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Page 1 of 36 Instructions for Form 1065-B 14:20 - 24-JAN-2003

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2002 Department of the Treasury


Internal Revenue Service

Instructions for Form 1065-B


U.S. Return of Income for Electing Large Partnerships
Section references are to the Internal Revenue Code unless otherwise noted.

Contents Page Contents Page taxpayer may obtain automatic consent of


Changes To Note . . . . . . . . . . . ..... 1 Part II — Taxable Income or the Commissioner to change certain
Photographs of Missing Children .... 1 Loss From Other Activities . . . . . 18 methods of accounting. See Rev. Proc.
Unresolved Tax Issues . . . . . . . ..... 1 Schedule A — Cost of Goods 2002-9, 2002-3 I.R.B. 327, as modified
Sold . . . . . . . . . . . . . . . . . . . . . 18 and clarified by Rev. Proc. 2002-19 and
How To Get Forms and
2002-54.
Publications . . . . . . . . . . . . . ..... 2 Schedule B — Other
Information . . . . . . . . . . . . . . . . 19
• The partnership must file a disclosure
General Instructions . . . . . . . . ..... 2 statement for each reportable tax shelter
Purpose of Form . . . . . . . . . . ..... 2 Schedule D — Capital Gains transaction in which it participated,
Electing Large Partnership and Losses . . . . . . . . . . . . . . . . 20 directly or indirectly, if the transaction is
Status . . . . . . . . . . . . . . . . ... . . 2 Schedules K and K-1 — reasonably expected to affect any
Definitions . . . . . . . . . . . . . . ... . . 2 Partners’ Shares of Income, partner’s Federal income tax liability. See
Termination of the Partnership .. . . 3 Credits, Deductions, etc. . . . . . . 23 Tax shelter disclosure statement on
When To File . . . . . . . . . . . . ... . . 3 Specific Instructions for page 7 for more details.
Where To File . . . . . . . . . . . . ... . . 3 Schedules K and K-1 . . . . . . . . . 24
Who Must Sign . . . . . . . . . . . ... . . 3 Analysis of Net Income (Loss) . . . 31 Photographs of Missing
Interest and Penalties . . . . . . ... . . 4 Schedule L — Balance Sheets . . . 31
Schedule M-1 — Reconciliation
Children
Accounting Methods . . . . . . . ... . . 4 The Internal Revenue Service is a proud
Accounting Periods . . . . . . . . ... . . 5 of Income (Loss) per Books
With Income (Loss) per partner with the National Center for
Rounding Off to Whole Dollars .. . . 5 Missing and Exploited Children.
Return . . . . . . . . . . . . . . . . . . . 32
Recordkeeping . . . . . . . . . . . ... . . 5 Photographs of missing children selected
Schedule M-2 — Analysis of by the Center may appear in instructions
Administrative Adjustment
Partners’ Capital Accounts . . . . . 32 on pages that would otherwise be blank.
Requests . . . . . . . . . . . . . ..... 5
Paperwork Reduction Act Notice . . . 32 You can help bring these children home
Other Forms, Returns, and
Statements That May Be Codes for Principal Business by looking at the photographs and calling
Required . . . . . . . . . . . . . . . . . . . 5 Activity and Principal Product 1-800-THE-LOST (1-800-843-5678) if you
Assembling the Return . . . . . . . . . . 7 or Service . . . . . . . . . . . . . . . . . . 33 recognize a child.
Overview . . . . . . . . . . . . . . . . . . . . 7 Changes To Note
Separately Stated Items . . . . . . . . . 8 • Additional guidance has been issued Unresolved Tax Issues
Limitations . . . . . . . . . . . . . . . . . . . 8 allowing qualifying small businesses to If the partnership has attempted to deal
Elections Made by the use the cash method of accounting. For with an IRS problem unsuccessfully, it
Partnership . . . . . . . . . . . . ..... 8 details, see Rev. Proc. 2002-28, 2002-18, should contact the Taxpayer Advocate.
Elections Made by Each I.R.B. 815. Also see Cost of Goods Sold The Taxpayer Advocate independently
Partner . . . . . . . . . . . . . . . ..... 8 on page 18. represents the partnership’s interests and
Partner’s Dealings With • As a result of changes to the North concerns within the IRS by protecting its
American Industry Classification System, rights and resolving problems that have
Partnership . . . . . . . . . . . . ..... 8 not been fixed through normal channels.
some of the codes for Principal Business
Contributions to the
Activities have changed beginning in While the Taxpayer Advocates cannot
Partnership . . . . . . . . . . . . ..... 8 2002. These changes have mainly change the tax law or make a technical
Dispositions of Contributed occurred in the Construction, Wholesale
Property . . . . . . . . . . . . . . ..... 9 tax decision, they can clear up problems
Trade, and Information sectors. See that resulted from previous contacts and
Recognition of Precontribution pages 33 through 35 for the new ensure that the partnership’s case is
Gain on Certain Partnership applicable codes that should be entered given a complete and impartial review.
Distributions . . . . . . . . . . . ..... 9 in item C of page 1 of Form 1065-B.
Unrealized Receivables and • For tax years ending on or after The partnership’s assigned personal
Inventory Items . . . . . . . . . ..... 9 December 31, 2001, if the partnership advocate will listen to its point of view and
Activities of Electing Large must make a section 481(a) adjustment will work with the partnership to address
Partnerships . . . . . . . . . . . ..... 9 because of an accounting method its concerns. The partnership can expect
Special Reporting change, the adjustment period for a the advocate to provide:
Requirements . . . . . . . . . . . . . . 10 negative adjustment is now 1 year. For • A “fresh look” at a new or on-going
details, including special rules and problem.
Extraterritorial Income
exceptions, see Rev. Proc. 2002-19, • Timely acknowledgement.
Exclusion . . . . . . . . . . . . . . . . . 12 2002-13 I.R.B. 696, as amplified and • The name and phone number of the
Specific Instructions . . . . . . . . . . . 13 clarified by Rev. Proc. 2002-54, 2002-35 individual assigned to its case.
General Information . . . . . . . . . . . 13 I.R.B. 432, and Change in accounting • Updates on progress.
Part I — Taxable Income or method on page 5. • Timeframes for action.
Loss From Passive Loss • Additional guidance was issued • Speedy resolution.
Limitation Activities . . . . . . . . . . 13 regarding the procedures under which a • Courteous service.
Cat. No. 25982P
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When contacting the Taxpayer can also get most forms and publications • Spouses of partners performing or who
Advocate, the partnership should provide at your local IRS office. had performed the services.
the following information: In addition, commodity partnerships
• The partnership’s name, address, and are not eligible to make the election.
employer identification number. Commodity partnerships have as their
• The name and telephone number of an General Instructions principal activity the buying and selling of
authorized contact person and the hours commodities (other than inventory
he or she can be reached. described in section 1221(a)(1)) or
• The type of tax return and year(s) Purpose of Form options, futures, or forwards relating to
involved. Form 1065-B is an information return commodities.
• A detailed description of the problem. used to report the income, deductions, Once a partnership has made an
• Previous attempts to solve the problem gains, losses, etc., from the operation of election by filing Form 1065-B, this
and the office that had been contacted. an electing large partnership (as defined treatment on the return will bind the
• A description of the hardship the in section 775). An electing large partnership and all of its partners. The
partnership is facing (if applicable). partnership may be required to pay IRS, however, is not bound by the
The partnership may contact a certain taxes, such as recapture of the treatment on the return. To the extent
Taxpayer Advocate by calling a toll-free investment credit, but generally it “passes provided in future regulations, a
number, 1-877-777-4778. Persons who through” any profits or losses to its partnership may cease to be treated as
have access to TTY/TDD equipment may partners. Partners must include these an electing large partnership for a tax
call 1-800-829-4059 and ask for the partnership items on their tax returns. year in which the number of its partners
Taxpayer Advocate. If the partnership A regular partnership is required to falls below 100.
prefers, it may call, write, or fax the separately report to each partner the
Taxpayer Advocate office in its area. See partner’s distributive share of any item of Definitions
Pub. 1546, The Taxpayer Advocate income, gain, loss, deduction, or credit
Service of the IRS, for a list of addresses that if separately taken into account by Partnership
and fax numbers. any partner would result in an income tax A partnership is the relationship between
liability for that partner different from that two or more persons who join to carry on
How To Get Forms and which would result if the item was not a trade or business, with each person
Publications taken into account separately. Unlike a contributing money, property, labor, or
regular partnership, an electing large skill and each expecting to share in the
Personal Computer partnership combines most items at the profits and losses of the business whether
partnership level and passes through net or not a formal partnership agreement is
You can access the IRS web site 24 amounts to partners. These electing large made.
hours a day, 7 days a week, at partnership rules override the regular
www.irs.gov to: The term “partnership” includes a
partnership tax rules to the extent they
• Order IRS products on-line. are inconsistent with the regular
limited partnership, syndicate, group,
• Download forms, instructions, and partnership tax rules.
pool, joint venture, or other
publications. unincorporated organization, through or
• See answers to frequently asked tax Electing Large Partnership
by which any business, financial
questions. operation, or venture is carried on, that is
• Search publications on-line by topic or Status not, within the meaning of the regulations
keyword. under section 7701, a corporation, trust,
A partnership chooses electing large
• Send us comments or request help by partnership status by filing Form 1065-B
estate, or sole proprietorship.
e-mail. instead of Form 1065. The election Foreign Partnership
• Sign up to receive local and national applies to the tax year for which it was A foreign partnership is a partnership that
tax news by e-mail. made and all later tax years and cannot is not created or organized in the United
You can also reach us using file be revoked without IRS consent. States or under the law of the United
transfer protocol at ftp.irs.gov.
To make the election, the partnership States or of any state.
CD-ROM must have had 100 or more partners
General Partner
Order Pub. 1796, 2002 Federal Tax during the preceding tax year. Thus, a
partnership cannot make the election for A general partner is a partner who is
Products CD-ROM, and get: personally liable for partnership debts.
• Current year forms, instructions, and its first tax year. The number of partners
publications. is determined by counting only persons General Partnership
• Prior year forms, instructions, and directly holding partnership interests,
A general partnership is composed only
publications. including persons holding through
of general partners.
• Frequently requested tax forms that nominees. Service partners are not
may be filled in electronically, printed out counted as partners for this purpose. Limited Partner
for submission, and saved for Service partners are those partners who A limited partner is a partner in a
recordkeeping. perform substantial services in connection partnership formed under a state limited
• The Internal Revenue Bulletin. with the partnership’s activities or who partnership law, whose personal liability
Buy the CD-ROM on the Internet at have performed such services in the past. for partnership debts is limited to the
www.irs.gov/cdorders from the National Service partnerships are not eligible to amount of money or other property that
Technical Information Service (NTIS) for make the election if substantially all of the the partner contributed or is required to
$22 (no handling fee), or call partners are: contribute to the partnership. Some
1-877-CDFORMS (1-877-233-6767) toll • Individuals performing substantial members of other entities, such as
free to buy the CD-ROM for $22 (plus a services in connection with the domestic or foreign business trusts or
$5 handling fee). partnership’s activities. limited liability companies that are
• Personal service corporations with the classified as partnerships, may be treated
By Phone and In Person owner-employees performing the as limited partners for certain purposes.
You can order forms and publications 24 services. See, for example, Temporary Regulations
hours a day, 7 days a week, by calling • Retired partners who had performed section 1.469-5T(e)(3), which treats all
1-800-TAX-FORM (1-800-829-3676). You the services. members with limited liability as limited

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partners for purposes of section granted to the 15th day of the 6th month year, fill in the tax year space at the top of
469(h)(2). following the close of the tax year. If the the form.
due date falls on a Saturday, Sunday, or
Limited Partnership legal holiday, file by the next business Where To File
A limited partnership is formed under a day. Note: For 2002, Form 1065-B cannot be
state limited partnership law and filed electronically or on magnetic media.
composed of at least one general partner Caution: Unlike regular partnerships, an
and one or more limited partners. electing large partnership is required to File Form 1065-B with the Internal
furnish Schedules K-1 to its partners by Revenue Service Center, Ogden, UT
Limited Liability Partnership the first March 15 following the close of 84201.
A limited liability partnership (LLP) is the partnership’s tax year.
formed under a state limited liability
Private Delivery Services
Who Must Sign
partnership law. Generally, a partner in an
LLP is not personally liable for the debts The partnership can use certain private General Partner or LLC Member
of the LLP or any other partner, nor is a delivery services designated by the IRS to Form 1065-B is not considered to be a
partner liable for the acts or omissions of meet the “timely mailing as timely filing/ return unless it is signed. One general
any other partner, solely by reason of paying” rule for Form 1065-B. The most partner or LLC member must sign the
being a partner. recent list of designated private delivery return. If a receiver, trustee in bankruptcy,
services was published by the IRS in or assignee controls the organization’s
Limited Liability Company September 2002. The list includes only property or business, that person must
A limited liability company (LLC) is an the following: sign the return.
entity formed under state law by filing • Airborne Express (Airborne): Overnight
articles of organization as an LLC. Unlike Air Express Service, Next Afternoon Paid Preparer’s Information
a partnership, none of the members of an Service, Second Day Service. If a partner or an employee of the
LLC are personally liable for its debts. An • DHL Worldwide Express (DHL): DHL partnership completes Form 1065-B, the
LLC may be classified for Federal income “Same Day” Service, DHL USA paid preparer’s space should remain
tax purposes either as a partnership, a Overnight. blank. In addition, anyone who prepares
corporation, or an entity disregarded as • Federal Express (FedEx): FedEx Form 1065-B but does not charge the
an entity separate from its owner by Priority Overnight, FedEx Standard partnership should not complete this
applying the rules in Regulations section Overnight, FedEx 2Day, FedEx section.
301.7701-3. See Form 8832, Entity International Priority, and FedEx Generally, anyone who is paid to
Classification Election, for more details. International First. prepare the partnership return must:
Note: A domestic LLC with at least two • United Parcel Service (UPS): UPS Next • Sign the return, by hand, in the space
members that does not file Form 8832 is Day Air, UPS Next Day Air Saver, UPS provided for the preparer’s signature.
classified as a partnership for Federal 2nd Day Air, UPS 2nd Day Air A.M., UPS Signature stamps or labels are not
income tax purposes. Worldwide Express Plus, and UPS acceptable.
Worldwide Express. • Fill in the other blanks in the Paid
Nonrecourse Loans The private delivery service can tell Preparer’s Use Only area of the return.
Nonrecourse loans are those liabilities of you how to get written proof of the mailing • Give the partnership a copy of the
the partnership for which no partner bears date. return in addition to the copy to be filed
the economic risk of loss. with the IRS.
Extension
Paid Preparer Authorization
Termination of the If you need more time to file a partnership
If the partnership wants to allow the paid
return, file Form 8736, Application for
Partnership Automatic Extension of Time To File U.S. preparer to discuss its 2002 Form 1065-B
An electing large partnership terminates Return for a Partnership, REMIC, or for with the IRS, check the “Yes” box in the
when all its operations are discontinued Certain Trusts, for an automatic 3-month signature area of the return. The
and no part of any business, financial extension. File Form 8736 by the regular authorization applies only to the individual
operation, or venture is continued by any due date of the partnership return. The whose signature appears in the “Paid
of its partners in a partnership. Unlike automatic 3-month extension period Preparer’s Use Only” section of its return.
other partnerships, an electing large includes any 2-month extension granted It does not apply to the firm, if any, shown
partnership does not terminate on the to partnerships that keep their records in the section.
sale or exchange of 50% or more of the and books of account outside the United If the “Yes” box is checked, the
partnership interests within a 12-month States and Puerto Rico. partnership is authorizing the IRS to call
period. the paid preparer to answer any
If, after you have filed Form 8736, you questions that may arise during the
The partnership’s tax year ends on the
still need more time to file the partnership processing of its return. The partnership
date of termination which is the date the
return, file Form 8800, Application for is also authorizing the paid preparer to:
partnership winds up its affairs.
Additional Extension of Time To File U.S. • Give the IRS any information that is
Special rules apply in the case of a Return for a Partnership, REMIC, or for missing from its return,
merger, consolidation, or division of a Certain Trusts, for an additional extension • Call the IRS for information about the
partnership. See Regulations section of up to 3 months. The partnership must processing of its return, and
1.708-1(b)(2) for details. provide a full explanation of the reasons • Respond to certain IRS notices that the
for requesting the extension in order to partnership has shared with the preparer
When To File get this additional extension. Form 8800 about math errors and return preparation.
Generally, a domestic partnership must must be filed by the extended due date of The notices will not be sent to the
file Form 1065-B by the 15th day of the the partnership return. preparer.
4th month following the date its tax year The partnership is not authorizing the
ended as shown at the top of Form Period Covered paid preparer to bind the partnership to
1065-B. For partnerships that keep their Form 1065-B is an information return for anything or otherwise represent the
records and books of account outside the calendar year 2002 and fiscal years partnership before the IRS. If the
United States and Puerto Rico, an beginning in 2002 and ending in 2003. If partnership wants to expand the paid
extension of time to file and pay is the return is for a fiscal year or a short tax preparer’s authorization, see Pub. 947,
Instructions for Form 1065-B -3-
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Practice Before the IRS and Power of increased to $100 or, if greater, 10% of • The amount can be determined with
Attorney. the aggregate amount of items required to reasonable accuracy.
The authorization cannot be revoked. be reported, and the $100,000 maximum See Regulations section 1.451-1(a) for
However, the authorization will does not apply. details.
automatically end no later than the due Generally, an accrual basis taxpayer
date (excluding extensions) for filing the
Trust Fund Recovery Penalty can deduct accrued expenses in the tax
2003 return. This penalty may apply if certain excise, year in which:
income, social security, and Medicare • All events that determine liability have
taxes that must be collected or withheld
Interest and Penalties occurred,
are not collected or withheld, or these • The amount of the liability can be
Interest taxes are not paid. These taxes are figured with reasonable accuracy, and
generally reported on: • Economic performance takes place
Interest is charged on taxes not paid by • Form 720, Quarterly Federal Excise with respect to the expense.
the due date, even if an extension of time Tax Return; There are exceptions to the economic
to file is granted. Interest is also charged • Form 941, Employer’s Quarterly performance rule for certain items,
from the due date (including extensions) Federal Tax Return; including recurring expenses. See section
to the date of payment on the failure to • Form 943, Employer’s Annual Tax 461(h) and the related regulations for the
file penalty, the accuracy-related penalty, Return for Agricultural Employees; or rules for determining when economic
and the fraud penalty. The interest • Form 945, Annual Return of Withheld performance takes place.
charged is figured at a rate determined Federal Income Tax.
under section 6621. The trust fund recovery penalty may Nonaccrual-experience method.
be imposed on all persons who are Accrual method partnerships are not
Late Filing of Return required to accrue certain amounts to be
determined by the IRS to have been
A penalty is assessed against the responsible for collecting, accounting for, received from the performance of
partnership if it is required to file a and paying over these taxes, and who services that, on the basis of their
partnership return and it (a) fails to file the acted willfully in not doing so. The penalty experience, will not be collected, if:
return by the due date, including is equal to the unpaid trust fund tax. See • The services are in the fields of health,
extensions, or (b) files a return that fails the instructions for Form 720; Pub. 15, law, engineering, architecture,
to show all the information required, Circular E, Employer’s Tax Guide; or accounting, actuarial science, performing
unless such failure is due to reasonable Pub. 51, Circular A, Agricultural arts, or consulting or
cause. If the failure is due to reasonable Employer’s Tax Guide, for more details, • The partnership’s average annual
cause, attach an explanation to the including the definition of a responsible gross receipts or the 3 prior tax years
partnership return. If no tax is due, the person. does not exceed $5 million.
penalty is $50 for each month or part of a This provision does not apply to any
month (for a maximum of 5 months) the amount if interest is required to be paid
failure continues, multiplied by the total Accounting Methods on the amount or if there is any penalty
number of persons who were partners in Figure ordinary income using the method for failure to timely pay the amount. For
the partnership during any part of the of accounting regularly used in keeping information, see Chapter 11 of Pub. 535,
partnership’s tax year for which the return the partnership’s books and records. Business Expenses.
is due. If tax is due, the penalty is the Generally, permissible methods include: Percentage of completion method.
amount stated above plus 5% of the • Cash, Long-term contracts (except for certain
unpaid tax for each month or part of a • Accrual, or real property construction contracts) must
month the return is late, up to a maximum • Any other method authorized by the generally be accounted for using the
of 25% of the unpaid tax. If the return is Internal Revenue Code. percentage of completion method
more than 60 days late, the minimum In all cases, the method used must described in section 460. See section 460
penalty is $100 or the balance of the tax clearly reflect income. for general rules on long-term contracts.
due on the return, whichever is smaller.
Generally, a partnership may not use Mark-to-market accounting. Dealers in
Late Payment of Tax the cash method of accounting if (a) it has securities must use the “mark-to-market”
A partnership that does not pay the tax at least one corporate partner, average accounting method described in section
when due generally may have to pay a annual gross receipts of more than $5 475. Under this method, any security that
penalty of 1/2 of 1% a month or part of a million, and it is not a farming business or is inventory to the dealer must be
month for each month the tax is not paid, (b) it is a tax shelter (as defined in section included in inventory at its fair market
up to a maximum of 25%. The penalty is 448(d)(3)). See section 448 for details. If value (FMV). Any security that is not
imposed on the net amount due. The inventories are required, the accrual inventory and that is held at the close of
penalty will not be imposed if the method must be used for sales and the tax year is treated as sold at its FMV
partnership can show that failure to pay purchases of merchandise. However, on the last business day of the tax year,
on time was due to reasonable cause. qualifying taxpayers and eligible and any gain or loss must be taken into
businesses of qualifying small business account in determining gross income. The
Failure To Furnish Information taxpayers are excepted from using the gain or loss taken into account is
Timely accrual method and may account for generally treated as ordinary gain or loss.
inventoriable items as materials and For details, including exceptions, see
For each failure to furnish Schedule K-1 supplies that are not incidental. For more section 475 and the related regulations.
to a partner when due and each failure to details, see Schedule A — Cost of
include on Schedule K-1 all the Dealers in commodities and traders
Goods Sold, on page 18.
information required to be shown (or the in securities and commodities may
inclusion of incorrect information), a $50 Accrual method. Under the accrual elect to use the mark-to-market
penalty may be imposed with respect to method, an amount is includible in income accounting method. To make the election,
each Schedule K-1 for which a failure when: the partnership must file a statement
occurs. The maximum penalty is • All the events have occurred that fix the describing the election, the first tax year
$100,000 for all such failures during a right to receive the income which is the the election is to be effective, and, in the
calendar year. If the requirement to report earliest of the date: (a) the required case of an election for traders in
correct information is intentionally performance takes place, (b) payment is securities or commodities, the trade or
disregarded, each $50 penalty is due, or (c) payment is received, and business for which the election is made.
-4- Instructions for Form 1065-B
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The statement must be filed by the due Recordkeeping


