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US Internal Revenue Service: I1065 - 1996
US Internal Revenue Service: I1065 - 1996
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unpaid interest are in Regulations section Line 19—Employee Benefit Programs Partnerships are not allowed to deduct
1.267(b)-1(b). amounts paid or incurred for membership
Enter the partnership’s contributions to dues in any club organized for business,
Line 16—Depreciation employee benefit programs not claimed pleasure, recreation, or other social purpose.
On line 16a, enter only the depreciation elsewhere on the return (e.g., insurance, This includes country clubs, golf and athletic
claimed on assets used in a trade or business health, and welfare programs) that are not clubs, airline and hotel clubs, and clubs
activity. Enter on line 16b the depreciation part of a pension, profit-sharing, etc., plan operated to provide meals under conditions
reported elsewhere on the return (e.g., on included on line 18. favorable to business discussion. But it does
Schedule A) that is attributable to assets Do not include amounts paid during the tax not include civic or public service
used in trade or business activities. See the year for insurance that constitutes medical organizations, professional organizations
Instructions for Form 4562 or Pub. 946, How care for a partner, a partner’s spouse, or a (such as bar and medical associations),
To Depreciate Property, to figure the amount partner’s dependents. Instead, include these business leagues, trade associations,
of depreciation to enter on this line. amounts on line 10 as guaranteed payments chambers of commerce, boards of trade, and
For depreciation, you must complete and and on Schedule K, line 5, and Schedule K-1, real estate boards, unless a principal purpose
attach Form 4562 only if the partnership line 5, of each partner on whose behalf the of the organization is to entertain, or provide
placed property in service during 1996 or amounts were paid. Also report these entertainment facilities for, members or their
claims depreciation on any car or other listed amounts on Schedule K, line 11, and guests.
property. Schedule K-1, line 11, of each partner on In addition, no deduction is allowed for
whose behalf the amounts were paid. travel expenses paid or incurred for a
Do not include any section 179 expense
deduction on this line. This amount is not Line 20—Other Deductions partner’s or employee’s spouse or dependent
deducted by the partnership. Instead, it is or other individual accompanying a partner or
Attach your own schedule, listing by type and employee of the partnership, unless that
passed through to the partners on line 9 of amount, all allowable deductions related to a
Schedule K-1. spouse, dependent, or other individual is an
trade or business activity for which there is employee of the partnership, and that
Line 17—Depletion no separate line on page 1 of Form 1065. person’s travel is for a bona fide business
Enter the total on this line. Do not include purpose and would otherwise be deductible
If the partnership claims a deduction for items that must be reported separately on
timber depletion, complete and attach Form by that person.
Schedules K and K-1.
T, Forest Activities Schedules. Generally, a partnership can deduct all
A partnership is not allowed the deduction other ordinary and necessary travel and
Caution: Do not deduct depletion for oil and for net operating losses.
gas properties. Each partner figures depletion entertainment expenses paid or incurred in its
on oil and gas properties. See the instructions Do not include qualified expenditures to trade or business. However, it cannot deduct
for Schedule K-1, line 25, item 3, for the which an election under section 59(e) may an expense paid or incurred for a facility
information on oil and gas depletion that must apply. (such as a yacht or hunting lodge) that is
be supplied to the partners by the Include on line 20 the deduction taken for used for an activity that is usually considered
partnership. amortization. You must complete and attach entertainment, amusement, or recreation.
Form 4562 if the partnership is claiming Note: The partnership may be able to deduct
Line 18—Retirement Plans, etc.
amortization of costs that begins during its otherwise nondeductible meals, travel, and
Do not deduct payments for partners to 1996 tax year. The instructions for Form 4562 entertainment expenses if the amounts are
retirement or deferred compensation plans provide code section references for specific treated as compensation and reported on
including IRAs, Keoghs, and simplified amortizable property. See Pub. 535 for more Form W-2 for an employee or on Form
employee pension (SEP) plans on this line. information on amortization. 1099-MISC for an independent contractor.
These amounts are reported on Schedule Do not deduct amounts paid or incurred to See Pub. 463 for more details.
K-1, line 11, and are deducted by the participate or intervene in any political
partners on their own returns. campaign on behalf of a candidate for public Schedule A—Cost of Goods
Enter the deductible contributions not office, or to influence the general public Sold
claimed elsewhere on the return made by the regarding legislative matters, elections, or
partnership for its common-law employees referendums. In addition, partnerships Inventories are required at the beginning and
under a qualified pension, profit-sharing, generally cannot deduct expenses paid or end of each tax year if the production,
annuity, or SEP plan, and under any other incurred to influence Federal or state purchase, or sale of merchandise is an
deferred compensation plan. legislation, or to influence the actions or income-producing factor. See Regulations
positions of certain Federal executive branch section 1.471-1.
If the partnership contributes to an
individual retirement arrangement (IRA) for officials. However, certain in-house lobbying Section 263A Uniform Capitalization
employees, include the contribution in expenditures that do not exceed $2,000 are Rules
salaries and wages on page 1, line 9, or deductible. See section 162(e) for more
details. The uniform capitalization rules of section
Schedule A, line 3, and not on line 18. 263A are discussed under Limitations on
Employers who maintain a pension, Do not deduct fines or penalties paid to a
Deductions on page 11. See those
profit-sharing, or other funded deferred government for violating any law.
instructions before completing Schedule A.
compensation plan (other than a SEP), A deduction is allowed for part of the cost
whether or not the plan is qualified under the of qualified clean-fuel vehicle property and Line 1—Inventory at Beginning of Year
Internal Revenue Code and whether or not a qualified clean-fuel vehicle refueling property. This figure should match the ending inventory
deduction is claimed for the current year, For more details, see section 179A. reported on the partnership’s 1995 Form
generally must file one of the following forms: Meals, travel, and entertainment.— 1065, Schedule A, line 7. If it is different,
● Form 5500, Annual Return/Report of Generally, the partnership can deduct only attach an explanation.
