the following.

Net Investment Income Tax Reporting Requirements

The information described in this section should be given directly to the partner and shouldn't be reported by the partnership to the IRS.

To allow partners to correctly figure the net investment income tax (NIIT) 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 NIIT 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’s 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.

Name and Address

Enter 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 U.S. territories, enter the information on the line for “City or town, state or province, country, and ZIP or foreign postal code” in the following order: city, province or state, and the foreign country. Follow the foreign country's practice in placing the postal code in the address. Don't 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.”

If the partnership changes its mailing address or the responsible party after filing its return, it can notify the IRS by filing Form 8822-B, Change of Address or Responsible Party—Business.

Partnerships With Adjustments in the Current Year That Didn’t Result in an IU

If a partnership has an adjustment from a BBA audit which doesn't result in an IU, the partnership shouldn't take the adjustment into account until the adjustment year (see Definitions, earlier). With its Form 1065 for the adjustment year, the partnership should provide a statement describing the adjustments, including the line numbers to which the adjustments relate, and incorporate those adjustments into its adjustment year return. If there's a reallocation adjustment being reported on the adjustment year return, ensure the statement identifies the partner receiving the reallocation adjustment. If there's an adjustment to a separately stated item or to a credit, the partnership must adjust that item or that credit in the adjustment year. See Examples 1 and 2 in Regulations 301.6225-3.

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 these instructions.

For example, if, as its principal business activity, the partnership (a) purchases raw materials, (b) subcontracts out for labor to make a finished product from the raw materials, and (c) retains title to the goods, the partnership is considered to be a manufacturer and must enter “Manufacturer” in item A and enter in item C one of the codes (311110 through 339900) listed under “Manufacturing” on the list, Codes for Principal Business Activity and Principal Product or Service, near the end of these instructions. For nonstore retailers, select the Principal Business Activity (PBA) code by the primary product that your establishment sells. For example, establishments primarily selling prescription and non-prescription drugs, select PBA code 456110 Pharmacies & Drug Retailers.

Item D. Employer Identification Number (EIN)

Show the correct EIN in item D. If the partnership doesn't have an EIN, it must apply for one in one of the following ways.

An LLC must determine which type of federal tax entity it will be (partnership, corporation, or disregarded entity (DE)) before applying for an EIN (see Form 8832 for details). If the partnership hasn't 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.

Item F. Total Assets

You aren't required to complete item F if the answer to Schedule B, question 4, is “Yes.”

If you're 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 zero.

Item J. Schedule C and Schedule M-3

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.

A partnership filing Form 1065 that isn't required to file Schedule M-3 may voluntarily file Schedule M-3 instead of Schedule M-1.

Any partnership that files Schedule M-3 must also complete and file Schedule C (Form 1065), Additional Information for Schedule M-3 Filers. See Eased requirements next.

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. If a cost offset method under section 451(b) or (c) is used, the resulting gross income is reported on line 1a.

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.

In general, advance payments are reported in the year of receipt. For exceptions to this general rule for partnerships that use the accrual method of accounting, see the following.

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

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.

Don't 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 Form 8825, line 20a, if the amount is from a rental real estate activity.

Ordinary income (loss) from another partnership that is a PTP isn't reported on this line. Instead, report the amount separately on Schedule K, line 11, and in box 11 of Schedule K-1 using code ZZ.

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's 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). Attach Schedule F (Form 1040) to Form 1065. Don't 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), don't include any section 179 expense deduction; this amount must be separately stated.

Also report the partnership's fishing income on this line.

For a special rule concerning the method of accounting for a farming partnership with a corporate partner and for other tax information on farms, see Pub. 225, Farmer's Tax Guide.

Because the partner, and not the 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 shouldn't 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

Include only ordinary gains or losses from the sale, exchange, or involuntary conversion of assets used in a trade or business activity. Ordinary gains or losses from the sale, exchange, or involuntary conversion of rental activity assets are reported separately on Form 8825, line 19, or Schedule K, line 3c, and in box 3 of Schedule K-1, generally as a part of the net income (loss) from the rental activity.