date (not including extensions) of the Accounting Periods The partnership must keep its records as
partnership return for the tax year long as they may be needed for the
immediately preceding the election year A partnership is generally required to
have one of the following tax years: administration of any provision of the
and attached to that return, or if Internal Revenue Code. The partnership
applicable, to a request for an extension 1. The tax year of a majority of its
partners (majority tax year). usually must keep records that support an
of time to file that return. For more details, item of income, deduction, or credit on the
see Rev. Proc. 99-17, 1999-1 C.B. 503, 2. If there is no majority tax year, then
the tax year common to all of the partnership return for 3 years from the
and sections 475(e) and (f). date the return is due or is filed,
partnership’s principal partners (partners
with an interest of 5% or more in the whichever is later. It also must keep
Change in accounting method. records that verify its basis in property for
partnership profits or capital).
Generally, the partnership must get IRS as long as they are needed to figure the
3. If there is neither a majority tax
consent to change its method of year nor a tax year common to all basis of the original or replacement
accounting used to report income (for principal partners, then the tax year that property.
income as a whole or for any material results in the least aggregate deferral of The partnership should also keep
item). To do so, it must file Form 3115, income. copies of all returns it has filed. They help
Application for Change in Accounting in preparing future returns and in making
Method. However, there are new Note: In determining the tax year of a computations when filing an amended
procedures under which a partnership partnership under 1, 2, or 3 above, the tax return.
may obtain automatic consent to certain years of certain tax-exempt and foreign
changes in accounting method. See Rev. partners are disregarded. See Administrative Adjustment
Proc. 2002-9, 2002-3 I.R.B. 327 as Regulations section 1.706-1(b) for more
modified by Rev. Proc. 2002-19, 2002-13 details. Requests
I.R.B. 696 and Rev. Proc. 2002-54, 4. Some other tax year, if: To correct an error on a Form 1065-B
2002-35 I.R.B. 432. For more information, • The partnership can establish that already filed, file Form 8082, Notice of
see Form 3115 and Pub. 538, Accounting there is a business purpose for the tax Inconsistent Treatment or Administrative
Periods and Methods. year (see Rev. Proc. 2002-39, 2002-22 Adjustment Request (AAR). Generally, an
I.R.B. 1046); adjustment to a partnership item
Certain partnerships that are qualifying
• The partnership satisfies the 25% requested on Form 8082 will flow through
gross receipts test for a natural business to the partners and be taken into account
taxpayers or small business taxpayers
year other than its required tax year (see in determining the amount of the same
that want to use the cash method for an Rev. Proc. 2002-38, 2002-2 I.R.B. 1037); item for the partnership tax year in which
eligible trade or business (described on • The tax year is a “grandfathered” the IRS allows the adjustment. If the
page 18) may get an automatic consent year (see Rev. Proc. 2002-38); or income, deductions, credits, or other
to change their method of accounting. For • The partnership elects under section information provided to any partner on
details, see Rev. Proc. 2001-10, 2001-2 444 to have a tax year other than a Schedule K-1 are incorrect under section
I.R.B. 272, Rev. Proc. 2002-28, and Form required tax year by filing Form 8716, 704 in the partner’s distributive share of
3115. Election to Have a Tax Year Other Than a any partnership item shown on Form
Required Tax Year. For a partnership to 1065-B, file an amended Schedule K-1
Example. The partnership changes to have this election in effect, it must make (Form 1065-B) for that partner with the
the cash method of accounting. It accrued the payments required by section 7519 Form 8082. Also give a copy of the
sales in 2001 for which it received and file Form 8752, Required Payment or amended Schedule K-1 to that partner.
payment in 2002. It must report those Refund Under Section 7519. See the Form 8082 instructions for
sales in both years as a result of A section 444 election ends if a details on how to file the amended Form
changing its accounting method and must partnership changes its accounting period 1065-B.
make a section 481(a) adjustment to to its required tax year or some other A change to the partnership’s Federal
prevent duplication of income. permitted year or it is penalized for return may affect its state return. This
willfully failing to comply with the includes changes made as a result of an
Section 481(a) adjustment. The requirements of section 7519. If the examination of the partnership return by
partnership may have to make an termination results in a short tax year, the IRS. For more information, contact the
adjustment to prevent amounts of income type or legibly print at the top of the first state tax agency for the state in which the
or expenses from being duplicated. This page of Form 1065-B for the short tax partnership return is filed.
is called a section 481(a) adjustment. The year, “SECTION 444 ELECTION
section 481(a) adjustment period is TERMINATED.” Other Forms, Returns, and
generally 1 year for a net negative
adjustment and 4 years for a net positive To change an accounting period, see Statements That May Be
adjustment. However, a partnership may Pub. 538 and Form 1128, Application To
Adopt, Change, or Retain a Tax Year Required
elect to use a 1-year adjustment period if
the net section 481(a) adjustment for the (unless the partnership is making an • Forms W-2 and W-3, Wage and Tax
election under section 444). Statement; and Transmittal of Wage and
change is less than $25,000. The
Tax Statements. Use these forms to
partnership must complete the Note: The tax year of a common trust report wages, tips, other compensation,
appropriate lines of Form 3115 to make fund must be the calendar year. and withheld income, social security and
the election. For more details on the Medicare taxes for employees.
section 481(a) adjustment, see Rev. Proc.
Rounding Off to Whole • Form 720, Quarterly Federal Excise
2002-19 as amplified and clarified by Rev. Tax Return. Use Form 720 to report
Proc. 2002-54. Dollars environmental excise taxes,
You may round off cents to whole dollars communications and air transportation
Include any net positive section 481(a) on your return and accompanying taxes, fuel taxes, luxury tax on passenger
adjustment on page 1, line 10. If the net schedules. To do so, drop amounts under vehicles, manufacturers’ taxes, ship
section 481(a) adjustment is negative, 50 cents and increase amounts from 50 passenger tax, and certain other excise
report it on Form 1065-B, line 23. to 99 cents to the next higher dollar. taxes.
Instructions for Form 1065-B -5-
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• Form 940 or Form 940-EZ, Employer’s trade or business and reimbursements of • Form 8275, Disclosure Statement. File
Annual Federal Unemployment (FUTA) overpaid interest. Form 8275 to disclose items or positions,
Tax Return. The partnership may be • Forms 1099-A, B, INT, LTC, MSA, except those contrary to a regulation, that
liable for FUTA tax and may have to file MISC, OID, R, and S. You may have to are not otherwise adequately disclosed
Form 940 or Form 940-EZ if it paid wages file these information returns to report on a tax return. The disclosure is made to
of $1,500 or more in any calendar quarter acquisitions or abandonments of secured avoid the parts of the accuracy-related
during the calendar year (or the preceding property; proceeds from broker and barter penalty imposed for disregard of rules or
calendar year) or one or more employees exchange transactions; interest substantial understatement of tax. Form
worked for the partnership for some part payments; payments of long-term care 8275 is also used for disclosures relating
of a day in any 20 different weeks during and accelerated death benefits; to preparer penalties for understatements
the calendar year (or the preceding miscellaneous income payments; due to unrealistic positions or disregard of
calendar year). distributions from an Archer MSA; original rules.
• Form 941, Employer’s Quarterly issue discount; distributions from • Form 8275-R, Regulation Disclosure
Federal Tax Return. Employers must file pensions, annuities, retirement or Statement, is used to disclose any item
this form quarterly to report income tax profit-sharing plans, IRAs, insurance on a tax return for which a position has
withheld on wages and employer and contracts, etc.; and proceeds from real been taken that is contrary to Treasury
employee social security and Medicare estate transactions. Also, use certain of regulations.
taxes. Agricultural employers must file these returns to report amounts that were • Forms 8288 and 8288-A, U.S.
Form 943, Employer’s Annual Tax Return received as a nominee on behalf of Withholding Tax Return for Dispositions
for Agricultural Employees, instead of another person. by Foreign Persons of U.S. Real Property
Form 941, to report income tax withheld For more information, see the General Interests; and Statement of Withholding
and employer and employee social Instructions for Forms 1099, 1098, 5498, on Dispositions by Foreign Persons of
security and Medicare taxes on and W-2G, and the separate specific U.S. Real Property Interests. Use these
farmworkers. instructions for each type of information forms to report and send withheld tax on
• Form 945, Annual Return of Withheld return you file (for example, Instructions the sale of U.S. real property by a foreign
Federal Income Tax. Use this form to for Forms 1099-MISC). person. See section 1445 and the related
report income tax withheld from Note: Every partnership must file Forms regulations for additional information.
nonpayroll payments, including pensions, 1099-MISC if, in the course of its trade or • Form 8300, Report of Cash Payments
annuities, IRAs, gambling winnings, and business, it makes payments of rents, Over $10,000 Received in a Trade or
backup withholding. commissions, or other fixed or Business. File this form to report the
determinable income (see section 6041) receipt of more than $10,000 in cash or
See Trust Fund Recovery
totaling $600 or more to any one person foreign currency in one transaction or a
! Penalty on page 4.
during the calendar year. series of related transactions.
• Form 8308, Report of a Sale or
CAUTION