Employee Benefit Plan, for each plan with 50% of the amount otherwise allowable for Line 2—Purchases
100 or more participants. meals and entertainment expenses paid or
incurred in its trade or business. In addition, Reduce purchases by items withdrawn for
● Form 5500-C/R, Return/Report of personal use. The cost of these items should
Employee Benefit Plan, for each plan with meals must not be lavish or extravagant; a
bona fide business discussion must occur be shown on line 23 of Schedules K and K-1
fewer than 100 participants. as distributions to partners.
during, immediately before, or immediately
● Form 5500-EZ, Annual Return of after the meal; and a partner or employee of
One-Participant (Owners and Their Spouses)
Line 4—Additional Section 263A Costs
the partnership must be present at the meal.
Retirement Plan, for each plan that covers See Pub. 463 for exceptions. An entry is required on this line only for
only partners or partners and their spouses. partnerships that have elected a simplified
Additional limitations apply to deductions
There are penalties for not filing these method.
for gifts, skybox rentals, luxury water travel,
forms on time. convention expenses, and entertainment For partnerships that have elected the
tickets. simplified production method, additional
section 263A costs are generally those costs,
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other than interest, that were not capitalized meaning of Regulations section 1.471-2(c). section 1446) at any time during the tax year.
under the partnership’s method of accounting These goods may be valued at the current Otherwise, answer “No.”
immediately prior to the effective date of bona fide selling price minus the direct cost If the partnership had gross income
section 263A that are now required to be of disposition (but not less than scrap value) effectively connected with a trade or business
capitalized under section 263A. Interest is to if such a price can be established. in the United States and foreign partners, it
be accounted for separately. For new If this is the first year the last-in first-out may be required to withhold tax under section
partnerships, additional section 263A costs (LIFO) inventory method was either adopted 1446 on income allocable to foreign partners
are the costs, other than interest, that must or extended to inventory goods not previously (without regard to distributions) and file Forms
be capitalized under section 263A, but which valued under the LIFO method, attach Form 8804, 8805, and 8813.
the partnership would not have been required 970, Application To Use LIFO Inventory
to capitalize if it had existed before the Question 7
Method, or a statement with the information
effective date of section 263A. For more required by Form 970. Also check the box on Answer “Yes” to Question 7 if interests in the
details, see Regulations section 1.263A-2(b). line 9c. partnership are traded on an established
For partnerships that have elected the If the partnership has changed or extended securities market or are readily tradable on a
simplified resale method, additional section its inventory method to LIFO and has had to secondary market (or its substantial
263A costs are generally those costs incurred write up its opening inventory to cost in the equivalent).
with respect to the following categories: year of election, report the effect of this Question 8
(a) off-site storage or warehousing; write-up as income (line 7, page 1, Form
(b) purchasing; (c) handling, processing, 1065) proportionately over a 3-year period Organizers of certain tax shelters are required
assembly, and repackaging; and that begins in the tax year of the LIFO to register the tax shelters by filing Form
(d) general and administrative costs (mixed election. 8264 no later than the day on which an
service costs). For more details, see interest in the shelter is first offered for sale.
Regulations section 1.263A-3(d). For more information on inventory valuation Organizers filing a properly completed Form
methods, see Pub. 538. 8264 will receive a tax shelter registration
Enter on line 4 the balance of section 263A
costs paid or incurred during the tax year not Schedule B—Other Information number that they must furnish to their
included on lines 2, 3, and 5. Attach a investors. See the Instructions for Form 8264
schedule listing these costs.
Question 1 for the definition of a tax shelter and the
Check box (d) for any other type of entity and investments exempted from tax shelter
Line 5—Other Costs registration.
state the type (e.g., limited liability
Enter on line 5 any other inventoriable costs partnership). Question 9—Foreign Accounts
paid or incurred during the tax year not
entered on lines 2 through 4. Attach a
Question 4—Consolidated Audit Answer “Yes” to Question 9 if either 1 OR 2
schedule. Procedures below applies to the partnership. Otherwise,
check the “No” box.
Line 7—Inventory at End of Year Generally, the tax treatment of partnership
items is determined at the partnership level in 1. At any time during calendar year 1996,
See Regulations sections 1.263A-1 through a consolidated audit proceeding, rather than the partnership had an interest in or signature
1.263A-3 for details on figuring the costs to in separate proceedings with individual or other authority over a bank account,
be included in ending inventory. partners. securities account, or other financial account
Lines 9a through 9c—Inventory in a foreign country; AND
Answer “Yes” to Question 4 if ANY of the
Valuation Methods following apply: ● The combined value of the accounts was
more than $10,000 at any time during the
Inventories can be valued at: ● The partnership had more than 10 partners
calendar year; AND
at any one time during the tax year (for
● Cost, ● The accounts were NOT with a U.S. military
purposes of this question, a husband and
● Cost or market value (whichever is lower), wife—and their estates—count as one banking facility operated by a U.S. financial
or person); or institution.
● Any other method approved by the IRS that ● Any partner was a nonresident alien or was 2. The partnership owns more than 50% of
conforms to the requirements of the other than a natural person or estate; or the stock in any corporation that would
applicable regulations. answer the question “Yes,” based on item 1
● Any partner’s share of any partnership item
The average cost (rolling average) method above.
was different from his or her share of any
of valuing inventories generally does not other partnership item; or Get Form TD F 90-22.1, Report of Foreign
conform to the requirements of the Bank and Financial Accounts, to see if the
● The partnership is a “small partnership”
regulations. See Rev. Rul. 71-234, 1971-1 partnership is considered to have an interest
that has elected to be subject to the rules for
C.B. 148. in or signature or other authority over a bank
consolidated audit proceedings. “Small
Partnerships that use erroneous valuation account, securities account, or other financial
partnerships” as defined in section
methods must change to a method permitted account in a foreign country.