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

Partnerships shouldn't 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 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.

Don't 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.

Don't report portfolio or rental activity income (loss) on this line.

Limitations on Deductions

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).

Don't 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.

Don't 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.

Don't 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 reported as guaranteed payments on the applicable line of Schedule K, line 4b, and in box 4b of Schedule K-1.

Don't include distributive shares of partnership profits.

Report the guaranteed payments to the appropriate partners using the applicable box 4 of Schedule K-1.

Line 11. Repairs and Maintenance

Enter the cost of repairs and maintenance not claimed elsewhere on the return, such as labor and supplies, that aren't payments for improvements to the partnership’s property. Amounts are paid for improvements if they’re for betterments to the property or for restorations of the property (such as the replacements of major components or substantial structural parts), or if they adapt the property to a new or different use. Improvements must be capitalized. See Regulations section 1.263(a)-3.

The partnership can deduct repair and maintenance expenses only to the extent they relate to a trade or business activity. 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.

Line 12. Bad Debts

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

Cash method partnerships can't take a bad debt deduction unless the amount was previously included in income.

Line 13. Rent

Enter rent paid on business property used in a trade or business activity. Don't 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 Form 4562, Part V. 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:

See Pub. 463, Travel, Gift, and Car Expenses, 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. Foreign taxes are included on line 14 only if they are taxes not creditable but deductible under sections 901 and 903. See Schedule K-2, Part II, Section 2, line 45, column (g).

Don't deduct the following taxes on line 14.

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

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

Don't reduce your deduction for social security and Medicare taxes by the nonrefundable and refundable portions of the FFCRA and ARP credits for qualified sick and family leave wages claimed on the partnership's employment tax returns. Instead, report the credits as income on line 7.

Line 15. Interest

Include only interest incurred in the trade or business activities of the partnership that isn't claimed elsewhere on the return.

Don't include interest expense on the following.

Special rules apply to the following.

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.

Don't include any section 179 expense deduction on this line. This amount isn't deducted by the partnership. Instead, it's passed through to the partners in box 12 of Schedule K-1. Generally, the basis of a partnership's section 179 property must be reduced to reflect the amount of section 179 expense elected by the partnership. This reduction must be made in the basis of partnership property even if the limitations of section 179(b) and Regulations section 1.179-2 prevent a partner from deducting all or a portion of the amount of the section 179 expense allocated by the partnership.

Line 17. Depletion

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

Don't deduct depletion for oil and gas properties. Each partner figures depletion on oil and gas properties. See the instructions for Schedule K-1, box 20, Depletion information oil and gas (code T), for the information on oil and gas depletion that must be supplied to the partners by the partnership.

Line 18. Retirement Plans, etc.

Don't 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 in box 13 of Schedule K-1, using code R, and are deducted by the partners on their own returns.

Enter the deductible contributions not claimed elsewhere on the return made by the partnership for its common-law employees under a qualified pension, profit-sharing, annuity, or SEP or SIMPLE IRA plan, and under any other deferred compensation plan.

If the partnership contributes to an 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 Code and whether or not a deduction is claimed for the current year, must generally file the applicable form listed below.

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.

Don't 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 the applicable line of Schedule K, line 4, and the applicable line of box 4 of Schedule K-1, of each partner on whose behalf the amounts were paid. Also report these amounts on Schedule K, line 13e, and in box 13 of Schedule K-1, using code M, of each partner on whose behalf the amounts were paid.

Line 20. Energy Efficient Commercial Building Deduction

Deduction for certain energy efficient commercial building property. See the Instructions for Form 7205 and section 179D for more information. Complete and attach Form 7205 if claiming this deduction.

Line 21. Other Deductions

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.

Also see Special Rules, later.

Don't deduct the following on line 21.

Tax and Payment

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

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.

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. Amounts related to forgiven Paycheck Protection Program (PPP) loans are disregarded for purposes of this question. The determination of the existence and amount of cancellation of debt income is determined 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 determined 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

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

If the “Yes” box is checked for this question, do the following.

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.