• Forms 1042 and 1042-S, Annual • Form 5471, Information Return of U.S.
Persons With Respect to Certain Foreign Exchange of Certain Partnership
Withholding Tax Return for U.S. Source Interests, is used by a partnership to
Income of Foreign Persons; and Foreign Corporations. A partnership may have to
file Form 5471 if it (a) controls a foreign report the sale or exchange by a partner
Person’s U.S. Source Income Subject to of all or part of a partnership interest
Withholding. Use these forms to report corporation; or (b) acquires, disposes of,
or owns 10% or more in value or vote of where any money or other property
and send withheld tax on payments or received in exchange for the interest is
distributions made to nonresident alien the outstanding stock of a foreign
corporation; or (c) owns stock in a attributable to unrealized receivables or
individuals, foreign partnerships, or inventory items.
corporation that is a controlled foreign
foreign corporations to the extent these
corporation for an uninterrupted period of • Form 8594, Asset Acquisition
payments or distributions constitute gross Statement Under Section 1060. Both the
income from sources within the United 30 days or more during any tax year of
the foreign corporation, and it owned that seller and buyer of a group of assets that
States that is not effectively connected makes up a trade or business must use
with a U.S. trade or business. A domestic stock on the last day of that year.
partnership must also withhold tax on a • Form 5713, International Boycott this form to report such a sale if goodwill
Report, is used by persons having or going concern value attaches, or could
foreign partner’s distributive share of such attach, to such assets.
operations in, or related to, a “boycotting”
income, including amounts that are not
country, company, or national of a • Form 8697, Interest Computation
actually distributed. Withholding on Under the Look-Back Method for
amounts not previously distributed to a country, to report those operations and
figure the loss of certain tax benefits. The Completed Long-Term Contracts. Use
foreign partner must be made and paid this form to figure the interest due or to be
over by the earlier of (a) the date on partnership must give each partner a
copy of the Form 5713 filed by the refunded under the look-back method of
which Schedule K-1 is sent to that partner section 460(b)(2) on certain long-term
or (b) the 15th day of the 3rd month after partnership if there has been participation
in, or cooperation with, an international contracts that are accounted for under
the end of the partnership’s tax year. For either the percentage of
more information, see sections 1441 and boycott.
1442 and Pub. 515, Withholding of Tax • Form 8264, Application for Registration completion-capitalized cost method or the
of a Tax Shelter. Tax shelter organizers percentage of completion method.
on Nonresident Aliens and Foreign
Corporations. must file Form 8264 to get a tax shelter • Forms 8804, 8805, and 8813, Annual
registration number from the IRS. Return for Partnership Withholding Tax
• Form 1042-T, Annual Summary and • Form 8271, Investor Reporting of Tax (Section 1446); Foreign Partner’s
Transmittal of Forms 1042-S. Use Form Shelter Registration Number. Information Statement of Section 1446
1042-T to transmit paper Forms 1042-S Partnerships that have acquired an Withholding Tax; and Partnership
to the IRS. interest in a tax shelter that is required to Withholding Tax Payment (Section 1446).
• Form 1096, Annual Summary and be registered use Form 8271 to report the File Forms 8804 and 8805 if the
Transmittal of U.S. Information Returns. tax shelter’s registration number. Attach partnership had effectively connected
• Form 1098, Mortgage Interest Form 8271 to any return on which a gross income and foreign partners for the
Statement. Use this form to report the deduction, credit, loss, or other tax benefit tax year. Use Form 8813 to send
receipt from any individual of $600 or attributable to a tax shelter is taken or any installment payments of withheld tax
more of mortgage interest (including income attributable to a tax shelter is based on effectively connected taxable
points) in the course of the partnership’s reported. income allocable to foreign partners.
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Exception: Publicly traded partnerships Depreciated Under the Income Forecast See Temporary Regulations section
that do not elect to pay tax based on Method. Use this form to figure the 1.6011-4T for more details, including:
effectively connected taxable income do interest due or to be refunded under the 1. Definitions of reportable
not file these forms. They must instead look-back method of section 167(g)(2) for transaction, listed transaction, and
withhold tax on distributions to foreign certain property placed in service after substantially similar.
partners and report and send payments September 13, 1995, and depreciated 2. Form and content of the disclosure
using Forms 1042 and 1042-S. See Rev. under the income forecast method. statement.
Proc. 89-31, 1989-1 C.B. 895 and Rev. • Form 8876, Excise Tax on Structured 3. Filing requirements for the
Proc. 92-66, 1992-2 C.B. 428 for more Settlement Factoring Transactions. Use disclosure statement.
information. Form 8876 to report and pay the 40%
• Form 8832, Entity Classification excise tax imposed under section 5891. Assembling the Return
Election. Except for a business entity • Statement of section 743(b) basis When submitting Form 1065-B, organize
automatically classified as a corporation, adjustments. If the partnership is
a business entity with at least two the pages of the return in the following
required to adjust the bases of order:
members may choose to be classified
either as a partnership or an association
partnership properties (under section • Pages 1 – 5,
taxable as a corporation. A domestic
743(b) because of a section 754 election) • Schedule F (Form 1040) (if required),
eligible entity with at least two members
on the sale or exchange of a partnership • Form 8825 (if required),
that does not file Form 8832 is classified
interest or on the death of a partner, the • Any other schedules in alphabetical
partnership must attach a statement to its order, and
under the default rules as a partnership.
However, a foreign eligible entity with at
return for the year of the transfer. The • Any other forms in numerical order.
statement must list: To assist us in processing the return,
least two members is classified under the
default rules as a partnership only if at 1. The name and identifying number complete every applicable entry space on
least one member does not have limited of the transferee partner, Form 1065-B and Schedule K-1. If you
liability. File Form 8832 only if the entity 2. The computation of the adjustment, attach statements, do not write “See
does not want to be classified under and attached” instead of completing the
these default rules or if it wants to change 3. The partnership properties to which entry spaces on the forms. Penalties
its classification. the adjustment has been allocated. may be assessed if the partnership
• Form 8865, Return of U.S. Persons See Regulations section 1.743-1(k) for files an incomplete return.
With Respect To Certain Foreign more information. If you need more space on the forms
Partnerships. A domestic partnership may • Tax shelter disclosure statement. or schedules, attach separate sheets and
have to file Form 8865 if it: For each reportable tax shelter place them at the end of the return. Use
1. Controlled a foreign partnership transaction in which the partnership the same size and format as on the
(i.e., it owned more than a 50% direct or participated, directly or indirectly, it must printed forms. But show your totals on
indirect interest in the partnership). attach a disclosure statement to its return the printed forms. Be sure to put the
2. Owned at least a 10% direct or for each year ending with or within the tax partnership’s name and EIN on each
indirect interest in a foreign partnership year of any partner whose Federal sheet.
while U.S. persons controlled that income tax liability is affected or
partnership. reasonably expected to be affected by the Overview
3. Had an acquisition, disposition, or partnership’s participation in the The taxable income of an electing large
change in proportional interest of a transaction. In addition, for the first tax partnership is computed in the same
foreign partnership that: year a disclosure statement is attached to manner as that of an individual, except
a. Increased its direct interest to at its return, the partnership must send a that the items described below are
least 10% or reduced its direct interest of copy of the statement to the Internal separately stated and certain
at least 10% to less than 10%. Revenue Service, LM:PFTG:OTSA, Large modifications are made. These
b. Changed its direct interest by at & Mid-Size Business Division, 1111 modifications include not allowing the
least a 10% interest. Constitution Ave., N.W., Washington, DC deduction for personal exemptions, the
4. Contributed property to a foreign 20224. If a transaction becomes a net operating loss deduction, and certain
partnership in exchange for a partnership reportable transaction after the itemized deductions. Other itemized
interest if: partnership files its return, it must attach deductions are modified.
a. Immediately after the contribution, the statement to the following year’s
return (whether or not any partner’s tax The netting of capital gains and losses
the partnership owned, directly or
liability is affected for that year). The occurs at the partnership level. Such net
indirectly, at least a 10% interest in the
partnership is considered to have capital gain (loss) is treated as long-term
foreign partnership or
indirectly participated if it participated as a capital gain (loss). Any excess of net
b. The fair market value of the
partner in a partnership or if it knows or short-term capital gain over net long-term
property the partnership contributed to the
has reason to know that the tax benefits capital loss is consolidated with the
foreign partnership in exchange for a
claimed were derived from a reportable partnership’s other taxable income and is
partnership interest, when added to other
transaction. not separately reported.
contributions of property made to the
foreign partnership during the preceding Disclosure is required for a reportable General credits are separately
12-month period, exceeds $100,000. transaction that is a listed transaction. A reported to partners as a single item.
Also, the domestic partnership may transaction is a listed transaction if it is They are taken into account by partners
have to file Form 8865 to report certain the same as or substantially similar to a as a current year general business credit.
dispositions by a foreign partnership of transaction that the IRS has determined General credits are those credits that are
property it previously contributed to that to be a tax avoidance transaction and has not separately reported. The refundable
foreign partnership if it was a partner at identified as a listed transaction by notice, credit for Federal tax paid on fuels and
the time of the disposition. regulation, or other published guidance. the refund or credit for tax paid on
For more details, including penalties See Notice 2001-51, 2001-34 I.R.B. 190, undistributed capital gains of a regulated
for failing to file Form 8865, see Form for transactions identified by the IRS as investment company or a real estate
8865 and its separate instructions. listed transactions. The listed transactions investment trust are taken by the
• Form 8866, Interest Computation identified in this notice will be updated in partnership and thus are not separately
Under the Look-Back Method for Property future published guidance. reported to partners. The partnership also
Instructions for Form 1065-B -7-
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recaptures the investment credit and character to the partnership. The items • The signature of the general partner
low-income housing credit. are treated as incurred by the partnership, authorized to sign the partnership return.
similar to the character rule for other The partnership can get an automatic
Separately Stated Items partnerships under section 702(b). 12-month extension to make the section
Partners must take into account 754 election provided corrective action is
separately (under section 772(a)) their Limitations taken within 12 months of the original
distributive shares of the following items deadline for making the election. For
Most limitations and other provisions
(whether or not they are actually details, see Regulations section
affecting taxable income or credit are
distributed). 301.9100-2.
applied at the partnership level except for:
• Taxable income or loss from passive • Section 68 — Overall itemized See section 754 and the related
loss limitation activities. deduction limitation; regulations for more information.
• Taxable income or loss from other • Sections 49 and 465 — At-risk If there is a distribution of property
activities (e.g., portfolio income or loss). limitations; and consisting of an interest in another
• Net capital gain or loss allocable to • Section 469 — Passive loss limitations. partnership, see section 734(b).
passive loss limitation activities. For example, the limitation on
• Net capital gain or loss allocable to miscellaneous itemized deductions is
The partnership is required to attach a
other activities. statement for any section 743(b) basis
applied at the partnership level. However,
• 28% rate gain or loss allocable to instead of the 2% floor, 70% of the
adjustments. See page 7 for details.
passive loss limitation activities. partnership’s total miscellaneous itemized
• 28% rate gain or loss allocable to other deductions are disallowed. Elections Made by Each
activities.
• Qualified 5-year gain. Another limitation that is applied at the Partner
• Tax-exempt interest income. partnership level is the deduction for Elections under the following sections are
• Extraterritorial income exclusion and charitable contributions. The deduction is made by each partner separately on the
foreign trading gross receipts. limited to 10% of the partnership’s taxable partner’s tax return.
• Net alternative minimum tax (AMT) income (before the charitable contribution
1. Section 108 (income from
adjustment separately computed for deduction).
discharge of indebtedness). If an electing
passive loss limitation activities. large partnership has income from the
• Net AMT adjustment separately Elections Made by the discharge of any indebtedness, this is
computed for other activities.
• General credits. Partnership reported separately to each partner.
2. Section 901 (foreign tax credit).
• Low-income housing credit. All elections, other than the exceptions
• Rehabilitation credit from rental real listed under Elections Made by Each
estate activities. Partner, affecting the computation of
• Credit for producing fuel from a taxable income or any credit are made by Partner’s Dealings With
nonconventional source. the partnership. For example, it chooses Partnership
• Creditable foreign taxes and foreign the accounting method and depreciation If a partner engages in a transaction with
source items. methods it will use. The partnership also his or her partnership, other than in his or
• Other items of income, gain, loss, makes elections under the following her capacity as a partner, the partner is
deduction, or credit, to the extent the IRS sections. treated as not being a member of the
determines separate treatment is 1. Section 179 (election to expense partnership for that transaction. Special
appropriate. Examples of such items certain tangible property). rules apply to sales or exchanges of
include gains on sales of qualified small 2. Section 1033 (involuntary property between partnerships and
business stock (information required for a conversions). certain persons, as explained in Pub.
section 1202 exclusion or section 1045 3. Section 754 (manner of electing 541, Partnerships.
rollover). optional adjustment to basis of
Note: For electing large partnerships, partnership property).
the term passive loss limitation There are no changes to the optional Contributions to the
activities includes trade or business, basis adjustment provisions as a result of Partnership
rental real estate, and other rental the electing large partnership rules. Under Generally, no gain (loss) is recognized to
activities. Partnership items from passive section 754, a partnership may elect to the partnership or any of the partners
loss limitation activities allocated to adjust the basis of partnership property when property is contributed to the
limited partners are treated as being from when property is distributed or when a partnership in exchange for an interest in
passive activities and subject to the partnership interest is transferred. Once the partnership. This rule does not apply
passive activity limitations. However, an election is made under section 754, it to any gain realized on a transfer of
general partners may have materially or applies both to all distributions and to all property to a partnership that would be
actively participated in some or all of transfers made during the tax year and in treated as an investment company (within
these passive loss limitation activities. all subsequent tax years unless the the meaning of section 351) if the
Each general partner must determine if election is revoked. See Regulations partnership were incorporated. If, as a
any partnership items from these section 1.754-1(c). result of a transfer of property to a
activities are subject to the passive This election must be made in a partnership, there is a direct or indirect
activity limitations. To allow each general statement that is filed with the transfer of money or other property to the
partner to correctly apply the passive partnership’s timely filed return (including transferring partner, the partner may have
activity limitations, the partnership must any extension) for the tax year during to recognize gain on the exchange.
report income or loss and credits which the distribution or transfer occurs.
separately for each trade or business The statement must include: The basis to the partnership of
activity, rental real estate activity, rental • The name and address of the property contributed by a partner is the
activity other than rental real estate, and partnership. adjusted basis in the hands of the partner
other activities (e.g., portfolio income). • A declaration that the partnership at the time it was contributed, plus any
See page 9 for details. elects under section 754 to apply the gain recognized (under section 721(b)) by
The character of any item separately provisions of section 734(b) and section the partner at that time. See section 723
stated to the partners is based on its 743(b). for more information.
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Dispositions of Unrealized Receivables rules of section 469. Thus, for example,


passive loss limitation activity income or
Contributed Property and Inventory Items loss is not treated as passive income with
If the partnership disposes of property Generally, if a partner sells or exchanges respect to the general partnership interest
contributed to the partnership by a a partnership interest and unrealized of a partner who materially participates in
partner, income, gain, loss, and receivables or inventory items are the partnership’s trade or business
deductions from that property must be involved, the transferor partner must activities. For general partners, the
allocated among the partners to take into notify the partnership, in writing, within 30 partnership does have to report items for
account the difference between the days of the exchange. The partnership each activity separately.
property’s basis and its FMV at the time must then file Form 8308, Report of a
Sale or Exchange of Certain Partnership Trade or Business Activities
of the contribution.
Interests. A trade or business activity is an activity
For property contributed to the (other than a rental activity or an activity
If a partnership distributes unrealized treated as incidental to an activity of
partnership, the contributing partner must receivables or substantially appreciated
recognize gain or loss on a distribution of holding property for investment) that:
inventory items in exchange for all or part
the property to another partner within 5 of a partner’s interest in other partnership 1. Involves the conduct of a trade or
years of its being contributed. For property (including money), treat the business (within the meaning of section
property contributed after June 8, 1997, transaction as a sale or exchange 162),
the 5-year period is generally extended to between the partner and the partnership. 2. Is conducted in anticipation of
7 years. The gain or loss is equal to the Treat the partnership gain (loss) as starting a trade or business, or
amount that the contributing partner ordinary income (loss). The income (loss) 3. Involves research or experimental
should have recognized if the property is specially allocated only to partners expenditures deductible under section
had been sold for its FMV when other than the distributee partner. 174 (or that would be if you chose to
distributed, because of the difference deduct rather than capitalize them).
If a partnership gives other property
between the property’s basis and its FMV (including money) for all or part of that
at the time of contribution. Rental Activities
partner’s interest in the partnership’s
unrealized receivables or substantially Generally, except as noted below, if the
See section 704(c) for details and appreciated inventory items, treat the gross income from an activity consists of
other rules on dispositions of contributed transaction as a sale or exchange of the amounts paid principally for the use of
property. See section 724 for the property. real or personal tangible property held by
character of any gain or loss recognized the partnership, the activity is a rental
on the disposition of unrealized See Rev. Rul. 84-102, 1984-2 C.B. activity.
receivables, inventory items, or capital 119, for information on the tax
consequences that result when a new There are several exceptions to this
loss property contributed to the general rule. Under these exceptions, an
partner joins a partnership that has
partnership by a partner. activity involving the use of real or
liabilities and unrealized receivables.
Also, see Pub. 541 for more information personal tangible property is not a rental
Recognition of on unrealized receivables and inventory activity if any of the following apply:
items. • The average period of customer use
Precontribution Gain on (defined below) for such property is 7
Activities of Electing Large days or less.
Certain Partnership • The average period of customer use for
Distributions Partnerships such property is 30 days or less and
The activities of an electing large significant personal services (defined
A partner who contributes appreciated
partnership are reported as either: below) are provided by or on behalf of the
property to the partnership must include
in income any precontribution gain to the • Passive loss limitation activities, partnership in making the property
including trade or business, real estate available for customer use.
extent the FMV of other property (other
rental, and other rental activities or • Extraordinary personal services
than money) distributed to the partner by
the partnership exceeds the adjusted • Other activities, including portfolio or (defined below) are provided by or on
investment activities. behalf of the partnership.
basis of his or her partnership interest just • The rental of such property is treated
before the distribution. Precontribution Passive Loss Limitation as incidental to a nonrental activity of the
gain is the net gain, if any, that would Activities partnership under Temporary Regulations
have been recognized under section section 1.469-1T(e)(3)(vi).
The term passive loss limitation
704(c)(1)(B) if the partnership had
activity means any activity involving the • The partnership customarily makes the
distributed to another partner all the conduct of a trade or business (including property available during defined
property that had been contributed to the any activity treated as a trade or business business hours for nonexclusive use by
partnership by the distributee partner under section 469(c)(5) or (6)), or any various customers.
within 5 years of the distribution and that rental activity. • The partnership provides property for
was held by the partnership just before use in a nonrental activity of a partnership
the distribution. For property contributed A limited partner’s share of an electing or joint venture in its capacity as an owner
after June 8, 1997, the 5-year period is large partnership’s taxable income or loss of an interest in such partnership or joint
generally extended to 7 years. from these activities is treated as income venture. Whether the partnership
or loss from the conduct of a single provides property used in an activity of
Appropriate basis adjustments are to passive trade or business activity. Thus, another partnership or of a joint venture in
be made to the adjusted basis of the an electing large partnership does not the partnership’s capacity as an owner of
distributee partner’s interest in the have to report items from multiple an interest in the partnership or joint
partnership and the partnership’s basis in activities separately to limited partners. venture is determined on the basis of all
the contributed property to reflect the gain However, if a partner holds an interest the facts and circumstances.
recognized by the partner. in an electing large partnership other than In addition, a guaranteed payment
as a limited partner, the distributive share described in section 707(c) is not income
For more details and exceptions, see of items from each activity is accounted from a rental activity under any
Pub. 541. for separately under the passive activity circumstances.