6231(a)(1)(B) are not subject to the rules for
for Federal tax purposes. To make this consolidated audit proceedings, but may If you answered “Yes” to Question 9, file
change, use Form 3115. make an irrevocable election under Form TD F 90-22.1 by June 30, 1997, with
On line 9a, check the methods used for Temporary Regulations section the Department of the Treasury at the
valuing inventories. Under lower of cost or 301.6231(a)(1)-1T(b)(2) to be covered by address shown on the form. Because Form
market, the term “market” (for normal goods) them. TD F 90-22.1 is not a tax return, do not file it
means the current bid price prevailing on the with Form 1065. You may order Form TD F
Note: The partnership does not make this
inventory valuation date for the particular 90-22.1 by calling 1-800-829-3676.
election when it answers “Yes” to Question 4.
merchandise in the volume usually purchased The election must be made separately. Question 10
by the taxpayer. For a manufacturer, market
If a partnership return is filed by an entity If the partnership received a distribution from
applies to the basic elements of cost—raw
for a tax year, but it is determined that the a foreign trust after August 20, 1996, it must
materials, labor, and burden. If section 263A
entity is not a partnership for that tax year, provide additional information. For this
applies to the taxpayer, the basic elements of
the consolidated partnership audit procedures purpose, a loan of cash or marketable
cost must reflect the current bid price of all
will generally apply to that entity and to securities generally is considered to be a
direct costs and all indirect costs properly
persons holding an interest in that entity. See distribution. See Pub. 553, Highlights of 1996
allocable to goods on hand at the inventory
Temporary Regulations section 301.6233-1T Tax Changes, for details.
date.
for details and exceptions. If the partnership was the grantor of, or the
Inventory may be valued below cost when
the merchandise is unsalable at normal prices
Question 6—Foreign Partners transferor to, a foreign trust that existed
during the tax year, it may have to file Form
or unusable in the normal way because the Answer “Yes” to Question 6 if the partnership
3520, Creation of or Transfers to Certain
goods are subnormal due to damage, had any foreign partners (for purposes of
Foreign Trusts; Form 3520-A, Annual Return
imperfections, shop wear, etc., within the
of Foreign Trust With U.S. Beneficiaries; or
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Form 926, Return by a U.S. Transferor of Each partner’s information must be on a determining each partner’s distributive share
Property to a Foreign Corporation, Foreign separate sheet of paper. Therefore, separate of any item of income, gain, loss, deduction,
Estate or Trust, or Foreign Partnership. all continuously printed substitutes before you etc.
file them with the IRS.
Designation of Tax Matters The partnership may be subject to a Specific Instructions
Partner (TMP) penalty if it files Schedules K-1 that do not (Schedule K Only)
If the partnership is subject to the rules for conform to the specifications of Rev. Proc.
96-48, 1996-39 I.R.B. 10. All partnerships must complete Schedule K.
consolidated audit proceedings in sections Rental activity income (loss) and portfolio
6221 through 6233, the partnership may How Income Is Shared Among income are not reported on page 1 of Form
designate a partner as the TMP for the tax 1065. These amounts are not combined with
year for which the return is filed by Partners
trade or business activity income (loss).
completing the Designation of Tax Matters Income (loss) is allocated to a partner only for Schedule K is used to report the totals of
Partner section on page 2 of Form 1065. See the part of the year in which that person is a these and other amounts.
the instructions for Question 4, consolidated member of the partnership. The partnership
audit procedures, to determine if the will either allocate on a daily basis or divide Specific Instructions
partnership is subject to these rules. The the partnership year into segments and
designated TMP must be a general partner allocate income, loss, or special items in each (Schedule K-1 Only)
and, in most cases, must also be a U.S. segment among the persons who were
person. For details, see Temporary partners during that segment. Partnerships
General Information
Regulations section 301.6231(a)(7)-1T. that report their income on the cash basis Prepare and give a Schedule K-1 to each
must allocate interest expense, taxes, and person who was a partner in the partnership
General Instructions for any payment for services or for the use of at any time during the year. Schedule K-1
Schedules K and K-1— property on a daily basis if there is any must be provided to each partner on or
change in any partner’s interest during the before the day on which the partnership
Partners’ Shares of year. See Pub. 541 for more information and return is required to be filed.
Income, Credits, for information on the tax consequences of
the termination of a partner’s interest.
Note: Generally, any person who holds an
interest in a partnership as a nominee for
Deductions, etc. Allocate shares of income, gain, loss, another person must furnish to the
Purpose of Schedules deduction, or credit among the partners partnership the name, address, etc., of the
according to the partnership agreement for other person.
Although the partnership is not subject to sharing income or loss generally. Partners On each Schedule K-1, enter the names,
income tax, the partners are liable for tax on may agree to allocate specific items in a ratio addresses, and identifying numbers of the
their shares of the partnership income, different from the ratio for sharing income or partner and partnership and the partner’s
whether or not distributed, and must include loss. For instance, if the net income exclusive distributive share of each item.
their shares on their tax returns. of specially allocated items is divided evenly
among three partners but some special items For an individual partner, enter the
Schedule K (page 3 of Form 1065) is a
are allocated 50% to one, 30% to another, partner’s social security number. For all other
summary schedule of all the partners’ shares
and 20% to the third partner, report the partners, enter the partner’s EIN. However, if
of the partnership’s income, credits,
specially allocated items on the appropriate a partner is an individual retirement
deductions, etc.
line of the applicable partner’s Schedule K-1 arrangement (IRA), enter the identifying
Schedule K-1 (Form 1065) shows each number of the custodian of the IRA. Do not
and the total on the appropriate line of
partner’s separate share. Attach a copy of enter the social security number of the person
Schedule K, instead of on the numbered lines
each Schedule K-1 to the Form 1065 filed for whom the IRA is maintained.
on page 1 of Form 1065 or Schedules A or D.
with the IRS; keep a copy with a copy of the
Special rules on the allocation of income, If a husband and wife each had an interest
partnership return as a part of the
gain, loss, and deductions generally apply if a in the partnership, prepare a separate
partnership’s records; and furnish a copy to
partner contributes property to the Schedule K-1 for each of them. If a husband
each partner. If a partnership interest is held
partnership and the fair market value of that and wife held an interest together, prepare
by a nominee on behalf of another person,
property at the time of contribution differs one Schedule K-1 if the two of them are
the partnership may be required to furnish
from the contributing partner’s adjusted tax considered to be one partner.