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, 10c, and 10d

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

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 that 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 DE. The distribution of its ownership interest in a DE is considered a distribution of the underlying property.

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 DE 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).

Question 13

Enter the number of Forms 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 an FDE or FB directly (or, in certain cases, indirectly or constructively) to satisfy the reporting requirements of sections 6011, 6012, 6031, and 6038, and the related regulations. See Form 8858 (and its separate instructions) for information on completing the form and the information that the partnership may need to provide to certain partners for them to complete their Forms 8858 relating to that FDE or FB.

Question 14

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

If the partnership had gross income effectively connected with a trade or business in the United States and foreign partners, it may be required to withhold tax under section 1446(a) 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 2023 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.

Question 20

For tax years beginning after 2015, domestic partnerships that are formed or availed of to hold specified foreign financial assets (“specified domestic entities”) must file Form 8938, Statement of Specified Foreign Financial Assets, 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.

A domestic partnership required to file Form 8938 with its Form 1065 for the tax year should check “Yes” to this question.

Question 22

Section 267A disallows a deduction for certain interest or royalty paid or accrued pursuant to a hybrid arrangement, to the extent that, under the foreign tax law, there isn't a corresponding income inclusion (including long-term deferral). In the entry line for question 22, report the total amount of interest and royalty paid or accrued by the partnership for which the partnership knows, or has reason to know, that one or more partners' distributive share of deductions is disallowed under section 267A. For additional information, see FAQs at IRS.gov/businesses/partnerships/FAQs-for-Form-1065-Schedule-B-Other-Information-Question-22.

Question 23

The limitation on BIE applies to every taxpayer with a trade or business, unless the taxpayer meets certain specified exceptions. A partnership may elect out of the limitation for certain businesses otherwise subject to the business interest expense limitation.

Certain real property trades or businesses and farming businesses qualify to make an election not to limit BIE. This is an irrevocable election. If you make this election, you're required to use the alternative depreciation system to depreciate certain property. Also, you aren’t 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 has an election in effect to exclude a real property trade or business or a farming business from section 163(j). For more information, see section 163(j) and the Instructions for Form 8990.

Question 24

Generally, a taxpayer with a trade or business must file Form 8990 to claim a deduction for business interest. BIE is interest that is properly allocable to a non-excepted trade or business or that is floor plan financing 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 (EBIE) allocated from the partnership. A pass-through entity allocating excess taxable income or excess business interest income to its owners (that is, a pass-through entity that isn't a small business taxpayer) must file Form 8990, regardless of whether it has any interest expense.

Question 25

To be certified as a QOF, the partnership must file Form 1065 and attach Form 8996, even if the partnership had no income or expenses to report. If the partnership is attaching Form 8996, check the "Yes" box for question 25. On the line following the dollar sign, enter the amount from Form 8996, Part III, line 15.

Question 26

Provide the number of foreign partners subject to section 864(c)(8) as a result of transferring all or a portion of an interest in the partnership if the partnership is engaged in a U.S. trade or business. Section 864(c)(8) provides that gain or loss of a foreign transferor from the transfer of a partnership interest is treated as effectively connected with the conduct of a trade or business within the United States to the extent that the transferor would have had effectively connected gain or loss if the partnership sold all of its assets at FMV on the date of transfer. For purposes of section 864(c)(8), a transfer of a partnership interest means a sale, exchange, or other disposition, and includes a distribution from a partnership to a partner to the extent that gain or loss is recognized on the distribution, as well as a transfer treated as a sale or exchange under section 707(a)(2)(B). Section 864(c)(8) applies to foreign partners that directly or indirectly transfer an interest in a partnership that is engaged in a U.S. trade or business. The partnership should include in its response any transfer for which it has received notification or otherwise knows about. If the partnership is a PTP as defined in section 469(k)(2) and has properly answered “Yes” to question 5 on Form 1065, Schedule B, then it's not required to answer the question.