Instructions for Form 1065-B -9-


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Average period of customer use. • The main purpose for holding the interest income. See Regulations section
Figure the average period of customer property is to realize a gain from the 1.469-7 for details.
use for a class of property by dividing the appreciation of the property.
total number of days in all rental periods • The gross rental income from such Other Activities
by the number of rentals during the tax property for the tax year is less than 2% The term other activities means
year. If the activity involves renting more of the smaller of the property’s activities other than passive loss limitation
than one class of property, multiply the unadjusted basis or its FMV. activities. This is income or expenses
average period of customer use of each Rental of property is incidental to a connected with property held for
class by the ratio of the gross rental trade or business activity if all of the investment, i.e., portfolio income.
income from that class to the activity’s following apply: Generally, portfolio income includes all
total gross rental income. The activity’s • The partnership owns an interest in the gross income, other than income derived
average period of customer use equals trade or business at all times during the in the ordinary course of a trade or
the sum of these class-by-class average year. business, that is attributable to interest;
periods weighted by gross income. See • The rental property was mainly used in dividends; royalties; income from a real
Regulations section 1.469-1(e)(3)(iii). the trade or business activity during the estate investment trust, a regulated
Significant personal services. Personal tax year or during at least 2 of the 5 investment company, a real estate
services include only services performed preceding tax years. mortgage investment conduit, a common
by individuals. To determine if personal • The gross rental income from the trust fund, a controlled foreign
services are significant personal services, property for the tax year is less than 2% corporation, a qualified electing fund, or a
consider all the relevant facts and of the smaller of the property’s unadjusted cooperative; income from the disposition
circumstances. Relevant facts and basis or its FMV. of property that produces income of a
circumstances include how often the The sale or exchange of property that type defined as portfolio income; and
services are provided, the type and is both rented and sold or exchanged income from the disposition of property
amount of labor required to perform the during the tax year (where the gain or held for investment. Portfolio income is
services, and the value of the services in loss is recognized) is treated as incidental reported separately and is reduced by
relation to the amount charged for use of to the activity of dealing in property if, at portfolio deductions, allocable investment
the property. the time of the sale or exchange, the interest expense, and nonbusiness
property was held primarily for sale to deductions. See Self-Charged Interest
The following services are not customers in the ordinary course of the
considered in determining whether above for an exception.
partnership’s trade or business.
personal services are significant:
• Services necessary to permit the lawful See Temporary Regulations section Special Reporting
use of the rental property. 1.469-1T(e)(3) and Regulations section
• Services performed in connection with 1.469-1(e)(3) for more information on the Requirements
improvements or repairs to the rental definition of rental activities for purposes
property that extend the useful life of the of the passive activity limitations.
General Partners
property substantially beyond the average
In reporting the partnership’s income Passive Activity Reporting
rental period.
• Services provided in connection with or losses and credits from rental activities, Requirements
the use of any improved real property that the partnership must separately report To allow general partners to correctly
are similar to those commonly provided in rental real estate activities and rental apply the passive activity loss and credit
connection with long-term rentals of activities other than rental real estate rules, any partnership that carries on
high-grade commercial or residential activities. more than one activity must:
property. Examples include cleaning and Partners who actively participate in a 1. Provide an attachment for each
maintenance of common areas, routine rental real estate activity may be able to activity conducted through the partnership
repairs, trash collection, elevator service, deduct part or all of their rental real estate that identifies the type of activity
and security at entrances. losses (and the deduction equivalent of conducted (trade or business, rental real
Extraordinary personal services. rental real estate credits) against income estate, rental activity other than rental real
Services provided in connection with (or tax) from nonpassive activities. The estate, or investment). See Grouping
making rental property available for combined amount of rental real estate Activities on page 11.
customer use are extraordinary personal losses and the deduction equivalent of 2. On the attachment for each activity,
services only if the services are rental real estate credits from all sources provide a schedule detailing the net
performed by individuals and the (including rental real estate activities not income (loss), credits, and all items
customers’ use of the rental property is held through the partnership) that may be required to be separately stated under
incidental to their receipt of the services. claimed is limited to $25,000. This section 772(a) from each trade or
$25,000 amount is generally reduced for business activity, from each rental real
For example, a patient’s use of a
high-income partners. estate activity, from each rental activity
hospital room generally is incidental to the
other than a rental real estate activity, and
care received from the hospital’s medical Self-Charged Interest from investments.
staff. Similarly, a student’s use of a
dormitory room in a boarding school is Certain “self-charged” interest income 3. Identify the net income (loss) and
incidental to the personal services and expense may be treated as passive credits from each oil or gas well drilled or
provided by the school’s teaching staff. activity gross income and passive activity operated under a working interest that
deductions if the loan proceeds are used any partner (other than a partner whose
Rental activity incidental to a nonrental in a passive activity. Generally, only interest in the partnership during the
activity. An activity is not a rental activity self-charged interest income and expense year is as a limited partner) holds through
if the rental of the property is incidental to result from loans to and from the the partnership. Further, if any partner
a nonrental activity, such as the activity of partnership and its partners. It also had an interest as a general partner in the
holding property for investment, a trade or includes loans between the partnership partnership during less than the entire
business activity, or the activity of dealing and another partnership if each owner in year, the partnership must identify both
in property. the borrowing entity has the same the disqualified deductions from each well
Rental of property is incidental to an proportional ownership interest in the that the partner must treat as passive
activity of holding property for investment lending entity. The partnership may elect activity deductions, and the ratable
if both of the following apply: not to apply these rules to self-charged portion of the gross income from each
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well that the partner must treat as passive 10. Identify the amount of gross income If the partner made the loan to the
activity gross income. from each oil or gas property of the partnership, also identify the activity in
4. Identify the net income (loss) and partnership. which the loan proceeds were used. If the
the partner’s share of partnership interest 11. Identify any gross income from loan proceeds were used in more than
expense from each activity of renting a sources that are specifically excluded one activity, allocate the interest to each
dwelling unit that any partner uses for from passive activity gross income, activity based on the amount of the
personal purposes during the year for including: proceeds used in each activity.
more than the greater of 14 days or 10% a. Income from intangible property if b. Loans between the partnership
of the number of days that the residence the partner is an individual and the and another partnership or an S
is rented at fair rental value. partner’s personal efforts significantly corporation. If the partnership’s partners
5. Identify the net income (loss) and contributed to the creation of the property. have the same proportional ownership
the partner’s share of partnership interest b. Income from state, local, or foreign interest in the partnership and the other
expense from each activity of trading income tax refunds. partnership or S corporation, identify each
personal property conducted through the c. Income from a covenant not to partner’s share of the interest income or
partnership. For this purpose, personal compete (in the case of a partner who is expense from the loan. If the partnership
property means property that is actively an individual and who contributed the was the borrower, also identify the activity
traded such as stocks, bonds, and other covenant to the partnership). in which the loan proceeds were used. If
securities. See Temporary Regulations 12. Identify any deductions that are not the loan proceeds were used in more
section 1.469-1T(e)(6). passive activity deductions. than one activity, allocate the interest to
6. For any gain (loss) from the 13. If the partnership makes a full or each activity based on the amount of the
disposition of an interest in an activity or partial disposition of its interest in another proceeds used in each activity.
of an interest in property used in an entity, identify the gain (loss) allocable to For more information on passive
activity (including dispositions before each activity conducted through the activities, see Pub. 925, Passive Activity
1987 from which gain is being recognized entity, and the gain allocable to a passive and At-Risk Rules.
after 1986): activity that would have been
a. Identify the activity in which the recharacterized as nonpassive gain had Grouping Activities
property was used at the time of the partnership disposed of its interest in Generally, one or more trade or business
disposition. property used in the activity (because the activities or rental activities may be
b. If the property was used in more property was substantially appreciated at treated as a single activity if the activities
than one activity during the 12 months the time of the disposition, and the gain make up an appropriate economic unit for
preceding the disposition, identify the represented more than 10% of the the measurement of gain or loss under
activities in which the property was used partner’s total gain from the disposition). the passive activity rules. Whether
and the adjusted basis allocated to each 14. Identify the following items from activities make up an appropriate
activity. activities that may be subject to the economic unit depends on all the relevant
c. For gains only, if the property was recharacterization rules under Temporary facts and circumstances. The factors
substantially appreciated at the time of Regulations section 1.469-2T(f) and given the greatest weight in determining
the disposition and the applicable holding Regulations section 1.469-2(f): whether activities make up an appropriate
period specified in Regulations section a. Net income from an activity of economic unit are:
1.469-2(c)(2)(iii)(A) was not satisfied, renting substantially nondepreciable • Similarities and differences in types of
identify the amount of the nonpassive property. trades or businesses.
gain and indicate whether the gain is b. The smaller of equity-financed • The extent of common control.
investment income under the provisions interest income or net passive income • The extent of common ownership.
of Regulations section from an equity-financed lending activity. • Geographical location.
1.469-2(c)(2)(iii)(F). c. Net rental activity income from • Reliance between or among the
7. Specify the amount of gross property that was developed (by the activities.
portfolio income, the interest expense partner or the partnership), rented, and
properly allocable to portfolio income, and sold within 12 months after the rental of Example. The partnership has a
expenses other than interest expense that the property commenced. significant ownership interest in a bakery
are clearly and directly allocable to d. Net rental activity income from the and a movie theater in Baltimore and a
portfolio income. rental of property by the partnership to a bakery and a movie theater in
8. Identify separately any of the trade or business activity in which the Philadelphia. Depending on the relevant
following types of payments to partners: partner had an interest (either directly or facts and circumstances, there may be
indirectly). more than one reasonable method for
a. Payments to a partner for services
e. Net royalty income from intangible grouping the partnership’s activities. For
other than in the partner’s capacity as a
property if the partner acquired the instance, the following groupings may or
partner under section 707(a).
partner’s interest in the partnership after may not be permissible:
b. Guaranteed payments to a partner
for services under section 707(c). the partnership created the intangible • A single activity,
c. Guaranteed payments for use of property or performed substantial • A movie theater activity and a bakery
services, or incurred substantial costs in activity,
capital.
developing or marketing the intangible • A Baltimore activity and a Philadelphia
d. If section 736(a)(2) payments are activity, or
property.
made for unrealized receivables or for
15. Identify separately the credits from • Four separate activities.
goodwill, the amount of the payments and Once the partnership chooses a
the activities to which the payments are each activity conducted by or through the
partnership. grouping under these rules, it must
attributable. continue using that grouping in later tax
e. If section 736(b) payments are 16. Identify the partner’s distributive
share of the partnership’s self-charged years unless a material change in the
made, the amount of the payments and facts and circumstances makes it clearly
the activities to which the payments are interest income or expense (see
Self-Charged Interest on page 10. inappropriate.
attributable.
9. Identify the ratable portion of any a. Loans between a partner and the The IRS may regroup the partnership’s
section 481 adjustment (whether a net partnership. Identify the lending or activities if the partnership’s grouping fails
positive or a net negative adjustment) borrowing partner’s share of the to reflect one or more appropriate
allocable to each partnership activity. self-charged interest income or expense. economic units and one of the primary

Instructions for Form 1065-B -11-


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purposes of the grouping is to avoid the Partnerships Holding Residual and the partnership may passthrough a
passive activity limitations. Interests in Real Estate full deduction of IDCs to its partners who
are not disqualified persons. Also, an
Limitation on grouping certain Mortgage Investment Conduits electing large partnership (and not the
activities. The following activities may (REMICs) partners) makes the section 59(e)
not be grouped together: For purposes of the excise tax on election to capitalize and amortize certain
1. A rental activity with a trade or partnerships holding residual interests in specific IDCs for its partners who are not
business activity unless the activities REMICs, all interests in an electing large disqualified persons. However, partners
being grouped together make up an partnership are treated as held by who are disqualified persons are
disqualified organizations. Therefore, an permitted to make their own separate
appropriate economic unit and
electing large partnership holding a section 59(e) election.
a. The rental activity is insubstantial residual interest in a REMIC is subject to
relative to the trade or business activity or A single AMT adjustment (under either
an annual tax equal to 35% of the excess corporate or noncorporate rules) is made
vice versa or inclusions. The amount that is subject to and reported to partners who are not
b. Each owner of the trade or tax is excluded from partnership income. disqualified persons. This separately
business activity has the same To report and pay this tax, file Form reported item is affected by the limitation
proportionate ownership interest in the 8831, Excise Taxes on Excess Inclusions on the repeal of the tax preference for
rental activity. If so, the portion of the of REMIC Residual Interests. excess IDCs. For purposes of computing
rental activity involving the rental of Partnerships Holding Oil and this limitation, the partnership is treated
property to be used in the trade or as the taxpayer. Thus, the limitation on
business activity may be grouped with the
Gas Properties
repeal of the IDC preference is applied at
trade or business activity. Partnerships holding oil and gas the partnership level and is based on the
properties generally follow the same
2. An activity involving the rental of cumulative reduction in the partnership’s
simplified reporting rules as other electing
real property with an activity involving the alternative minimum taxable income
large partnerships. However, certain
rental of personal property (except resulting from repeal of that preference.
partners are treated as disqualified
personal property provided in connection persons, and special rules apply. Finally, in making partnership-level
with the real property or vice versa). computations, any item of income, gain,
Computing depletion. Depletion is
3. Any activity with another activity in generally computed at the partnership loss, deduction, or credit attributable to a
a different type of business and in which level. The 1,000-barrel-per-day-limitation disqualified person is disregarded. For
the partnership holds an interest as a on depletion does not apply. Depletion is example, in computing the partnership’s
limited partner or as a limited also computed without regard to the net income from oil and gas for purposes
entrepreneur (as defined in section 65-percent-of-taxable-income limitation of determining the IDC preference to be
464(e)(2)) if that other activity engages in and the depletion basis adjustment. The reported to partners as part of the AMT
holding, producing, or distributing motion depletion deduction is computed with the adjustment, disqualified persons’
picture films or videotapes; farming; assumptions that the partnership is the distributive shares of the partnership’s net
leasing section 1245 property; or taxpayer and that it qualifies for the income from oil and gas are not taken into
percentage depletion deduction. This account.
exploring for or exploiting oil and gas
resources or geothermal deposits. deduction is reported to partners (other
than disqualified persons) as part of their Extraterritorial Income
Activities conducted through other share of the taxable income (loss) from Exclusion
partnerships. Once a partnership passive loss limitation activities.
The partnership may exclude
determines its activities under these rules, Disqualified persons. Two categories extraterritorial income to the extent of
the partnership as a partner may use of taxpayers are defined as disqualified qualifying foreign trade income. For
these rules to group those activities with: persons: details and to figure the amount of the
• Each other, • Certain retailers and refiners who do exclusion, see Form 8873, Extraterritorial
not qualify for the section 613A
• Activities conducted directly by the percentage depletion deduction. See
Income Exclusion, and its separate
instructions. The partnership must report
partnership, or section 613A(d)(2) and (4). the extraterritorial income exclusion on its
• Activities conducted through other • Any other person whose average daily return as follows:
partnerships. production of domestic crude oil and
1. If the partnership met the foreign
A partner may not treat as separate natural gas exceeds 500 barrels for its tax
economic process requirements
activities those activities grouped together year in which the partnership’s tax year
explained in the Instructions for Form
by a partnership. ends. See section 776(b) for more details.
8873, it may report the exclusion as a
A disqualified person must notify the
non-separately stated item on whichever
Tax-Exempt Partners partnership of its status as such.
of the following lines apply to that activity:
A tax-exempt partner is subject to tax on Reporting to disqualified persons. An • Form 1065-B, Part I, line 23;
its distributive share of partnership electing large partnership reports • Form 1065-B, Part I, line 5; or
income to the extent that the partnership information related to oil and gas • Form 8825, line 15.
activity is an unrelated business for the activities to a disqualified person in box 9 In addition, the partnership must
of Schedule K-1 (Form 1065-B) providing report, as an item of information using
partner. Therefore, partnership items
the same information as required for other Code P1 in box 9 of Schedule K-1, the
must be separately reported to
partnerships. This information may be partner’s distributive share of foreign
tax-exempt partners to allow them to provided in an attached statement if
compute income from an unrelated trading gross receipts from Form 8873,
additional space is required. However, the line 15.
business. simplified rules do apply to a disqualified 2. If the foreign trading gross receipts
person’s share of items not related to oil of the partnership for the tax year are $5
Publicly Traded Partnerships and gas activities. million or less and the partnership did not
For electing large partnerships, the Other reporting requirements. Unlike meet the foreign economic process
requirement that the passive loss rules be other partnerships, the election to deduct requirements, it may not report the
separately applied to each publicly traded intangible drilling and development costs extraterritorial income exclusion as a
partnership continues to apply. (IDCs) is made at the partnership level, non-separately stated item on its return.