Schedule K-1 to the nominee. See Temporary
Regulations sections 1.6031(b)-1T and basis. Under these rules, the partnership Note: There is space on line 25 of Schedule
1.6031(c)-1T for more information. must use a reasonable method of making K-1 for you to provide information to the
allocations of income, gain, loss, and partners. This space may be used instead of
Be sure to give each partner a copy of
deductions from the property so that the of attachments.
either the Partner’s Instructions for Schedule
contributing partner receives the tax burdens
K-1 (Form 1065) or specific instructions for
and benefits of any built-in gain or loss (i.e., Specific Items and Questions
each item reported on the partner’s Schedule
precontribution appreciation or diminution of Question A
K-1 (Form 1065).
value of the contributed property). See
Regulations section 1.704-3 for details on Answer Question A on all Schedules K-1. If a
Substitute Forms partner holds interests as both a general and
how to make these allocations, including a
The partnership does not need IRS approval description of specific allocation methods that limited partner, check the first two boxes and
to use a substitute Schedule K-1 if it is an are generally reasonable. attach a schedule for each activity that shows
exact copy of the IRS schedule, or if it the amounts allocable to the partner’s interest
See Dispositions of Contributed Property as a limited partner.
contains only those lines the taxpayer is
on page 6 for special rules on the allocation
required to use. The lines must use the same Question B—What Type of Entity Is
of income, gain, loss, and deductions on the
numbers and titles and must be in the same This Partner?
disposition of property contributed to the
order and format as on the comparable IRS
partnership by a partner.
Schedule K-1. The substitute schedule must State on this line whether the partner is an
include the OMB number. The partnership If the partnership agreement does not individual, a corporation, an estate, a trust, a
must provide each partner with the Partner’s provide for the partner’s share of income, partnership, an exempt organization, or a
Instructions for Schedule K-1 (Form 1065) or gain, loss, deduction, or credit, or if the nominee (custodian). If the partner is a
other prepared specific instructions. allocation under the agreement does not have nominee, use one of the following codes to
substantial economic effect, the partner’s indicate the type of entity the nominee
The partnership must request IRS approval
share is determined according to the represents: I—Individual; C—Corporation;
to use other substitute Schedules K-1. To
partner’s interest in the partnership. See F—Estate or Trust; P—Partnership;
request approval, write to Internal Revenue
Regulations section 1.704-1 for more E—Exempt Organization; or IRA—Individual
Service, Attention: Substitute Forms Program
information. Retirement Arrangement.
Coordinator, T:FP:S, 1111 Constitution
Avenue, N.W., Washington, DC 20224. Note: If a partner’s interest changed during
the year, see section 706(d) before
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Question C—Domestic/Foreign (i.e., films or videotapes, leasing section 1245 total is entered on line 4e of Schedule K,
Partner property, farming, or oil and gas property), along with any net long-term capital gain (or
give each partner his or her share of the total loss) from line 11 of Schedule D (Form 1065).
Check the foreign partner box if the partner is pre-1976 losses from that activity for which
a nonresident alien individual, foreign there existed a corresponding amount of Income (Loss)
partnership, foreign corporation, or a foreign nonrecourse liability at the end of each year Line 1—Ordinary Income (Loss) From
estate or trust. Otherwise, check the in which the losses occurred. Get Form 6198,
domestic partner box. Trade or Business Activities
At-Risk Limitations, and related instructions
Item D—Partner’s Profit, Loss, and for more information. Enter the amount from page 1, line 22. Enter
Capital Sharing Percentages Qualified nonrecourse financing secured by the income or loss without reference to
real property used in an activity of holding (a) the basis of the partners’ interests in the
Enter in Item D, column (ii), the appropriate partnership, (b) the partners’ at-risk
real property that is subject to the at-risk
percentages as of the end of the year. limitations, or (c) the passive activity
rules is treated as an amount at risk.
However, if a partner’s interest terminated limitations. These limitations, if applicable, are
“Qualified nonrecourse financing” generally
during the year, enter in column (i) the determined at the partner level.
includes financing for which no one is
percentages that existed immediately before If the partnership has more than one trade
personally liable for repayment that is
the termination. When the profit or loss or business activity, identify on an attachment
borrowed for use in an activity of holding real
sharing percentage has changed during the to Schedule K-1 the amount from each
property and that is loaned or guaranteed by
year, show the percentage before the change separate activity. See Passive Activity
a Federal, state, or local government or that
in column (i) and the end-of-year percentage Reporting Requirements on page 9.
is borrowed from a “qualified” person.
in column (ii). If there are multiple changes in
Qualified persons include any person actively Line 1 should not include rental activity
the profit and loss sharing percentage during
and regularly engaged in the business of income (loss) or portfolio income (loss).
the year, attach a statement giving the date
lending money, such as a bank or savings
and percentage before each change. Line 2—Net Income (Loss) From
and loan association. Qualified persons
“Ownership of capital” means the portion of generally do not include related parties Rental Real Estate Activities
the capital that the partner would receive if (unless the nonrecourse financing is Enter the net income or loss from rental real
the partnership was liquidated at the end of commercially reasonable and on substantially estate activities of the partnership from Form
the year by the distribution of undivided the same terms as loans involving unrelated 8825. Attach this form to Form 1065. If the
interests in partnership assets and liabilities. persons), the seller of the property, or a partnership has more than one rental real
Item F—Partner’s Share of Liabilities person who receives a fee for the estate activity, identify on an attachment to
partnership’s investment in the real property. Schedule K-1 the amount attributable to each
Enter each partner’s share of nonrecourse See section 465 for more information on activity.