If a partnership had any foreign partners subject to section 864(c)(8), the partnership must complete Schedule K-3 (Form 1065), Part XIII, for each foreign partner subject to section 864(c)(8) on a transfer or distribution. The partnership may also be required to withhold under section 1446(f)(4) on future distributions that it makes to the transferee partner if that partner failed to withhold on the transfer under section 1446(f)(1). See Pub. 515, Withholding of Tax on Nonresident Aliens and Foreign Entities, for more information.

Question 27

Answer "Yes" if at any time during the tax year there were transfers between the partnership and its partners subject to the disclosure requirements of Regulations section 1.707-8. For certain transfers that are presumed to be sales, the partnership or the partners must comply with the disclosure requirements in Regulations section 1.707-8. Generally, disclosure is required when:

The disclosure must be made on the transferor partner's return using Form 8275, Disclosure Statement, or on an attached statement providing the same information. When more than one partner transfers property to a partnership under a plan, the disclosure may be made by the partnership rather than by each partner.

Question 28

Section 7874 applies in certain cases in which a foreign corporation directly or indirectly acquires substantially all of the properties constituting a trade or business of a domestic partnership. Check “Yes” if, since December 22, 2017, a foreign corporation directly or indirectly acquired substantially all of the properties constituting a trade or business of your partnership (and you're a domestic partnership), and the ownership with respect to the acquisition was greater than 50% (by vote or value). If “Yes” is checked, list the ownership percentage by both vote and value.

The information must be reported even if you conclude that section 7874 doesn't apply.

Section 7874 generally applies when the following three requirements are met.

When section 7874 applies, the tax treatment of the acquisition depends on the ownership percentage. If the ownership is at least 80%, the foreign acquiring corporation is treated as a domestic corporation for all purposes of the Code. See section 7874(b). If the ownership is at least 60% but less than 80%, the foreign acquiring corporation is considered a foreign corporation but the domestic partnership and certain other persons are subject to special rules that reduce the tax benefits of the acquisition. See section 7874(a)(1).

The Tax Cuts and Jobs Act of 2017 provides additional special rules for certain cases in which section 7874 applies. See sections 59A(d)(4) and 965(l).

Question 29

Under section 4501, the partnership may be required to file Form 7208 and pay the stock repurchase excise tax if, during the partnership's tax year, (a) the partnership is a specified affiliate of an applicable foreign corporation, or (b) the partnership is an expatriated entity with respect to a covered surrogate foreign corporation. Don't complete a Form 7208 until the date specified in upcoming regulations under section 4501. For additional information, see section 4501 and Announcement 2023-18.

Question 30

Digital assets are any digital representations of value that are recorded on a cryptographically secured distributed ledger or any similar technology. For example, digital assets include non-fungible tokens (NFTs) and virtual currencies, such as cryptocurrencies and stablecoins. If a particular asset has the characteristics of a digital asset, it will be treated as a digital asset for federal income tax purposes.

Check the “Yes” box if at any time during 2023, the partnership (a) received (as a reward, award, or payment for property or services); or (b) sold, exchanged, or otherwise disposed of a digital asset (or any financial interest in any digital asset).

For example, check “Yes” if at any time during 2023 the partnership:

The partnership has a financial interest in a digital asset if it’s the owner of record of a digital asset, or has an ownership stake in an account that holds one or more digital assets, including the rights and obligations to acquire a financial interest, or it owns a wallet that holds digital assets.

The following actions or transactions in 2023, alone, generally don’t require the partnership to check “Yes.”

Don’t leave the question unanswered. You must answer “Yes” or “No” by checking the appropriate box. For more information, go to IRS.gov/VirtualCurrencyFAQs.

Question 31

Answer "Yes" if an eligible partnership chooses to elect out of the centralized partnership audit regime for the tax year and enter the total from Schedule B-2, Part III, line 3. If making the election, attach a completed Schedule B-2 to Form 1065. An election out of the centralized partnership audit regime can only be made on a timely filed return (including extensions). A partnership is an eligible partnership for the tax year if it has 100 or fewer eligible partners in that year. Eligible partners are individuals, C corporations, S corporations, foreign entities that would be C corporations if they were domestic entities, and estates of deceased partners. 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 isn't eligible to elect out of the centralized partnership audit regime if it's required to issue a Schedule K-1 to any of the following partners.