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Instead, the partnership must report the address. Do not abbreviate the country receipts from farming on this line. Instead,
following separately-stated items to the name. show the net profit (loss) from farming on
partners: If the partnership has had a change of line 7. Also, do not include on line 1a
• Using Code P1, enter in box 9 of address, check box G(3). If the portfolio income.
Schedule K-1 the partner’s distributive partnership changes its mailing address In general, advance payments are
share of foreign trading gross receipts after filing its return, it can notify the IRS reported in the year of receipt. To report
from the partnership’s Form 8873, line 15. by filing Form 8822, Change of Address. income from long-term contracts, see
• Using Code P2, enter in box 9 of Employer identification number (EIN). section 460. For special rules for
Schedule K-1 the partner’s distributive reporting certain advance payments for
share of the extraterritorial income Show the correct EIN in item D on page 1
of Form 1065-B. goods and long-term contracts, see
exclusion from the partnership’s Form Regulations section 1.451-5. For
8873, line 55. For general partners only, Items A and C permissible methods for reporting
identify the activity to which the exclusion Enter the applicable activity name and the advance payments for services by an
relates. code number from the list beginning on accrual method partnership, see Rev.
page 33. Proc. 71-21, 1971-2 C.B. 549.
Note: Upon request of a partner, the
partnership should furnish a copy of the For example, if, as its principal Installment sales. Generally, the
partnership’s Form 8873 if that partner business activity, the partnership (a) installment method cannot be used for
has a reduction for international boycott purchases raw materials, (b) subcontracts dealer dispositions of property. A “dealer
operations, illegal bribes, kickbacks, etc. out for labor to make a finished product disposition” is any disposition of:
from the raw materials, and (c) retains 1. Personal property by a person who
title to the goods, the partnership is regularly sells or otherwise disposes of
considered to be a manufacturer and personal property of the same type on the
Specific Instructions must enter “Manufacturer” in item A and installment plan or
enter in item C one of the codes (311110 2. Real property held for sale to
through 339900) listed under customers in the ordinary course of the
These instructions follow the line numbers “Manufacturing” beginning on page 33. taxpayer’s trade or business.
on Form 1065-B. The accompanying
schedules are discussed separately. Item F—Total Assets Exception. These restrictions on using
Specific instructions for most of the lines Enter the partnership’s total assets at the the installment method do not apply to
are provided on the following pages. end of the tax year, as determined by the dispositions of property used or produced
Lines that are not discussed in the accounting method regularly used in in a farming business. See section 453(l)
instructions are self-explanatory. keeping the partnership’s books and for details and exceptions.
records. If there were no assets at the For sales of timeshares and residential
Fill in all applicable lines and
end of the tax year, enter “0.” lots reported under the installment
schedules.
method, the electing large partnership’s
Enter any items specially allocated to
income tax is increased by the interest
the partners in the appropriate box of the Part I—Taxable Income or payable under section 453(l)(3). In
applicable partner’s Schedule K-1. Enter
Loss from Passive Loss determining the amount of interest
the total amount on the appropriate line of
payable, the partnership is treated as
Schedule K. Do not enter separately Limitation Activities subject to tax at a 38.6% rate. To report
stated amounts on the numbered lines on
this addition to the tax, see the
Form 1065-B, Parts I or II, or on Schedule
instructions for line 26.
A or Schedule D. Report only amounts from passive loss
limitation activities in Part I. See page 9 Enter on line 1a the gross profit on
File only one Form 1065-B for each collections from installment sales for any
partnership. Mark “Duplicate Copy” on for the definition of “passive loss limitation
activity.” of the following:
any copy you give to a partner. • Dealer dispositions of property before
Do not report any tax-exempt interest March 1, 1986.
General Information income or income from the discharge of • Dispositions of property used or
any indebtedness on lines 1a through 10. produced in the trade or business of
Name, Address, and Employer These amounts are accounted for farming.
Identification Number separately by each partner and are • Dispositions of timeshares and
reported in box 9 of Schedule K-1 (Form residential lots reported under the
Name. Print or type the legal name of the 1065-B). Income from discharge of
partnership as it appears in the installment method.
indebtedness is also reported on line 8 of Attach a schedule showing the
partnership agreement. Schedule K, and tax-exempt interest following information for the current year
If the partnership has changed its income is reported on line 9 of Schedule and the 3 preceding years:
name, check box G(2). K. • Gross sales.
Address. Include the suite, room, or If the partnership has had debt • Cost of goods sold.
other unit number after the street discharged resulting from a title 11 • Gross profits.
address. If the Post Office does not bankruptcy proceeding or while insolvent, • Percentage of gross profits to gross
deliver mail to the street address and the see Form 982, Reduction of Tax sales.
partnership has a P.O. box, show the box Attributes Due to Discharge of • Amount collected.
number instead. Indebtedness, and Pub. 908, Bankruptcy • Gross profit on amount collected.
Tax Guide.
If the partnership’s address is outside Line 2 —Cost of Goods Sold
the United States or its possessions or Income See the instructions for Schedule A on
territories, enter the information on the page 18.
line for “City or town, state, and ZIP code” Line 1a —Gross Receipts or Sales
in the following order: city, province or Enter the gross receipts or sales from all Line 4 —Net Income (Loss) From
state, and the name of the foreign trade or business operations except those Rental Real Estate Activities
country. Follow the foreign country’s that must be reported on lines 6 through Enter the net income or loss from rental
practice in placing the postal code in the 10. For example, do not include gross real estate activities of the partnership
Instructions for Form 1065-B -13-
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from Form 8825. Attach this form to Form For a special rule concerning the Do not report the following expenses
1065-B. If the amount entered is from method of accounting for a farming on lines 12 through 24:
more than one activity, attach a schedule partnership with a corporate partner and • Rental activity expenses. Report these
identifying the amount from each activity. for other tax information on farms, see expenses on Form 8825 or on an
Pub. 225, Farmer’s Tax Guide. attached schedule for line 5 of Form
Line 5 —Net Income (Loss) From 1065-B, Part I.
Other Rental Activities Line 9 —Net Gain (Loss) From • Deductions allocable to portfolio
On line 5 enter the net income from rental Form 4797 income. Report these deductions on page
activities other than rental real estate On this line include only the ordinary 2, Part II.
activities. See page 9 of these gains or losses from the sale, exchange, • Nondeductible expenses (e.g.,
instructions and Pub. 925 for the or involuntary conversion of assets used expenses connected with the production
definition of rental activities. Include on in a trade or business activity. Ordinary of tax-exempt income). Report
this line the gain (loss) from line 18 of gains or losses from the sale, exchange, nondeductible expenses on an
Form 4797 that is attributable to the sale, or involuntary conversion of rental activity attachment to line 16 of Schedule K and
exchange, or involuntary conversion of an assets are not reported on line 9. Instead, in box 9 of Schedules K-1.
asset used in a rental activity other than a report them on line 19 of Form 8825 or • Items the partnership must state
rental real estate activity. If the amount line 5 of Form 1065-B, Part I. separately that require separate
entered is from more than one activity, computations by the partners. An
A partnership that is a partner in example is foreign taxes paid. The
attach a schedule identifying the amount
another partnership must include on distributive share of this expense is
from each activity.
Form 4797, Sales of Business Property, reported separately to each partner on
Line 6 —Ordinary Income (Loss) its share of ordinary gains (losses) from Schedule K-1, box 9.
From Other Partnerships, Estates, sales, exchanges, or involuntary
conversions (other than casualties or Limitations on Deductions
and Trusts thefts) of the other partnership’s trade or
Enter the ordinary income (loss) shown business assets. Section 263A uniform capitalization
on Schedule K-1 (Form 1065, 1065-B, or rules. The uniform capitalization rules of
1041) or other ordinary income (loss) Line 10 —Other Income (Loss) section 263A require partnerships to
from a foreign partnership, estate, or Enter on line 10 trade or business income capitalize or include in inventory costs,
trust. Be sure to show the partnership’s, (loss) that is not included on lines 1a certain costs incurred in connection with:
estate’s, or trust’s name, address, and through 9. Examples of such income • The production of real and tangible
EIN on a separate statement attached to include: personal property held in inventory or
this return. If the amount entered is from held for sale in the ordinary course of
1. Interest income derived in the
more than one source, identify the business. Tangible personal property
ordinary course of the partnership’s trade
amount from each source. produced by a partnership includes a film,
or business, such as interest charged on
sound recording, videotape, book, or
Do not include rental activity income receivable balances.
similar property.
(loss) from other partnerships, estates, or 2. Recoveries of bad debts deducted
trusts on this line. Instead, report these in earlier years under the specific
• Real property or personal property
(tangible and intangible) acquired for
amounts on line 20a of Form 8825 or line charge-off method.
resale.
5 of Form 1065-B, Part I. 3. Taxable income from insurance
proceeds.
• The production of real property and
Ordinary income or loss from another tangible personal property by a
4. The amount of credit figured on
partnership that is a publicly traded partnership for use in its trade or business
Form 6478, Credit for Alcohol Used as
partnership is not reported on this line. or in an activity engaged in for profit.
Fuel.
Instead, report the amount separately on The costs required to be capitalized
5. All section 481 income adjustments
an attachment to line 16 of Schedule K under section 263A are not deductible
resulting from changes in accounting
and in box 9 of Schedule K-1. until the property to which the costs relate
methods. Show the computation of the
is sold, used, or otherwise disposed of by
Treat shares of other items separately section 481 adjustments on an attached
the partnership.
reported on Schedule K-1 issued by the schedule.
other entity as if the items were realized 6. The amount of any deduction Exceptions. Section 263A does not
or incurred by this partnership. previously taken under section 179A that apply to:
If there is a loss from another
is subject to recapture. See Pub. 535, • Inventoriable items accounted for in the
Business Expenses, for details, including same manner as material and supplies
partnership, the amount of the loss that how to figure the recapture. that are not incidental. See Schedule
may be claimed is subject to the at-risk 7. The recapture amount for section A — Cost of Goods Sold on page 18, for
and basis limitations as appropriate. 280F if the business use of listed property details.
If the tax year of your partnership does drops to 50% or less. To figure the • Personal property acquired for resale if
not coincide with the tax year of the other recapture amount, the partnership must the partnership’s average annual gross
partnership, estate, or trust, include the complete Part IV of Form 4797. receipts for the 3 prior tax years were $10
ordinary income (loss) from the other Do not include items requiring million or less.
entity in the tax year in which the other separate computations that must be • Timber.
entity’s tax year ends. reported on Schedules K and K-1. See • Most property produced under a
the instructions for Schedules K and K-1 long-term contract.
Line 7 —Net Farm Profit (Loss)
beginning on page 23. • Certain property produced in a farming
Enter the partnership’s net farm profit business.
(loss) from Schedule F (Form 1040), Do not report portfolio or rental • Research and experimental costs
Profit or Loss From Farming. Attach activity income (loss) on this line. under section 174.
Schedule F (Form 1040) to Form 1065-B. • Intangible drilling costs for oil, gas, and
In figuring the partnership’s net farm profit Deductions geothermal property.
(loss), include any section 179 expense • Mining exploration and development
deduction. Do not include on this line any Report only trade or business costs.
farm profit (loss) from other partnerships. !
CAUTION
activity deductions on lines 12
through 24.
Tangible personal property
Report those amounts on line 6. produced by a partnership includes a film,

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sound recording, videotape, book, or must be capitalized. They cannot be not deductible on line 13. They are capital
similar property. depreciated or amortized. See the expenditures. However, they should be
Partnerships subject to the rules are instructions for line 13 for the treatment of separately reported on Schedule K, line 7,
required to capitalize not only direct costs syndication fees paid to a partner. and Schedules K-1, box 9.
but an allocable part of most indirect Reducing certain expenses for which Do not include distributive shares of
costs (including taxes) that benefit the credits are allowable. For each of the partnership profits.
assets produced or acquired for resale, or following credits, the partnership must Report the guaranteed payments to
are incurred by reason of the reduce the otherwise allowable the appropriate partners on Schedules
performance of production or resale deductions for expenses used to figure K-1, box 9.
activities. the credit by the amount of the current
For inventory, some of the indirect year credit: Line 14 —Repairs and Maintenance
costs that must be capitalized are: 1. The work opportunity credit. Enter the costs of incidental repairs and
• Administration expenses. 2. The welfare-to-work credit. maintenance that do not add to the value
• Taxes. 3. The credit for increasing research of the property or appreciably prolong its
• Depreciation. activities. life, but only to the extent that such costs
• Insurance. 4. The enhanced oil recovery credit. relate to a trade or business activity and
• Compensation paid to officers 5. The disabled access credit. are not claimed elsewhere on the return.
attributable to services. 6. The empowerment zone and New buildings, machinery, or
• Rework labor. renewal community employment credit. permanent improvements that increase
• Contributions to pension, stock bonus, 7. The Indian employment credit. the value of the property are not
and certain profit-sharing, annuity, or 8. The credit for employer social deductible. They are chargeable to capital
deferred compensation plans. security and Medicare taxes paid on accounts and may be depreciated or
Regulations section 1.263A-1(e)(3) certain employee tips. amortized.
specifies other indirect costs that relate to 9. The orphan drug credit.
production or resale activities that must 10. The New York Liberty Zone Line 15 —Bad Debts
be capitalized and those that may be business employment credit. Enter the total debts that became
currently deductible. worthless in whole or in part during the
If the partnership has any of these
Interest expense paid or incurred year, but only to the extent such debts
credits, be sure to figure each current
during the production period of relate to a trade or business activity.
year credit before figuring the deductions
designated property must be capitalized Report deductible nonbusiness bad debts
for expenses on which the credit is based.
and is governed by special rules. For as a short-term capital loss on
more details, see Regulations sections Line 12 —Salaries and Wages Schedule D.
1.263A-8 through 1.263A-15. Enter on line 12 the salaries and wages Cash method partnerships cannot
For more details on the uniform paid or incurred for the tax year, reduced
by any applicable employment credits
! take a bad debt deduction unless
CAUTION the amount was previously
capitalization rules, see Regulations
sections 1.263A-1 through 1.263A-3. from Form 5884, Work Opportunity included in income.
Credit; Form 8861, Welfare-to-Work
Transactions between related Credit; Form 8844, Empowerment Zone Line 16 —Rent
taxpayers. Generally, an accrual basis and Renewal Community Employment Enter rent paid on business property used
partnership may deduct business Credit; Form 8845, Indian Employment in a trade or business activity. Do not
expenses and interest owed to a related Credit; and Form 8884, New York Liberty deduct rent for a dwelling unit occupied
party (including any partner) only in the Zone Business Employment Credit. See by any partner for personal use.
tax year of the partnership that includes the instructions for these forms for more
the day on which the payment is If the partnership rented or leased a
information. vehicle, enter the total annual rent or
includible in the income of the related
party. See section 267 for details. Do not include salaries and wages lease expense paid or incurred in the
reported elsewhere on the return, such as trade or business activities of the
Business start-up expenses. Business partnership. Also complete Part V of
amounts included in cost of goods sold,
start-up expenses must be capitalized. An Form 4562, Depreciation and
elective contributions to a section 401(k)
election may be made to amortize them Amortization. If the partnership leased a
cash or deferred arrangement, or
over a period of not less than 60 months. vehicle for a term of 30 days or more, the
amounts contributed under a salary
See Pub. 535 and Regulations section deduction for vehicle lease expense may
reduction simplified employee plan (SEP)
1.195-1. have to be reduced by an amount called
agreement or a SIMPLE IRA plan.
Organization costs. Amounts paid or the inclusion amount. You may have an
incurred to organize a partnership are Line 13 —Guaranteed Payments to inclusion amount if:
capital expenditures. They are not Partners
deductible as a current expense. Deduct payments or credits to a partner And the
vehicle’s
The partnership may elect to amortize for services or for the use of capital if the FMV on the
organization expenses over a period of 60 payments or credits are determined first day of
or more months, beginning with the without regard to partnership income and the lease
month in which the partnership begins are allocable to a trade or business The lease term began: exceeded:
business. Include the amortization activity. Also include on line 13 amounts
expense on line 23. On the balance sheet paid during the tax year for insurance that After 12/31/98 . . . . . . . . . . . . . . . . . . $15,500
(Schedule L) show the unamortized constitutes medical care for a partner, a
balance of organization costs. See the partner’s spouse, or a partner’s After 12/31/96 but before 1/1/99 . . . . . . . $15,800
instructions for line 13 for the treatment of dependents.
After 12/31/94 but before 1/1/97 . . . . . . . $15,500
organization expenses paid to a partner. Do not include any payments and If the lease term began before January 1, 1995, see Pub.
See Pub. 535 for more information. credits that should be capitalized. For 463, Travel, Entertainment, Gift, and Car Expenses, to
Syndication costs. Costs for issuing example, although payments or credits to find out if the partnership has an inclusion amount.
and marketing interests in the a partner for services rendered in
partnership, such as commissions, organizing or syndicating a partnership See Pub. 463 for instructions on figuring
professional fees, and printing costs, may be guaranteed payments, they are the inclusion amount.
Instructions for Form 1065-B -15-
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Line 17 —Taxes and Licenses debt used in a rental activity. Interest during the tax year or claims depreciation
Enter taxes and licenses paid or incurred allocable to a rental real estate activity is on any car or other listed property.
in the trade or business activities of the reported on Form 8825 and is used in
arriving at net income (loss) from rental Line 20 —Depletion
partnership if not reflected in cost of
goods sold. Federal import duties and real estate activities on line 4. Interest An electing large partnership computes
Federal excise and stamp taxes are allocable to a rental activity other than a the deduction for oil and gas depletion at
deductible only if paid or incurred in rental real estate activity is used in the partnership level. The deduction is
carrying on the trade or business of the arriving at net income (loss) from a rental computed under the assumptions that the
partnership. activity (other than a rental real estate partnership is the taxpayer and that it
activity). This net amount is reported on qualifies for the percentage depletion
Do not deduct the following taxes on line 5. deduction. In computing the depletion
line 17: deduction, the 1,000-barrel-per-day
• State and local sales taxes paid or Do not include interest expense on
limitation and the 65
incurred in connection with the acquisition debt used to buy property held for percent-of-taxable-income limitation do
or disposition of business property. These investment. Do not include interest not apply.
taxes must be added to the cost of the expense that is clearly and directly
property, or, in the case of a disposition, allocable to interest, dividend, royalty, or The amount of the depletion deduction
subtracted from the amount realized. annuity income not derived in the ordinary is generally reported to each partner as a
• Taxes assessed against local benefits course of a trade or business. Interest component of that partner’s distributive
to the extent that they increase the value paid or incurred on debt used to purchase share of taxable income or loss from
of the property assessed, such as for or carry investment property is reported passive loss limitation activities. However,
paving, etc. on line 7 of Part II. See the instructions for the partnership must report information
• Federal income taxes or taxes reported Form 4952, Investment Interest Expense related to oil and gas activities to a
elsewhere on the return. Deduction, for more information on partner who is a disqualified person in the
• Section 901 foreign taxes. Report these investment property. same manner that it reports the
taxes separately on Schedule K, line 15g, information under the regular partnership
Temporary Regulations section tax law. See Partnerships Holding Oil
and Schedules K-1, box 9. 1.163-8T gives rules for allocating interest
• Taxes allocable to a rental activity. expense among activities so that the
and Gas Properties on page 12 for more
Taxes allocable to a rental real estate details.
limitations on passive activity losses,
activity are reported on Form 8825. Taxes investment interest, and personal interest If the partnership claims a deduction
allocable to a rental activity other than a can be properly figured. Generally, for timber depletion, complete and attach
rental real estate activity are reported on interest expense is allocated in the same Form T, Forest Activities Schedules.
Form 1065-B on an attachment to Part I, manner that debt is allocated. Debt is
line 5. allocated by tracing disbursements of the Line 21 —Retirement Plans, etc.
• Taxes allocable to portfolio income. debt proceeds to specific expenditures, Enter the deductible contributions not
These taxes are reported on Form as provided in the regulations. claimed elsewhere on the return made by
1065-B in Part II, line 8 or 11. the partnership for its common-law
• Taxes paid or incurred for the Interest paid by a partnership to a employees under a qualified pension,
production or collection of income, or for partner for the use of capital should be profit-sharing, annuity, or SEP or SIMPLE
the management, conservation, or entered on line 13 as guaranteed IRA plan, and under any other deferred
maintenance of property held to produce payments. compensation plan.
income. Also report these taxes on Form Prepaid interest can only be deducted
1065-B in Part II, line 8 or 11. If the partnership contributes to an
over the period to which the prepayment individual retirement arrangement (IRA)
See section 263A(a) for rules on applies.
capitalization of allocable costs (including for employees, include the contribution in
taxes) for any property. Note: Additional limitations on interest salaries and wages on Part I, line 12, or
deductions apply when the partnership is Schedule A, line 3, and not on line 21.
Line 18 —Interest a policyholder or beneficiary with respect Employers who maintain a pension,
Include only interest incurred in the trade to a life insurance, endowment, or annuity profit-sharing, or other funded deferred
or business activities of the partnership contract issued after June 8, 1997. For compensation plan (other than a SEP or
that is not claimed elsewhere on the details, see section 264. Attach a SIMPLE IRA), whether or not the plan is
return. statement showing the computation of the qualified under the Internal Revenue
Do not deduct interest expense on deduction disallowed under section 264. Code and whether or not a deduction is
debt required to be allocated to the Line 19 —Depreciation and Section claimed for the current year, generally
production of designated property. must file the applicable form listed below:
179 Expense Deduction
Designated property includes real • Form 5500, Annual Return/Report of
property, personal property that has a On line 19a, enter only the depreciation Employee Benefit Plan. File this form for
class life of 20 years or more, and other (including section 179 expense a plan that is not a one-participant plan
tangible property requiring more than 2 deduction) claimed on assets used in a (see below).
years (1 year in the case of property with trade or business activity. Enter on line • Form 5500-EZ, Annual Return of
a cost of more than $1 million) to produce 19b the depreciation (including section One-Participant (Owners and Their
or construct. Interest that is allocable to 179 expense deduction) reported Spouses) Retirement Plan. File this form
designated property produced by a elsewhere on the return (for example, on for a plan that only covers one or more
partnership for its own use or for sale Schedule A) that is attributable to assets partners (or partners and their spouses).
must be capitalized. In addition, a used in trade or business activities. See There are penalties for not filing these
partnership must also capitalize any the Instructions for Form 4562 or Pub. forms on time.
interest on debt that is allocable to an 946, How To Depreciate Property, to
asset used to produce designated figure the amount of depreciation Line 22 —Employee Benefit
property. See section 263A(f) and (including section 179 expense Programs
Regulations sections 1.263A-8 through deduction) to enter on this line.
Enter the partnership’s contributions to
1.263A-15. For depreciation, you must complete employee benefit programs not claimed
Do not include interest expense on and attach Form 4562 only if the elsewhere on the return (e.g., insurance,
debt used to purchase rental property or partnership placed property in service health, and welfare programs) that are not