liabilities, partnership-level qualified qualified nonrecourse financing.
nonrecourse financing, and other liabilities. Line 3—Net Income (Loss) From Other
The partner as well as the partnership must
“Nonrecourse liabilities” are those liabilities meet the qualified nonrecourse rules. Rental Activities
of the partnership for which no partner bears Therefore, the partnership must enter on an On Schedule K, line 3a, enter gross income
the economic risk of loss. The extent to attached statement any other information the from rental activities other than rental real
which a partner bears the economic risk of partner needs to determine if the qualified estate activities. See page 7 of these
loss is determined under the rules of nonrecourse rules are also met at the partner instructions and Pub. 925 for the definition of
Regulations section 1.752-2. Do not include level. rental activities. Include on line 3a, the gain
partnership-level qualified nonrecourse (loss) from line 20 of Form 4797 that is
financing (defined below) on the line for Item G—Tax Shelter Registration
Number attributable to the sale, exchange, or
nonrecourse liabilities. involuntary conversion of an asset used in a
If the partner terminated his or her interest If the partnership is a registration-required tax rental activity other than a rental real estate
in the partnership during the year, enter the shelter, it must enter its tax shelter activity.
share that existed immediately before the registration number in Item G. If the On line 3b of Schedule K, enter the
total disposition. In all other cases, enter it as partnership invested in a registration-required deductible expenses of the activity. Attach a
of the end of the year. shelter, the partnership must also furnish a schedule of these expenses to Form 1065.
If the partnership is engaged in two or copy of its Form 8271 to its partners. See
Form 8271 for more information. Enter the net income (loss) on line 3c of
more different types of at-risk activities, or a Schedule K. Enter each partner’s share on
combination of at-risk activities and any other Item J—Analysis of Partner’s Capital line 3 of Schedule K-1.
activity, attach a statement showing the Account
partner’s share of nonrecourse liabilities, If the partnership has more than one rental
partnership-level qualified nonrecourse You are not required to complete Item J if the activity reported on line 3, identify on an
financing, and other liabilities for each answer to Question 5 of Schedule B is “Yes.” attachment to Schedule K-1 the amount from
activity. See Pub. 925 to determine if the If you are required to complete this item, see each activity.
partnership is engaged in more than one the instructions for Schedule M-2 on page 23. Lines 4a Through 4f—Portfolio Income
at-risk activity. (Loss)
The at-risk rules of section 465 generally
Specific Instructions
Enter portfolio income (loss) on lines 4a
apply to any activity carried on by the (Schedules K and K-1, through 4f.
partnership as a trade or business or for the
production of income. These rules generally
Except as Noted) See page 8 of these instructions for a
limit the amount of loss and other deductions Schedules K and K-1 have the same line definition of portfolio income. Do not reduce
a partner can claim from any partnership numbers for lines 1 through 23. portfolio income by deductions allocable to it.
activity to the amount for which that partner Report such deductions (other than interest
is considered at risk. However, for partners Special Allocations expense) on line 10 of Schedules K and K-1.
who acquired their partnership interests Interest expense allocable to portfolio income
An item is specially allocated if it is allocated is generally investment interest expense and
before 1987, the at-risk rules do not apply to to a partner in a ratio different from the ratio
losses from an activity of holding real is reported on line 12a of Schedules K and
for sharing income or loss generally. K-1.
property the partnership placed in service
before 1987. The activity of holding mineral Report specially allocated ordinary gain Lines 4a and 4b.—Enter only taxable interest
property does not qualify for this exception. (loss) on Schedules K and K-1, line 7. Report and dividends on these lines. Taxable interest
Identify on an attachment to Schedule K-1 other specially allocated items on the is interest from all sources except interest
the amount of any losses that are not subject applicable lines of the partner’s Schedule exempt from tax and interest on tax-free
to the at-risk rules. K-1, with the total amount on the applicable covenant bonds.
line of Schedule K. For example, specially
If a partnership is engaged in an activity allocated long-term capital gain is entered on Lines 4d and 4e.—Enter on line 4d of
subject to the limitations of section 465(c)(1) line 4e of the partner’s Schedule K-1, and the Schedule K the amount on line 5 of Schedule
Page 16
D (Form 1065) plus any short-term capital activity, identify on an attachment the amount $500. The partnership must give a copy of its
gain (loss) that is specially allocated to and the activity to which each amount Form 8283 to every partner if the deduction
partners. Report each partner’s share on line relates. for an item or group of similar items of
4d of Schedule K-1. Items to be reported on line 7 include: contributed property exceeds $5,000. Each
The amount reported for line 4e of partner must be furnished a copy even if the
● Gains from the disposition of farm amount allocated to any partner is $5,000 or
Schedule K is the amount on line 11 of recapture property (see Form 4797) and other
Schedule D (Form 1065) plus any long-term less.
items to which section 1252 applies.
capital gain (loss) that is specially allocated to If the deduction for an item or group of
partners. Report each partner’s share on line ● Gains from the disposition of an interest in similar items of contributed property is $5,000
4e of Schedule K-1. oil, gas, geothermal, or other mineral or less, the partnership should pass through
properties (section 1254). each partner’s share of the amount of
Caution: If any short-term or long-term
capital gain or loss is from the disposition of ● Any net gain or loss from section 1256 noncash contributions so the partners will be
nondepreciable personal property used in a contracts from Form 6781, Gains and Losses able to complete their own Forms 8283. See
trade or business, it may not be treated as From Section 1256 Contracts and Straddles. the Instructions for Form 8283 for additional
portfolio income. Report such gain or loss on ● Recoveries of tax benefit items (section information.