Designated Partnership Representative (PR)

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 PR who shall have the sole authority to act on behalf of the partnership. On Form 1065, provide the name, address, and phone number of the PR. If an entity is designated as the PR, the partnership must also appoint an individual to act on the entity's behalf (a DI). To be a DI, the appointed person must also have a substantial presence in the United States.

See the Instructions for Form 8979 for information concerning how and when Form 8979 can be submitted to the IRS.

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.

Substitute Forms

The partnership doesn't need IRS approval to use a substitute Schedule K-1 if it's an exact copy of the IRS schedule. The boxes must use the same numbers and titles and must be in the same order and format as on the comparable IRS Schedule K-1. The substitute schedule must include the OMB number. The partnership must provide each partner with the Partner's Instructions for Schedule K-1 (Form 1065) or other prepared specific instructions for each item reported on the partner's Schedule K-1.

The partnership must request IRS approval to use other substitute Schedules K-1. To request approval, write to:

Internal Revenue Service
Attention: Substitute Forms Program
SE:W:CAR:MP:P:TP:TP
5000 Ellin Road, Mail Stop C6-110
Lanham, MD 20706
substituteforms@irs.gov

Each partner's information must be on a separate sheet of paper. Therefore, separate all continuously printed substitutes before you file them with the IRS.

The partnership may be subject to a penalty if it files Schedules K-1 that don't 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, and 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 proration 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.

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.

General Information

Generally, the partnership is required to prepare and give a Schedule K-1 to each person who was a partner in the partnership at any time during the year. Schedule K-1 must be provided to each partner on or before the day on which the partnership return is required to be filed.

However, a foreign partnership that has one or more U.S. partners must file Form 1065. But if it 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).

Generally, any person who holds an interest in a partnership as a nominee for another person must furnish to the partnership the name, address, etc., of the other person.

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

Items E and F

For an individual partner, enter the partner's SSN or individual taxpayer identification number (ITIN) rather than the TIN of the DE partner. For all other partners, enter the partner's EIN.

However, if a partner is an IRA, enter the identifying number of the custodian of the IRA. Don't enter the identification number of the person for whom the IRA is maintained. If the partnership reports UBTI to such IRA partner, include the IRA partner's unique EIN in box 20, code AR, along with the amount of such income.

Don’t include dashes when entering the EIN in box 20.

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 the partner in the partnership is an entity, such as single-member LLC, that is a DE for federal income tax purposes, enter the TIN of the beneficial owner of the DE partner in item E rather than the TIN of the DE partner. The beneficial owner is the taxpayer who owns the DE partner. In item F, enter the name and address of the beneficial owner of the DE partner. See the instructions for item H2 below.

Item G

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

Item H1. 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 H2. Disregarded Entity (DE)

If the partner is a DE, check the box and provide the name and TIN of the DE partner. The partnership should make reasonable attempts to obtain the DE’s TIN. If after making reasonable attempts to obtain the DE’s TIN such TIN is unavailable or unknown to the partnership, the partnership may report the DE’s TIN as unknown. If the DE doesn't have a TIN, enter “None” in the space for the DE’s TIN. For more information about DE reporting, go to IRS.gov/forms-pubs/clarifications-for-disregarded-entity-reporting-and-section-743b-reporting.

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 DE, an exempt organization, a foreign government, or a nominee (custodian). If the partner is an LLC and has elected to be treated as other than a DE under Regulations section 301.7701-3 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 any legal owner of the partnership is a DE for federal income tax purposes, report the beneficial owner’s entity type in item I1. 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. If the partner is a nominee that acts on behalf of more than one person, use code M—Multiple.

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

On each line, enter the partner's percentage share of the partnership's profit, loss, and capital as of the beginning and end of the partnership's tax year, as determined under the partnership agreement. If a partner's interest commences after the beginning of the partnership's tax year, enter in the Beginning column the percentages that existed for the partner immediately after admission. If a partner's interest terminates before the end of the partnership's tax year, enter in the Ending column the percentages that existed immediately before termination.