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part of a pension, profit-sharing, etc., plan • Expenses allocable to tax-exempt tickets. See section 274 and Pub. 463 for
included on line 21. income. Report these expenses on more details.
Schedule K, line 16. Travel. The partnership cannot
Do not include amounts paid during • Any amount that is allocable to a class deduct travel expenses of any individual
the tax year for insurance that constitutes of exempt income. See section 265(b) for
medical care for a partner, a partner’s accompanying a partner or partnership
exceptions. employee, including a spouse or
spouse, or a partner’s dependents. • Net operating losses. Only individuals dependent of the partner or employee,
Instead, include these amounts on line 13 and corporations may claim a net
as guaranteed payments and on unless:
operating loss deduction. • That individual is an employee of the
Schedule K, line 7, and Schedule K-1, • Amounts paid or incurred to participate partnership and
box 9, of each partner on whose behalf
the amounts were paid.
or intervene in any political campaign on • His or her travel is for a bona fide
behalf of a candidate for public office, or business purpose and would otherwise be
Line 23 —Other Deductions to influence the general public regarding deductible by that individual.
legislative matters, elections, or
Attach your own schedule, listing by type referendums. Meals and entertainment.
and amount, all allowable deductions • Expenses paid or incurred to influence Generally, the partnership can deduct
related to a trade or business activity only Federal or state legislation, or to influence only 50% of the amount otherwise
for which there is no separate line on Part the actions or positions of certain Federal allowable for meals and entertainment
I of Form 1065-B. Enter the total on this executive branch officials. However, expenses. In addition (subject to
line. certain in-house lobbying expenditures exceptions under section 274(k)(2)):
Include on line 23 qualified that do not exceed $2,000 are deductible. • Meals must not be lavish or
See section 162(e) for more details. extravagant,
expenditures deducted under:
• Section 173, relating to circulation • A bona fide business discussion must
Special Rules occur during, immediately before, or
expenditures.
• Section 174, relating to research and Commercial revitalization deduction. If immediately after the meal, and
experimental expenditures. the partnership constructs, purchases, or • A partner or employee of the
• Section 263(c), relating to intangible substantially rehabilitates a qualified partnership must be present at the meal.
building in a renewal community it may See section 274(n)(3) for a special rule
drilling and development expenditures.
• Section 616(a), relating to development qualify for a deduction of either (a) 50% of that applies to expenses for meals
qualified capital expenditures in the year consumed by individuals subject to the
expenditures.
• Section 617(a), relating to mining the building is placed in service or (b) hours of service limits of the Department
amortization of 100% of the qualified of Transportation.
exploration expenditures.
The election to deduct intangible capital expenditures over a 120-month Membership dues. The partnership
drilling costs under section 263(c) is period beginning with the month the may deduct amounts paid or incurred for
made at the partnership level. As stated building is placed in service. If the membership dues in civic or public
on page 12, an electing large partnership partnership elects to amortize these service organizations, professional
also has the responsibility with respect to expenditures, complete and attach Form organizations, business leagues, trade
its partners who are not disqualified 4562. To qualify, the building must be associations, chambers of commerce,
persons for making an election under nonresidential (as defined in section boards of trade, and real estate boards.
section 59(e) to capitalize and amortize 168(e)(2)) and placed in service by the However, no deduction is allowed if a
certain specified intangible drilling costs. partnership. The partnership must be the principal purpose of the organization is to
However, disqualified persons make their original user of the building unless it is entertain, or provide entertainment
own separate section 59(e) elections. See substantially rehabilitated. The amount of facilities for, members or their guests. In
Partnerships Holding Oil and Gas the qualified expenditures cannot exceed addition, the partnership may not deduct
Properties on page 12 for more the lesser of $10 million or the amount membership dues in any club organized
information. allocated to the building by the for business, pleasure, recreation, or
commercial revitalization agency of the other social purpose. This includes
Include on line 23 the deduction taken state in which the building is located. Any country clubs, golf and athletic clubs,
for amortization. Complete and attach remaining expenditures are depreciated airline and hotel clubs, and clubs
Form 4562 if the partnership is claiming over the regular depreciation recovery operated to provide meals under
amortization of costs that begins during period. See Pub. 954, Tax Incentives for conditions favorable to business
the tax year. Include amortization of Empowerment Zones and Other discussion.
reforestation expenditures under section Distressed Communities, and section
194. The partnership can elect to Entertainment facilities. The
1400I for details. partnership cannot deduct an expense
amortize up to $10,000 of qualified
reforestation expenditures paid or Rental real estate. Do not report this paid or incurred for a facility (such as a
incurred during the tax year. This deduction on line 23 if the building is yacht or hunting lodge) used for an
amortization is deducted by the placed in service as rental real estate. A activity usually considered entertainment,
partnership instead of separately commercial revitalization deduction for amusement, or recreation.
reporting the amortizable basis to its rental real estate is not deducted by the Note: The partnership may be able to
partners. See Pub. 535 for more partnership but is passed through to the deduct otherwise nondeductible meals,
information on amortization. partners. Report this deduction on an travel, and entertainment expenses if the
attachment to line 16 of Schedule K and amounts are treated as compensation
Also, see Special Rules below for in box 9 of Schedule K-1 using Code R. and reported on Form W-2 for an
limits on certain other deductions.
Travel, meals, and entertainment. employee or on Form 1099-MISC for an
Do not deduct on line 23: Subject to limitations and restrictions independent contractor.
• Items that must be reported separately discussed below, a partnership can
Line 26 —Tax
on Schedules K and K-1. deduct ordinary and necessary travel,
• Qualified expenditures to which an meals, and entertainment expenses paid Net recapture taxes. Recapture of the
election under section 59(e) may apply. or incurred in its trade or business. low-income housing credit and investment
• Fines or penalties paid to a government Special rules apply to deductions for gifts, credit is imposed at the partnership level,
for violating any law. Report these skybox rentals, luxury water travel, and the amount of recapture is
expenses on Schedule K, line 16. convention expenses, and entertainment determined by assuming that the credit
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was fully utilized to reduce tax. Credit attach the acknowledgment to the tax
recapture does not result from any Part II—Taxable Income or return, but keep it with the partnership’s
transfer of an interest in an electing large records. These rules apply in addition to
partnership. Report recapture of Loss From Other Activities the filing requirements for Form 8283.
low-income housing and investment credit Form 8283, Noncash Charitable
as follows: Report in Part II only income (loss) and Contributions, must be completed and
1. Apply the recapture to reduce any deductions from activities not included in attached to Form 1065-B if the deduction
current year credit of the same type Part I (for example, portfolio income and claimed for noncash contributions
deductions). See page 10 for a definition exceeds $500.
(low-income housing or investment
credit). of portfolio income. Certain contributions made to an
Lines 1 and 2 organization conducting lobbying
2. Report any remaining recapture on
activities are not deductible. See section
line 26. The partnership is liable to pay Enter only taxable interest and ordinary 170(f)(9) for more details.
any unapplied recapture amount. dividends (not from passive loss
limitation activities) on these lines. If the partnership made a qualified
Report recapture of any other credit as conservation contribution, include the
a separately stated item. Line 5 FMV of the underlying property before
Report and identify other income or loss and after the donation, as well as the type
Interest on deferred tax attributable to on an attachment for line 5. of legal interest contributed, and describe
installment sales of certain timeshares the conservation purpose furthered by the
Line 7 donation.
and residential lots. For sales of
Investment interest is interest paid or
timeshares and residential lots reported accrued on debt properly allocable to Lines 10a and 10b
under the installment method, the property held for investment. Property Enter on line 10a miscellaneous itemized
partnership’s income tax is increased by held for investment includes property that deductions as defined in section 67(b).
the interest payable under section produces income (unless derived in the These deductions include expenses for
453(l)(3). In determining the amount of ordinary course of a trade or business) the production or collection of income
interest payable, the partnership is from interest, dividends, annuities, or under section 212, such as investment
treated as subject to tax at a 38.6% rate. royalties; and gains from the disposition advisory fees, subscriptions to investment
Report this amount on line 26 with the of property that produces those types of advisory publications, and the cost of safe
notation “Section 453(l)(3) interest.” income or is held for investment. deposit boxes. Multiply line 10a by 30%
Attach a schedule showing the Investment interest does not include (.30) and enter the result on line 10b. The
computation. interest expense allocable to passive loss remaining 70% of the amount on line 10a
limitation activities. is not allowed as a deduction to the
Interest on tax deferred under the To figure the deductible amount of partnership or its partners.
installment method for certain investment interest, complete Form 4952. Line 11
nondealer real property installment Enter the amount from line 8 of Form
4952. Other allowable deductions include items
obligations. If an obligation arising from such as:
the disposition of real property to which Line 8 • Real estate taxes and personal
section 453A applies is outstanding at the Include on line 8 state and local income property taxes on investment property.
close of the year, the partnership must taxes paid by the partnership that would • Casualty and theft losses on
include the interest due under section be allowed as itemized deductions on any income-producing property.
453A(c). In determining the amount of partners’ income tax returns if they were • Any penalty on the early withdrawal of
interest payable, the partnership is paid directly by the partner for the same savings.
treated as subject to tax at a 38.6% rate. purpose. Attach a schedule for line 11 listing the
Report this amount on line 26 with the type and amount of each allowable
Line 9 deduction for which there is no separate
notation “Section 453A(c) interest.” Attach Enter contributions or gifts actually paid line in Part II of Form 1065-B.
a schedule showing the computation. during the tax year to or for the use of
charitable and governmental
Line 27 organizations described in section 170(c). Schedule A—Cost of
Enter the total amounts from line 2 of The total amount claimed may not be
Form 2439, Notice to Shareholder of more than 10% of the partnership’s Goods Sold
taxable income (total income minus
Undistributed Long-Term Capital Gains,
deductions) figured without regard to the
and line 10 of Form 4136, Credit for deduction for charitable contributions. The Generally, inventories are required at the
Federal Tax Paid on Fuels. The credit for deduction for certain contributions of beginning and end of each tax year if the
tax paid on undistributed capital gains of ordinary income and capital gain property production, purchase, or sale of
a regulated investment company or a real is reduced under section 170(e). merchandise is an income-producing
estate investment trust and the factor. See Regulations section 1.471-1.
Generally, no deduction is allowed for
refundable credit for fuel used for certain any contribution of $250 or more unless However, if the partnership is a
purposes are allowed to the partnership. the partnership obtains a written qualifying taxpayer or a qualifying small
They are not separately reported to acknowledgment from the charitable business taxpayer, it may adopt or
partners. organization that shows the amount of change its accounting method to account
cash contributed, describes any property for inventoriable items in the same
contributed, and gives an estimate of the manner as materials and supplies that are
Line 28 not incidental.
value of any goods or services provided
Attach a check or money order payable to in return for the contribution. The A qualifying taxpayer is a taxpayer
the “United States Treasury.” Write acknowledgment must be obtained by the (a) whose average annual gross receipts
“2002 Form 1065-B,” and the due date (including extensions) of the for the 3 prior tax years are $1 million or
partnership’s name, address, phone partnership return or, if earlier, the date less and (b) whose business is not a tax
number, and EIN on the payment. the partnership files its return. Do not shelter (as defined in section 448(d)(3)).
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A qualifying small business must be accounted for separately. For does not conform to the requirements of
taxpayer is a taxpayer (a) whose average new partnerships, additional section 263A the regulations. See Rev. Rul. 71-234,
annual gross receipts for the 3 prior tax costs are the costs, other than interest, 1971-1 C.B. 148.
years are more than $1 million but not that must be capitalized under section Partnerships that use erroneous
more than $10 million, (b) whose 263A, but which the partnership would not valuation methods must change to a
business is not a tax shelter (as defined in have been required to capitalize if it had method permitted for Federal tax
section 448(d)(3)), and (c) whose existed before the effective date of purposes. To make this change, use
principal business activity is not an section 263A. For more details, see Form 3115.
ineligible activity as explained in Rev. Regulations section 1.263A-2(b).
On line 9a, check the methods used
Proc. 2002-28. For partnerships that have elected the for valuing inventories. Under lower of
Under this accounting method, simplified resale method, additional cost or market, the term “market” (for
inventory costs for raw materials section 263A costs are generally those normal goods) means the current bid
purchased for use in producing finished costs incurred with respect to the price prevailing on the inventory valuation
goods and merchandise purchased for following categories: date for the particular merchandise in the
resale are deductible in the year the • Off-site storage or warehousing. volume usually purchased by the
finished goods or merchandise are sold • Purchasing. taxpayer. For a manufacturer, market
(but not before the year the partnership • Handling, such as processing, applies to the basic elements of cost —
paid for the raw materials or assembly, repackaging, and transporting. raw materials, labor, and burden. If
merchandise, if it is also using the cash • General and administrative costs section 263A applies to the taxpayer, the
method). Enter amounts paid for all raw (mixed service costs). basic elements of cost must reflect the
materials and merchandise during the tax For more details, see Regulations current bid price of all direct costs and all
year on line 2. The amount the section 1.263A-3(d). indirect costs properly allocable to goods
partnership can deduct for the tax year is Enter on line 4 the balance of section on hand at the inventory date.
figured on line 8. For additional guidance 263A costs paid or incurred during the tax Inventory may be valued below cost
on this method of accounting for inventory year not includible on lines 2, 3, and 5. when the merchandise is unsalable at
items, see Rev. Proc. 2001-10, 2001-2 Attach a schedule listing these costs. normal prices or unusable in the normal
I.R.B. 272 if you are a qualifying taxpayer, way because the goods are subnormal
or Rev. Proc. 2002-28 if you are a Line 5—Other Costs
due to damage, imperfections, shop wear,
qualifying small business taxpayer. Enter on line 5 any other inventoriable
etc., within the meaning of Regulations
All filers that have not elected to treat costs paid or incurred during the tax year
section 1.471-2(c). These goods may be
inventoriable items as materials and not entered on lines 2 through 4. Attach a
valued at the current bona fide selling
supplies that are not incidental should see schedule.
price minus the direct cost of disposition
Section 263A uniform capitalization Line 7—Inventory at End of (but not less than scrap value) if such a
rules on page 14 before completing Year price can be established.
Schedule A. If this is the first year the last-in
See Regulations sections 1.263A-1
Line 1—Inventory at Beginning through 1.263A-3 for details on figuring first-out (LIFO) inventory method was
of Year the amount of additional section 263A either adopted or extended to inventory
costs to be included in ending inventory. goods not previously valued under the
If the partnership is changing its method LIFO method, attach Form 970,
of accounting for the current tax year, it If the partnership accounts for
inventoriable items in the same manner Application To Use LIFO Inventory
must refigure last year’s closing inventory Method, or a statement with the
using its new method of accounting and as materials and supplies that are not
incidental, enter on line 7 the portion of its information required by Form 970. Also
enter the result on line 1. If there is a check the box on line 9c.
difference between last year’s closing raw materials and merchandise
inventory and the refigured amount, purchased for resale that are included on If the partnership has changed or
attach an explanation and take it into line 6 and were not sold during the year. extended its inventory method to LIFO
account when figuring the partnership’s See Rev. Proc. 2001-10 and Rev. Proc. and has had to write up its opening
section 481(a) adjustment (explained on 2002-28 for more information. inventory to cost in the year of election,
page 5). report the effect of this write-up as income
Lines 9a through 9e—Inventory (line 10, Part I, Form 1065-B)
Line 2—Purchases Valuation Methods proportionately over a 3-year period that