line 7 of Schedules K and K-1. 111). If the partnership made a qualified
Line 4f.—Report and identify other portfolio ● Gambling gains and losses (subject to the conservation contribution, include the fair
income or loss on an attachment for line 4f. limitations in section 165(d)). market value of the underlying property
before and after the donation and describe
For example, income reported to the ● Any income, gain, or loss to the partnership the conservation purpose furthered by the
partnership from a real estate mortgage under section 751(b). donation. Give a copy of this information to
investment conduit (REMIC), in which the ● Specially allocated ordinary gain (loss). each partner.
partnership is a residual interest holder, would
be reported on an attachment for line 4f. If ● Net gain (loss) from involuntary conversions Line 9—Section 179 Expense
the partnership holds a residual interest in a due to casualty or theft. The amount for this Deduction
REMIC, report on the attachment for line 4f line is shown on Form 4684, Casualties and
Thefts, line 38a, 38b, or 39. A partnership may elect to expense part of
the partner’s share of: the cost of certain tangible property the
1. Taxable income (net loss) from the Each partner’s share must be entered on
partnership purchased this year for use in its
REMIC (line 1b of Schedules Q (Form 1066)), Schedule K-1. Give each partner a schedule
trade or business or certain rental activities.
that shows the amounts to be reported on
2. “Excess inclusion” (line 2c of Schedules See Pub. 946 for a definition of what kind of
the partner’s Form 4684, line 34, columns
Q (Form 1066)), and property qualifies for the section 179
(b)(i), (b)(ii), and (c).
deduction.
3. Section 212 expenses (line 3b of If there was a gain (loss) from a casualty or
Schedules Q (Form 1066)). Do not report Complete Part I of Form 4562 to figure the
theft to property not used in a trade or
these section 212 expenses on line 10 of partnership’s section 179 expense deduction.
business or for income-producing purposes,
Schedules K and K-1. The partnership does not claim the deduction
notify the partner. The partnership should not
itself but instead passes it through to the
Because Schedule Q (Form 1066) is a complete Form 4684 for this type of casualty
partners. Attach Form 4562 to Form 1065 and
quarterly statement, the partnership must or theft. Instead, each partner will complete
show the total section 179 expense
follow the Schedule Q instructions to figure his or her own Form 4684.
deduction on Schedule K, line 9. Report each
the amounts to report to the partner for the partner’s allocable share on Schedule K-1,
partnership’s tax year. Deductions
line 9. Do not complete line 9 of Schedule
Line 5—Guaranteed Payments to Line 8—Charitable Contributions K-1 for any partner that is an estate or trust.
Partners Enter the total amount of charitable If the partnership is an enterprise zone
Guaranteed payments to partners include: contributions made by the partnership during business, also report on an attachment to
its tax year on Schedule K. Enter each Schedules K and K-1 the cost of section 179
1. Payments for salaries, health insurance, partner’s distributive share on Schedule K-1. property placed in service during the year
and interest deducted by the partnership and On an attachment to Schedules K and K-1, that is qualified zone property.
reported on Form 1065, page 1, line 10; Form show separately the dollar amount of
8825; or on Schedule K, line 3b; and See the instructions for line 25 of Schedule
contributions subject to each of the 50%, K-1, item 4, for any recapture of a section
2. Payments the partnership must 30%, and 20% of adjusted gross income 179 amount.
capitalize. See the Instructions for Form 1065, limits. For additional information, get Pub.
line 10. 526, Charitable Contributions. Note: See the Instructions for Form 4562 for
limitations on the section 179 deduction that
Generally, amounts reported on line 5 are Generally, no deduction is allowed for any the partnership is allowed to claim.
not considered to be related to a passive contribution of $250 or more unless the
activity. For example, guaranteed payments partnership obtains a written Line 10—Deductions Related to
for personal services paid to a partner would acknowledgment from the charitable Portfolio Income
not be passive activity income. Likewise, organization that shows the amount of cash Enter on line 10 and attach an itemized list of
interest paid to any partner is not passive contributed, describes any property the deductions clearly and directly allocable
activity income. contributed, and gives an estimate of the to portfolio income (other than interest
Line 6—Net Gain (Loss) Under Section value of any goods or services provided in expense and section 212 expenses from a
return for the contribution. The REMIC). Interest expense related to portfolio
1231 (Other Than Due to Casualty or acknowledgment must be obtained by the
Theft) income is investment interest expense and is
due date (including extensions) of the reported on line 12a of Schedules K and K-1.
Enter on line 6 the amount shown on line 8 of partnership return, or if earlier, the date the Section 212 expenses from the partnership’s
Form 4797. Do not include specially allocated partnership files its return. Do not attach the interest in a REMIC are reported on an
ordinary gains and losses or net gains or acknowledgment to the tax return, but keep it attachment for line 4f of Schedules K and
losses from involuntary conversions due to with the partnership’s records. These rules K-1.
casualties or thefts on this line. Instead, apply in addition to the filing requirements for
report them on line 7. If the partnership has Form 8283 described below. No deduction is allowable under section
more than one activity, attach a statement to 212 for expenses allocable to a convention,
Certain contributions made to an seminar, or similar meeting.
Schedule K-1 that identifies the activity to organization conducting lobbying activities
which the section 1231 gain (loss) relates. are not deductible. See section 170(f)(9) for Line 11—Other Deductions
Line 7—Other Income (Loss) more details. Use line 11 to report deductions not included
Form 8283, Noncash Charitable on lines 8, 9, 10, 17e, and 18b. On an
Use line 7 to report other items of income,
Contributions, must be completed and attachment, identify the deduction and
gain, or loss not included on lines 1 through
attached to Form 1065 if the deduction amount, and if the partnership has more than
6. If the partnership has more than one
claimed for noncash contributions exceeds
Page 17
one activity, the activity to which the on line 12a. Instead, report this interest on low-income housing credit for property placed
deduction relates. line 11. in service after 1989.