On the line for Capital, enter the percentage share of the capital that the partner would receive if the partnership was liquidated by the distribution of undivided interests in partnership assets and liabilities. If the partner's capital account is negative or zero, express the percentage ownership of capital as zero.

The partner's percentage share of each category must be expressed as a percentage. The percentage must not be negative. The total percentage interest in each category must total 100% for all partners. To determine whether the total beginning and ending percentages are 100%, don't 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.

If there is a decrease in the partner's share of profits, losses, or capital, indicate whether it was due to a sale or an exchange.

Item K1. 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. Don't include partnership-level qualified nonrecourse financing (defined below) on the line for nonrecourse liabilities.

If the partner terminated their 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 don't 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 property), give each partner their 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 don't include related parties (unless the nonrecourse financing is commercially reasonable and on substantially the same terms as loans involving unrelated persons), the seller of the property, or a person who receives a fee for the partnership's investment in the real property. See section 465(b)(6) for more information on qualified nonrecourse financing.

The partner as well as the partnership must meet the qualified nonrecourse rules. Therefore, the partnership must enter on an attached statement any other information the partner needs to determine if the qualified nonrecourse rules are also met at the partner level.

Item K2

If a partnership (upper-tier) owns a direct interest in other partnerships (lower-tier), then Regulations section 1.752-4(a) requires that the upper-tier partnership allocate to its partners its share of the lower-tier partnership's liabilities (except for any liability of the lower-tier partnership that is owed to the upper-tier partnership). Allocate those lower-tier partnership liabilities to each partner based on whether that liability is a recourse or nonrecourse liability to the partner under the regulations under section 752. The characterization of a liability may change as it moves from a lower-tier partnership to an upper-tier partnership. If Schedule K-1 (Form 1065) includes lower-tier partnership liabilities, check the box in item K2. If the total liabilities on all Schedules K-1 (Form 1065) don't equal the total liabilities on Schedule L, attach a reconciliation.

Item K3. Payment Obligations Including Guarantees and Deficit Restoration Obligations (DROs)

Check the box in item K3 if the partner or a related person has certain payment obligations, including guarantees or DROs, with respect to any liability in item K1. See the instructions for line 20c, code X, for additional information. For purposes of item K3, a payment obligation is defined as an obligation under Regulations section 1.752-2(b)(1) that is recognized under Regulations sections 1.752-2(b)(3)(i)(A) and (B) (such as a recognized guarantee or an obligation to restore a deficit capital account upon liquidation) and a related person is defined as a related person as defined in Regulations section 1.752-4(b).

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're required to complete this item, also see the instructions for Schedule M-2, later.

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 property's built-in gain is the amount by which the FMV 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 FMV 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 FMV 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 Schedule K, line 19b, for distributions subject to section 737 (code B). If the partnership distributes contributed property with a built-in gain or loss to any partner other than the partner that contributed the property and the date of the distribution is within 7 years of the date the property was contributed to the partnership, it will need this information for the attached statement required by the instructions for line 20c of Schedule K for the precontribution gain (loss) (code W).

Item N. Partner's Share of Net Unrecognized Section 704(c) Gain or (Loss)

For item N, the partnership should report the partner's share of net unrecognized section 704(c) gains or losses, both at the beginning and at the end of the partnership's tax year. Solely for purposes of completing item N, the section 704(c) gain or loss is the partner's share of the net (net means aggregate or sum) of all unrecognized section 704(c) gain or loss in partnership property, including section 704(c) gain or loss arising from revaluations of partnership property. See Notice 2019-66 for more information.

Special Allocations

An item is specially allocated if it's 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 in box 11 of Schedule K-1. 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.

Income (Loss)

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

Deductions

Self-Employment

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

Credits

International Transactions

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.

Don't include as a tax preference item any qualified expenditures to which an election under section 59(e) may apply. Instead, report these expenditures on Schedule K, line 13d(2). Because these expenditures are subject to an election by each partner, the partnership can't 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.

Other Information