Reduce purchases by items withdrawn for Inventories can be valued at: begins in the tax year of the LIFO
personal use. The cost of items • Cost, election.
withdrawn for personal use should be • Cost or market value (whichever is For more information on inventory
shown as property distributions on an lower), or valuation methods, see Pub. 538,
attachment to line 16 of Schedule K and • Any other method approved by the IRS Accounting Periods and Methods.
in box 9 of Schedule K-1. that conforms to the requirements of the
applicable regulations.
Line 4—Additional Section However, the partnership is required to Schedule B—Other
263A Costs use cost if it is using the cash method of
An entry is required on this line only for accounting. Information
partnerships that have elected a Partnerships that account for
simplified method. inventoriable items in the same manner Question 1
For partnerships that have elected the as materials and supplies that are not Check box 1f for any other type of entity
simplified production method, incidental may currently deduct and state the type.
additional section 263A costs are expenditures for direct labor and all
generally those costs, other than interest, indirect costs that would otherwise be Question 3
that were not capitalized under the included in inventory costs. See Rev. The partnership must answer Yes to
partnership’s method of accounting Proc. 2001-10 and Rev. Proc. 2002-28 for Question 3, if during the tax year, it
immediately prior to the effective date of more information. owned:
section 263A that are required to be The average cost (rolling average) • An interest in another partnership
capitalized under section 263A. Interest method of valuing inventories generally (foreign or domestic) or
Instructions for Form 1065-B -19-
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• A foreign entity that was disregarded as or other financial account in a foreign How Income Is Shared Among
an entity separate from the partnership country; and Partners on page 23.
under Regulations sections 301.7701-2 • The combined value of the accounts
and 301.7701-3. was more than $10,000 at any time What are Capital Assets?
If the partnership answered Yes to this during the calendar year and Each item of property the partnership held
question, report the following information • The accounts were not with a U.S. (whether or not connected with its trade
on an attached schedule: military banking facility operated by a U.S. or business) is a capital asset except:
1. If the partnership owned at least a financial institution. • Stock in trade or other property
10% interest, directly or indirectly, in any 2. The partnership owns more than included in inventory or held mainly for
other foreign or domestic partnership 50% of the stock in any corporation that sale to customers.
(other than any partnership for which a would answer the question Yes based on • Accounts or notes receivable acquired
Form 8865 is attached to the tax return), item 1 above. in the ordinary course of the trade or
show each partnership’s name, EIN (if business for services rendered or from
Get Form TD F 90-22.1, Report of the sale of stock in trade or other property
any), and the country under whose laws Foreign Bank and Financial Accounts, to
the partnership was organized. held mainly for sale to customers.
2. If the partnership owned any
see if the partnership is considered to • Depreciable or real property used in the
have an interest in or signature or other trade or business, even if it is fully
entities that have been disregarded as authority over a bank account, securities
separate from the partnership, show each depreciated.
disregarded entity’s name, EIN (if any),
account, or other financial account in a • Certain copyrights; literary, musical, or
foreign country. artistic compositions; letters or
and the country under whose laws the
disregarded entity was organized. If you answered Yes to Question 7, file memoranda; or similar property. See
Form TD F 90-22.1 by June 30, 2003, section 1221(a)(3).
Note: Clearly indicate whether each with the Department of the Treasury at • U.S. Government publications,
entity in the attached schedule is a the address shown on the form. Because including the Congressional Record, that
partnership or a disregarded entity. Form TD F 90-22.1 is not a tax return, do the partnership received from the
not file it with Form 1065-B. You may Government, other than by purchase at
Question 4—Foreign Partners order Form TD F 90-22.1 by calling the normal sales price, or that the
Answer Yes to Question 4 if the 1-800-TAX-FORM (1-800-829-3676) or partnership got from another taxpayer
partnership had any foreign partners (for you can download it from the IRS web who had received it in a similar way, if the
purposes of section 1446) at any time site at www.irs.gov. partnership’s basis is determined by
during the tax year. Otherwise, answer reference to the previous owner.
No. Question 8 • Certain commodities derivative
If the partnership had gross income The partnership may be required to file financial instruments held by a dealer.
effectively connected with a trade or Form 3520, Annual Return To Report See section 1221(a)(6).
business in the United States and foreign Transactions With Foreign Trusts and • Certain hedging transactions entered
partners, it may be required to withhold Receipt of Certain Foreign Gifts, if: into in the normal course of the trade or
tax under section 1446 on income • It directly or indirectly transferred business. See section 1221(a)(7).
allocable to foreign partners (without property or money to a foreign trust. For • Supplies regularly used in the trade or
regard to distributions) and file Forms this purpose, any U.S. person who business.
8804, 8805, and 8813. See Rev. Proc created a foreign trust is considered a
transferor.
Overview of Large Partnership
89-31, 1989-1 C.B. 895 and Rev. Proc.
92-66, 1992-2 C.B. 428 for more • It is treated as the owner of any part of Provisions
information. the assets of a foreign trust under the For electing large partnerships, capital
grantor trust rules. gains and losses generally are netted at
Question 5 • It received a distribution from a foreign the partnership level. A partner in a large
Answer Yes to Question 5 if interests in trust. partnership takes into account separately
the partnership are traded on an For more information, see the his distributive share of the partnership’s
established securities market or are Instructions for Form 3520. net capital gain or net capital loss. Such
readily tradable on a secondary market net capital gain (loss) is treated as
Note: An owner of a foreign trust must long-term capital gain (loss). The 28%
(or its substantial equivalent).
ensure that the trust files an annual rate gain (loss) is treated in the same
Question 6 information return on Form 3520-A, manner.
Organizers of certain tax shelters are Annual Information Return of Foreign
Trust with a U.S. Owner. Any excess of net short-term capital
required to register the tax shelters by gain over net long-term capital loss is not
filing Form 8264 no later than the day on separately stated. Instead, it is
which an interest in the shelter is first consolidated with the partnership’s other
offered for sale. Organizers filing a Schedule D—Capital taxable income.
properly completed Form 8264 will
receive a tax shelter registration number Gains and Losses A partner’s distributive share is divided
that they must furnish to their investors. between passive loss limitation activities
See the Instructions for Form 8264 for the and other activities. Capital gain (loss) is
Purpose of Schedule allocated to passive loss limitation
definition of a tax shelter and the
investments exempted from tax shelter Use Schedule D (Form 1065-B) to report activities to the extent that it is from sales
registration. sales or exchanges of capital assets, and exchanges of property used in
capital gain distributions, and connection with a trade or business or
Question 7—Foreign Accounts nonbusiness bad debts. rental activity. Any excess is allocated to
Answer Yes to Question 7 if either 1 or 2 Do not report on Schedule D capital other activities (i.e., portfolio income).
below applies to the partnership. gains (losses) specially allocated to any Section 1231 gains are also netted at
Otherwise, check the No box. partners. Enter specially allocated capital the partnership level. The net gain is
1. At any time during the 2002 gains (losses) directly on line 3 or 4 of generally treated as long-term capital
calendar year, the partnership had an Schedule K, or on an attachment to line gain. The net loss is treated as an
interest in or signature or other authority 16 of Schedule K and in box 3, 4, or 9 of ordinary loss and is included in computing
over a bank account, securities account, Schedule K-1, whichever applies. See the partnership’s taxable income.
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Items for Special Treatment • See section 897 for the disposition of months after the due date (excluding
• Use Form 4797, Sales of Business foreign investment in a U.S. real property extensions) of the original return. Write
Property, to report (a) sales or exchanges interest. “See attached Form 8082 for AAR per
of property used in a trade or business, • Any loss from a sale or exchange of IRC section 6251; Filed pursuant to
(b) sales or exchanges of depreciable or property between the partnership and section 301.9100-2” in the top margin of
amortizable property, (c) sales or other certain related persons is not allowed, the amended return, and file it at the
dispositions of securities or commodities except for distributions in complete same address the original return was
held in connection with a trading liquidation of a corporation. See sections filed. See Administrative Adjustment
business, if the partnership made a 267 and 707(b) for details. Requests on page 5 for details.
mark-to-market election (see page 4), (d) • Any loss from securities that are capital • A sale or other disposition of an interest
involuntary conversions (other than from assets that become worthless during the in a partnership owning unrealized
casualties or thefts), and (e) the year is treated as a loss from the sale or receivables or inventory items may result
disposition of noncapital assets (other exchange of a capital asset on the last in ordinary gain or loss. See Pub. 541,
than inventory or property held primarily day of the tax year. Partnerships, for more details.
for sale to customers in the ordinary • Gain from the sale or exchange of • Certain constructive ownership
course of a trade or business). stock in a collapsible corporation is not a transactions. Gain in excess of the gain
that would have been recognized if the
• Use Form 4684, Casualties and Thefts, capital gain. See section 341.
to report involuntary conversions of • Nonrecognition of gain on sale of stock partnership had held a financial asset
to an employee stock ownership plan directly during the term of a derivative
property due to a casualty or theft.
contract must be treated as ordinary
• Gains and losses from section 1256 (ESOP) or an eligible cooperative. See
income. See section 1260 for details.
contracts and straddles are reported on section 1042 and Temporary Regulations
Form 6781, Gains and Losses From section 1.1042-1T for rules under which Constructive sale treatment for certain
Section 1256 Contracts and Straddles. the partnership may elect not to recognize appreciated positions. Generally, the
• An exchange of business or investment gain from the sale of certain stock to an partnership must recognize gain (but not
property for property of a like kind is ESOP or an eligible cooperative. loss) on the date it enters into a
reported on Form 8824, Like-Kind • A nonbusiness bad debt must be constructive sale of any appreciated
Exchanges. treated as a short-term capital loss and position in stock, a partnership interest, or
• Transactions by a securities dealer. can be deducted only in the year the debt certain debt instruments as if the position
See section 1236. becomes totally worthless. For each bad were disposed of at fair market value on
• See Pub. 550, Investment Income and debt, enter the name of the debtor and that date.
Expenses, for information on bonds and “Schedule Attached” in column (a) of line
1 and the amount of the bad debt as a The partnership is treated as making a
other debt instruments. constructive sale of an appreciated
loss in column (f). Also attach a statement
• For certain real estate subdivided for of facts to support each bad debt position when it (or a related person, in
sale that may be considered a capital deduction. some cases) does one of the following:
asset, see section 1237.
• Any loss from a wash sale of stock or • Enters into a short sale of the same or
• Gain on the sale of depreciable securities (including contracts or options substantially identical property (that is, a
property to a more than 50%-owned to acquire or sell stock or securities) “short sale against the box”).
entity, or to a trust in which the cannot be deducted unless the • Enters into an offsetting notional
partnership is a beneficiary, is treated as partnership is a dealer in stock or principal contract relating to the same or
ordinary gain. securities and the loss was sustained in a substantially identical property.
• For liquidating distributions from a transaction made in the ordinary course • Enters into a futures or forward contract
corporation, see Pub. 550. of the partnership’s trade or business. A to deliver the same or substantially
• See section 1248 for gain on the sale wash sale occurs if the partnership identical property.
or exchange of stock in certain foreign acquires (by purchase or exchange), or • Acquires the same or substantially
corporations. has a contract or option to acquire, identical property (if the appreciated
• For gain or loss on options to buy or substantially identical stock or securities position is a short sale, offsetting notional
sell, including closing transactions, see within 30 days before or after the date of principal contract, or a futures or forward
Pub. 550. the sale or exchange. See section 1091 contract).
• Gain or loss from a short sale of for more information. Exception. Generally, constructive
property. See Pub. 550 for details. • If the partnership sold property at a sale treatment does not apply if:
• For undistributed capital gains from a gain and it will receive a payment in a tax • The partnership closed the transaction
regulated investment company or a real year after the year of sale, it generally before the end of the 30th day after the
estate investment trust, the partnership must report the sale on the installment end of the year in which it was entered
will receive information on Form 2439. method unless it elects not to. However, into,
• See section 84 for the transfer of the installment method may not be used • The partnership held the appreciated
property to a political organization if the to report sales of stock or securities position to which the transaction relates
FMV of the property exceeds the traded on an established securities throughout the 60-day period starting on
partnership’s adjusted basis in such market. Use Form 6252, Installment Sale the date the transaction was closed, and
property. Income, to report the sale on the • At no time during that 60-day period
was the partnership’s risk of loss reduced
• Any loss on the disposition of installment method. Also use Form 6252
by holding certain other positions.
converted wetland or highly erodible to report any payment received during the
tax year from a sale made in an earlier For details and other exceptions to
cropland that is first used for farming after
year that was reported on the installment these rules, see Pub. 550.
March 1, 1986, is reported as a long-term
capital loss on Schedule D, but any gain method. Special rules for traders in securities.
on such a disposition is reported as If the partnership wants to elect out of Traders in securities are engaged in the
ordinary income on Form 4797. See the installment method, it must report the business of buying and selling securities
section 1257 for details. full amount of the gain on a timely filed for their own account. To be engaged in
• See Rev. Rul. 84-111, 1984-2 C.B. 88, return (including extensions). If the business as a trader in securities:
for the transfer of partnership assets and partnership filed Form 1065-B on time, • The partnership must seek to profit
liabilities to a newly formed corporation in the election may be made on an from daily market movements in the
exchange for all of its stock. amended return filed no later than 6 prices of securities and not from
Instructions for Form 1065-B -21-
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dividends, interest, or capital Rollover” and enter as a (loss) in column Note: A specialized small business
appreciation. (f) the amount of the postponed gain. investment company (SSBIC) is treated
• The partnership’s trading activity must as having met test 2 above.
be substantial. The partnership also must A qualified business is any business
• The partnership must carry on the ! separately state the amount of the other than the following:
• One involving services performed in the
CAUTION gain rolled over on qualified stock
activity with continuity and regularity.
The following facts and circumstances under section 1045 on an attachment to fields of health, law, engineering,
should be considered in determining if a Form 1065-B, Schedule K, line 16, architecture, accounting, actuarial
partnership’s activity is a business: because each partner must determine if science, performing arts, consulting,
• Typical holding periods for securities he or she qualifies for the rollover at the athletics, financial services, or brokerage
bought and sold. partner level. Also, the partnership must services.
• The frequency and dollar amount of the separately state on that line (and not on • One whose principal asset is the
partnership’s trades during the year. Schedule D) any gain that would qualify reputation or skill of one or more
• The extent to which the partners for the section 1045 rollover at the partner employees.
pursue the activity to produce income for level instead of the partnership level
(because a partner was entitled to
• Any banking, insurance, financing,
a livelihood. leasing, investing, or similar business.
• The amount of time devoted to the purchase replacement stock) and any • Any farming business (including raising
activity. gain on qualified stock that could qualify or harvesting of trees).
Like an investor, a trader must report for the 50% exclusion under section 1202. • Any business involving the production
each sale of securities (taking into To be qualified small business of products for which percentage
account commissions and any other costs stock, the stock must meet all of the depletion can be claimed.
of acquiring or disposing of the securities) following tests: • Any business of operating a hotel,
on Schedule D or on an attached • It must be stock in a C corporation (that motel, restaurant, or similar business.
statement containing all the same is not S corporation stock). Rollover of gain from empowerment
information for each sale in a similar • It must have been originally issued zone assets. If the partnership sold a
format. However, if a trader made the after August 10, 1993. qualified empowerment zone asset it held