Examples of items to be reported on an Investment interest does not include Line 13b—Qualified Rehabilitation
attachment to line 11 include: interest expense allocable to a passive Expenditures Related to Rental Real
● Amounts paid by the partnership that activity. Estate Activities
would be allowed as itemized deductions on The amount on line 12a will be deducted
(after applying the investment interest Enter total qualified rehabilitation
any of the partners’ income tax returns if they
expense limitations of section 163(d)) by expenditures related to rental real estate
were paid directly by a partner for the same
individual partners on Schedule A (Form activities of the partnership. Also complete
purpose. However, do not enter expenses
1040), line 13. the applicable lines of Form 3468, Investment
related to portfolio income or investment
Credit, that apply to qualified rehabilitation
interest expense on this line. For more information, get Form 4952, expenditures for property related to rental real
If there was a loss from an involuntary Investment Interest Expense Deduction. estate activities of the partnership for which
conversion due to casualty or theft of Lines 12b(1) and 12b(2)—Investment income or loss is reported on line 2 of
income-producing property, include in the Schedule K. See Form 3468 for details on
total amount for this line the relevant amount
Income and Expenses
qualified rehabilitation expenditures. Attach
from Form 4684, line 32. Enter on line 12b(1) only the investment Form 3468 to Form 1065.
● Any penalty on early withdrawal of savings. income included on lines 4a, 4b, 4c, and 4f of
For line 13b of Schedule K-1, enter each
Schedules K and K-1. Do not include other
● Soil and water conservation expenditures portfolio gains or losses on this line.
partner’s distributive share of the
(section 175). expenditures. On the dotted line to the left of
Enter on line 12b(2) only the investment the entry space for line 13b, enter the line
● Expenditures for the removal of expense included on line 10 of Schedules K number of Form 3468 on which the partner
architectural and transportation barriers to the and K-1. should report the expenditures. If there is
elderly and handicapped and which the
If there are other items of investment more than one type of expenditure, or the
partnership has elected to treat as a current
income or expense included in the amounts expenditures are from more than one rental
expense (section 190).
that are required to be passed through real estate activity, report this information
● Any amounts paid during the tax year for separately to the partner on Schedule K-1, separately for each expenditure or activity on
health insurance coverage for a partner such as net short-term capital gain or loss, an attachment to Schedules K and K-1.
(including that partner’s spouse and net long-term capital gain or loss, and other Note: Qualified rehabilitation expenditures for
dependents). For 1996, a partner may be portfolio gains or losses, give each partner a property not related to rental real estate
allowed to deduct up to 30% of such schedule identifying these amounts. activities must be listed separately on line 25
amounts on Form 1040, line 26.
Investment income includes gross income of Schedule K-1.
● Payments for a partner to an IRA, Keogh, from property held for investment, the excess
or SEP plan. If there is a defined benefit plan Line 13c—Credits (Other Than Credits
of net gain from the disposition of property Shown on Lines 13a and 13b) Related
(Keogh), attach to the Schedule K-1 for each held for investment over net capital gain from
partner a statement showing the amount of to Rental Real Estate Activities
the disposition of property held for
benefit accrued for the tax year. investment, and any net capital gain from the Report any information that the partners need
● Interest expense allocated to debt-financed disposition of property held for investment to figure credits related to a rental real estate
distributions. See Notice 89-35 for more that each partner elects to include in activity, other than the low-income housing
information. investment income under section credit and qualified rehabilitation
● Interest paid or accrued on debt properly 163(d)(4)(B)(iii). Generally, investment income expenditures. On the dotted line to the left of
allocable to each general partner’s share of a and investment expenses do not include any the entry space for line 13c (or in the margin),
working interest in any oil or gas property (if income or expenses from a passive activity. identify the type of credit. If there is more
the partner’s liability is not limited). General Property subject to a net lease is not than one type of credit or the credit is from
partners that did not materially participate in treated as investment property because it is more than one activity, report this information
the oil or gas activity treat this interest as subject to the passive loss rules. Do not separately for each credit or activity on an
investment interest; for other general reduce investment income by losses from attachment to Schedules K and K-1.
partners, it is trade or business interest. passive activities. Line 13d—Credits Related to Other
Investment Interest Investment expenses are deductible Rental Activities
expenses (other than interest) directly Use this line to report information that the
Lines 12a through 12b(2) must be completed connected with the production of investment partners need to figure credits related to a
for all partners. income. See the Form 4952 instructions for rental activity other than a rental real estate
Line 12a—Interest Expense on more information on investment income and activity. On the dotted line to the left of the
Investment Debts expenses. entry space for line 13d, identify the type of
Credits credit. If there is more than one type of credit
Include on this line interest paid or accrued
or the credit is from more than one activity,
on debt properly allocable to property held for Line 13a—Low-Income Housing Credit report this information separately for each
investment. Property held for investment
Section 42 provides a credit that may be credit or activity on an attachment to
includes property that produces income
claimed by owners of low-income residential Schedules K and K-1.
(unless derived in the ordinary course of a
trade or business) from interest, dividends, rental buildings. If the partners are eligible to Line 14—Other Credits
annuities, or royalties; and gains from the take the low-income housing credit, complete
and attach Form 8586, Low-Income Housing Enter on line 14 any other credit, except
disposition of property that produces those credits or expenditures shown or listed for
types of income or is held for investment. Credit; Form 8609, Low-Income Housing
Credit Allocation Certification; and Schedule lines 13a through 13d of Schedules K and
Property held for investment also includes A (Form 8609), Annual Statement, to Form K-1. On the dotted line to the left of the entry
each general partner’s share of a working 1065. space for line 14, identify the type of credit. If
interest in any oil or gas property for which there is more than one type of credit or the
the partner’s liability is not limited and in Report on line 13a(1) the total low-income credit is from more than one activity, report
which the partner did not materially housing credit for property placed in service this information separately for each credit or
participate. However, the level of each before 1990 with respect to which a activity on an attachment to Schedules K and
partner’s participation in an activity is partnership is to be treated under section K-1. The credits to be reported on line 14 and
determined by the partner and not by the 42(j)(5) as the taxpayer to which the other required attachments are as follows:
partnership. As a result, interest allocable to a low-income housing credit was allowed.
Report any other low-income housing credit ● Credit for backup withholding on dividends,
general partner’s share of a working interest interest, or patronage dividends.
in any oil or gas property (if the partner’s for property placed in service before 1990 on
liability is not limited) should not be reported line 13a(2). On lines 13a(3) and (4), report the ● Nonconventional source fuel credit. The
credit is figured at the partnership level and
Page 18
then is apportioned to the partners based on ● Orphan drug credit (Form 8820). payments for services they actually rendered
their distributive shares of partnership income ● Credit for contributions to selected to, or on behalf of, the partnership to the
attributable to sales of qualified fuels. Attach community development corporations (Form extent that those payments are payment for
a separate schedule to the return to show the 8847). those services.
computation of the credit. See section 29 for Worksheet Instructions
more information. Note: See the instructions for line 25, item 13
of Schedule K-1 to report expenditures Line 1b.—Include on line 1b any part of the
● Qualified electric vehicle credit (Form 8834). qualifying for the (a) rehabilitation credit not net income (loss) from rental real estate
● Unused credits from cooperatives. The related to rental real estate activities, activities from Schedule K, line 2, that is
unused credits are apportioned to persons (b) energy credit, or (c) reforestation credit. from:
who were partners in the partnership on the
last day of the partnership’s tax year. Self-Employment 1. Rentals of real estate held for sale to
customers in the course of a trade or
● Work opportunity credit (Form 5884). This Note: If the partnership is an options dealer business as a real estate dealer, or
credit is apportioned among the partners or a commodities dealer, see section 1402(i)
according to their interest in the partnership before completing lines 15a, b, and c, to 2. Rentals for which services were rendered
at the time the wages on which the credit is determine the amount of any adjustment that to the occupants (other than services usually
figured were paid or accrued. may have to be made to the amounts shown or customarily rendered for the rental of
on the Worksheet for Figuring Net Earnings space for occupancy only). The supplying of
● Credit for alcohol used as fuel (Form 6478). maid service is such a service; but the
This credit is apportioned to persons who (Loss) From Self-Employment below. If the
partnership is engaged solely in the operation furnishing of heat and light, the cleaning of
were partners on the last day of the public entrances, exits, stairways and lobbies,
partnership’s tax year. The credit must be of a group investment program, earnings from
the operation are not self-employment trash collection, etc., are not considered
included in income on page 1, line 7, of Form services rendered to the occupants.
1065. See section 40(f) for an election the earnings for either general or limited partners.
partnership can make to not have the credit General partners.—General partners’ net Lines 3b and 4b.—Allocate the amounts on
apply. earnings (loss) from self-employment do not these lines in the same way Form 1065,
include: page 1, line 22, is allocated to these
If this credit includes the small ethanol particular partners.
producer credit, identify on a statement ● Dividends on any shares of stock and
attached to each Schedule K-1 (a) the interest on any bonds, debentures, notes, Line 4a.—Include in the amount on line 4a
amount of the small producer credit included etc., unless the dividends or interest are any guaranteed payments to partners
in the total credit allocated to the partner, received in the course of a trade or business, reported on Schedules K and K-1, line 5, and
(b) the number of gallons of qualified ethanol such as a dealer in stocks or securities or derived from a trade or business as defined in
fuel production allocated to the partner, and interest on notes or accounts receivable. section 1402(c). Also include other ordinary
(c) the partner’s share in gallons of the income and expense items (other than
● Rentals from real estate, except rentals of expense items subject to separate limitations
partnership’s productive capacity for alcohol. real estate held for sale to customers in the at the partner level, such as the section 179
● Credit for increasing research activities course of a trade or business as a real estate expense deduction) reported on Schedules K
(Form 6765). dealer or payments for rooms or space when and K-1 that are used to figure
● Enhanced oil recovery credit (Form 8830). significant services are provided. self-employment earnings under section
● Disabled access credit (Form 8826). ● Royalty income, except royalty income 1402.
received in the course of a trade or business. Line 15a—Net Earnings (Loss) From
● Renewable electricity production credit
(Form 8835). See the instructions for Schedule SE Self-Employment
(Form 1040), Self-Employment Tax, for more
● Empowerment zone employment credit information. Schedule K.—Enter on line 15a the amount
(Form 8844). from line 5 of the worksheet.
Limited partners.—Generally, a limited
● Indian employment credit (Form 8845). partner’s share of partnership income (loss) is Schedule K-1.—Do not complete this line for
● Credit for employer social security and not included in net earnings (loss) from any partner that is an estate, trust,
Medicare taxes paid on certain employee tips self-employment. Limited partners treat as corporation, exempt organization, or
(Form 8846). self-employment earnings only guaranteed individual retirement arrangement (IRA).
Page 23
Codes for Principal Business Activity and Principal Product or Service
These codes for the Principal Business Activity Standard Industrial Classification Codes (SIC), In Item A, state the principal business activity.
are designed to classify an enterprise by the they should not be used as SIC codes. In Item B, state the principal product or service
type of activity in which it is engaged to facilitate Using the list below, enter on page 1, Item C, that accounts for the largest percentage of total
the administration of the Internal Revenue Code. the code for the specific industry group for assets. For example, if the principal business
Though similar in format and structure to the which the largest percentage of “total assets activity is “Retail food store,” the principal
(Schedule L, line 14, column (d))” is used. product or service may be “dairy products.”
Page 24