mark-to-market election (see page 4), • As of the date the stock was issued, for more than one year, it may be able to
each transaction is reported in Part II of the corporation was a qualified small elect to postpone part or all of the gain.
Form 4797 instead of Schedule D. business. A qualified small business is a For details, see Pub. 954, Tax Incentives
Regardless of whether a trader reports its domestic C corporation with total gross for Empowerment Zones and Other
gains and losses on Schedule D or Form assets of $50 million or less (a) at all Distressed Communities, and section
4797, the gain or loss from the disposition times after August 9, 1993, and before 1397B.
of securities is not taken into account the stock was issued, and (b) immediately
when figuring net earnings from after the stock was issued. Gross assets Specific Instructions
self-employment on Schedules K and include those of any predecessor of the
K-1. See section 1402(i) for an exception corporation. All corporations that are Columns (b) and (c) —Date
that applies to section 1256 contracts. members of the same parent-subsidiary Acquired and Date Sold
The limitation on investment interest controlled group are treated as one Use the trade dates for date acquired and
expense that applies to investors does corporation. date sold for stocks and bonds traded on
not apply to interest paid or incurred in a • The partnership must have acquired an exchange or over-the-counter market.
trading business. A trader reports interest the stock at its original issue (either The acquisition date for an asset the
expense and other expenses (excluding directly or through an underwriter), either partnership held on January 1, 2001, for
commissions and other costs of acquiring in exchange for money or other property which it made an election to recognize
or disposing of securities) from a trading or as pay for services (other than as an any gain on a deemed sale, is the date of
business in Part I of Form 1065-B. underwriter) to the corporation. In certain the deemed sale.
cases, the partnership may meet the test
A trader also may hold securities for if it acquired the stock from another Column (d) —Sales Price
investment. The rules for investors person who met this test (such as by gift Enter in this column either the gross sales
generally will apply to those securities. or inheritance) or through a conversion or price or the net sales price from the sale.
Allocate interest and other expenses exchange of qualified small business On sales of stocks and bonds, report the
between the partnership’s trading stock held by the partnership. gross amount as reported to the
business and its investment securities. • During substantially all the time the partnership by the partnership’s broker on
Investment interest expense is reported partnership held the stock: Form 1099-B, Proceeds From Broker and
on line 7 of Part II, Form 1065-B. 1. The corporation was a C Barter Exchange Transactions, or similar
Rollover of gain from qualified stock. corporation, statement. However, if the broker advised
If the partnership sold qualified small 2. At least 80% of the value of the the partnership that gross proceeds
business stock (defined below) it held for corporation’s assets were used in the (gross sales price) less commissions and
more than 6 months, it may postpone active conduct of one or more qualified option premiums were reported to the
gain if it purchased other qualified small businesses (defined below), and IRS, enter that net amount in column (d).
business stock during the 60-day period 3. The issuing corporation was not a
foreign corporation, domestic international Column (e) —Cost or Other Basis
that began on the date of the sale. The
partnership must recognize gain to the sales corporation (DISC), former DISC, In general, the cost or other basis is the
extent the sale proceeds exceed the cost interest charge domestic international cost of the property plus purchase
of the replacement stock. Reduce the sales corporation (IC-DISC), former commissions and improvements and
basis of the replacement stock by any IC-DISC, corporation that has made (or minus depreciation, amortization, and
postponed gain. that has a subsidiary that has made) a depletion. If the partnership got the
section 936 election, regulated property in a tax-free exchange,
If the partnership chooses to postpone investment company (RIC), real estate involuntary conversion, or wash sale of
gain, report the entire gain realized on the investment trust (REIT), real estate stock, it may not be able to use the actual
sale on line 1 or 5. Directly below the line mortgage investment conduit (REMIC), cash cost as the basis. If the partnership
on which the partnership reported the financial asset securitization investment does not use cash cost, attach an
gain, enter in column (a) “Section 1045 trust (FASIT), or cooperative. explanation of the basis.
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If the partnership sold stock, adjust the Capital Gains and Losses From W:CAR:MP:FP:S:SP, 1111 Constitution
basis by subtracting all the stock-related Other Partnerships, Estates, and Avenue, NW, Washington, DC 20224.
nontaxable distributions received before Trusts Each partner’s information must be on
the sale. This includes nontaxable a separate sheet of paper. Therefore,
See the Schedule K-1 or other
distributions from utility company stock separate all continuously printed
information supplied to you by the other
and mutual funds. Also adjust the basis substitutes before you file them with the
partnership, estate, or trust. Enter the
for any stock splits or stock dividends. IRS.
gains (losses) on line 1 or 5, whichever
If the partnership elected to recognize applies. Do not complete columns (a) The partnership may be subject to a
gain on an asset held on January 1, 2001, through (e). Instead, write “From penalty if it files Schedules K-1 that do not
its basis in the asset is its closing market Schedule K-1 (Form 1065, 1065-B, or conform to the specifications of Rev.
price or fair market value, whichever 1041)” across these columns. Proc. 2002-60, 2002-40 I.R.B. 645.
applies, on the date of the deemed sale, How Income Is Shared Among
whether the deemed sale resulted in a
gain or an unallowed loss.
Partners
Schedules K and K-1— Generally, allocate shares of income,
If a charitable contribution deduction is Partners’ Shares of gain, loss, deduction, or credit among the
allowed because of a bargain sale of partners according to the partnership
property to a charitable organization, the Income, Credits, agreement for sharing income or loss.
adjusted basis for purposes of Deductions, etc. However, partners may agree to allocate
determining gain from the sale is the specific items in a ratio different from the
amount which has the same ratio to the ratio for sharing income or loss.
adjusted basis as the amount realized Purpose of Schedules In determining the amounts required to
has to the fair market value. The partners are liable for tax on their be separately taken into account by a
shares of the partnership income, partner, those provisions of the large
See section 852(f) for the treatment of whether or not distributed, and must partnership rules governing computation
certain load charges incurred in acquiring include their shares on their tax returns. of taxable income are applied separately
stock in a mutual fund with a reinvestment with respect to that partner by taking into
right. Schedule K (page 4 of Form 1065-B) is
account that partner’s distributive share of
a summary schedule of all the partners’
the partnership’s items of income, gain,
If the gross sales price is reported in shares of the partnership’s income,
loss, deduction, or credit. This rule
column (d), increase the cost or other credits, deductions, etc.
permits partnerships to make otherwise
basis by any expense of sale, such as Schedule K-1 (Form 1065-B) shows valid special allocations of partnership
broker’s fees, commissions, or option each partner’s separate share. Attach a items to partners.
premiums, before making an entry in copy of each Schedule K-1 to the Form
column (e). Report the specially allocated items in
1065-B filed with the IRS; keep a copy the appropriate box of the applicable
with a copy of the partnership return as a partner’s Schedule K-1 and the total on
For more details, see Pub. 551, Basis
part of the partnership’s records; and the appropriate line of Schedule K,
of Assets.
furnish a copy to each partner. If a instead of on Parts I or II of Form 1065-B
partnership interest is held by a nominee or Schedules A or D. For example,
Column (f) —Gain or (Loss) on behalf of another person, the
Make a separate entry in this column for specially allocated net capital gain from
partnership may be required to furnish passive activities is entered in box 3 of
each transaction reported on lines 1 and Schedule K-1 to the nominee. See
5 and any other lines that apply to the Schedule K-1, and the total is entered on
Temporary Regulations sections line 3c of Schedule K, along with any net
partnership. For lines 1 and 5, subtract 1.6031(b)-1T and 1.6031(c)-1T for more
the amount in column (e) from the amount capital gain from line 18 of Schedule D
information. (Form 1065-B).
in column (d). Enter negative amounts in
parentheses. Give each partner a copy of either the If a partner’s interest changed during
Partner’s Instructions for Schedule K-1 the year, see section 706(d) before
Column (g) —28% Rate Gain or (Form 1065-B) or specific instructions for determining each partner’s distributive
each item reported on the partner’s share of any item of income, gain, loss,
(Loss) Schedule K-1 (Form 1065-B). deduction, etc. Income (loss) is allocated
Enter in column (g) only the amount, if
to a partner only for the part of the year in
any, from Part II, column (f), that is from Substitute Forms which that person is a member of the
collectibles gains and losses. A The partnership does not need IRS partnership. The partnership will either
collectibles gain or loss is any approval to use a substitute Schedule K-1 allocate on a daily basis or divide the
long-term gain or deductible long-term if it is an exact copy of the IRS schedule, partnership year into segments and
loss from the sale or exchange of a or if it contains only those boxes the allocate income, loss, or special items in
collectible that is a capital asset. taxpayer is required to use. The boxes each segment among the persons who
must use the same numbers and titles were partners during that segment.
Collectibles include works of art, rugs, and must be in the same order and format
antiques, metals (such as gold, silver, and Partnerships that report their income on
as on the comparable IRS Schedule K-1. the cash basis must allocate interest
platinum bullion), gems, stamps, coins, The substitute schedule must include the
alcoholic beverages, and certain other expense, taxes, and any payment for
OMB number. The partnership must services or for the use of property on a
tangible property. provide each partner with the Partner’s daily basis if there is any change in any
Also include gain (but not loss) from Instructions for Schedule K-1 (Form partner’s interest during the year. See
the sale or exchange of an interest in a 1065-B) or other prepared specific Pub. 541 for more details.
partnership or trust held for more than 1 instructions.
Special rules on the allocation of
year and attributable to unrealized The partnership must request IRS income, gain, loss, and deductions
appreciation of collectibles. For details, approval to use other substitute generally apply if a partner contributes
see Regulations section 1.1(h)-1. Also Schedules K-1. To request approval, write property to the partnership and the FMV
attach the statement required under to Internal Revenue Service, Attention: of that property at the time of contribution
Regulations section 1.1(h)-1(e). Substitute Forms Program, differs from the contributing partner’s
Instructions for Form 1065-B -23-
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adjusted tax basis. Under these rules, the and the partner’s distributive share of determine if the partnership is engaged in
partnership must use a reasonable each item. more than one at-risk activity.
method of making allocations of income, For an individual partner, enter the The at-risk rules of section 465
gain, loss, and deductions from the partner’s social security number (SSN) or generally apply to any activity carried on
property so that the contributing partner individual taxpayer identification number by the partnership as a trade or business
receives the tax burdens and benefits of (ITIN). For all other partners, enter the or for the production of income. These
any built-in gain or loss (for example, partner’s EIN. However, if a partner is an rules generally limit the amount of loss
precontribution appreciation or diminution individual retirement arrangement (IRA), and other deductions a partner can claim
of value of the contributed property). See enter the identifying number of the from any partnership activity to the
Regulations section 1.704-3 for details on custodian of the IRA. Do not enter the amount for which that partner is
how to make these allocations, including SSN of the person for whom the IRA is considered at risk. However, for partners
a description of specific allocation maintained. who acquired their partnership interests
methods that are generally reasonable. before 1987, the at-risk rules do not apply
Foreign partners without a U.S.
See Dispositions of Contributed taxpayer identifying number should be to losses from an activity of holding real
Property on page 9 for special rules on notified by the partnership of the property the partnership placed in service
the allocation of income, gain, loss, and necessity of obtaining one. Certain aliens before 1987. The activity of holding
deductions on the disposition of property who are not eligible to obtain an SSN can mineral property does not qualify for this
contributed to the partnership by a apply for an ITIN on Form W-7, exception. Identify on an attachment to
partner. Application for IRS Individual Taxpayer Schedule K-1 the amount of any losses
Identification Number. that are not subject to the at-risk rules.
If the partnership agreement does not
provide for the partner’s share of income, If a husband and wife each had an If the partnership is engaged in an
gain, loss, deduction, or credit, or if the interest in the partnership, prepare a activity subject to the limitations of section
allocation under the agreement does not separate Schedule K-1 for each of them. 465(c)(1) (such as films or videotapes,
have substantial economic effect, the If a husband and wife held an interest leasing section 1245 property, farming, or
partner’s share is determined according together, prepare one Schedule K-1 if the oil and gas property), give each partner
to the partner’s interest in the partnership. two of them are considered to be one his or her share of the total pre-1976
See Regulations section 1.704-1 for more partner. losses from that activity for which there
information. existed a corresponding amount of
Using the codes beginning on page nonrecourse liability at the end of each
30, box 9 of Schedule K-1 can be used to year in which the losses occurred. See
report several items. If more space is Form 6198, At-Risk Limitations, and
Specific Instructions for needed, include the information in an related instructions for more information.
Schedules K and K-1 attachment to box 9.
Qualified nonrecourse financing
Due date. Unlike other partnerships, an secured by real property used in an
electing large partnership must provide a activity of holding real property that is
Generally, the partnership is required to Schedule K-1 to each partner by the first subject to the at-risk rules is treated as an
prepare and give a Schedule K-1 to each March 15 following the close of the amount at risk. “Qualified nonrecourse
person who was a partner in the partnership’s tax year. For calendar year financing” generally includes financing for
partnership at any time during the year. 2002 partnerships, the due date is March which no one is personally liable for
However, if a foreign partnership 15, 2003. repayment that is borrowed for use in an
meets each of the following four Partner’s Share of Liabilities activity of holding real property and that is
requirements, it is not required to file or loaned or guaranteed by a Federal, state,
provide Schedule K-1 for foreign partners
(Schedule K-1) or local government or that is borrowed
(unless the foreign partner is a Enter each partner’s share of: from a “qualified” person. Qualified
passthrough entity through which a U. S. • Nonrecourse liabilities. persons include any person actively and
person holds an interest in the foreign • Partnership-level qualified nonrecourse regularly engaged in the business of
partnership): financing. lending money, such as a bank or savings
• The partnership had no gross income • Other liabilities. and loan association. Qualified persons
effectively connected with the conduct of “Nonrecourse liabilities” are those generally do not include related parties
a trade or business within the United liabilities of the partnership for which no (unless the nonrecourse financing is
States during its tax year. partner bears the economic risk of loss. commercially reasonable and on
• All required Forms 1042 and 1042-S The extent to which a partner bears the substantially the same terms as loans
were filed by the partnership or another economic risk of loss is determined under involving unrelated persons), the seller of
withholding agent as required by the rules of Regulations section 1.752-2. the property, or a person who receives a
Regulations section 1.1461-1(b) and (c). Do not include partnership-level qualified fee for the partnership’s investment in the
• The tax liability of each partner for nonrecourse financing (defined below) on real property. See section 465 for more
amounts reportable under Regulations the line for nonrecourse liabilities. information on qualified nonrecourse
sections 1.1461-1(b) and (c) has been If the partner terminated his or her financing.
fully satisfied by the withholding of tax at interest in the partnership during the year, The partner as well as the partnership
the source. enter the share that existed immediately must meet the qualified nonrecourse
• The partnership is not a withholding before the total disposition. In all other rules. Therefore, the partnership must
foreign partnership as defined in cases, enter it as of the end of the year. enter on an attached statement any other
Regulations section 1.1441-5(c). information the partner needs to
If the partnership is engaged in two or
Generally, any person who holds an determine if the qualified nonrecourse
more different types of at-risk activities, or
interest in a partnership as a nominee for rules are also met at the partner level.
a combination of at-risk activities and any
another person must furnish to the
other activity, attach a statement showing
partnership the name, address, etc., of
the partner’s share of nonrecourse Tax Shelter Registration
the other person. Number (Schedule K-1)
liabilities, partnership-level qualified
On each Schedule K-1, enter the nonrecourse financing, and other If the partnership is a registration-required
names, addresses, and identifying liabilities for each activity. See Pub. 925, tax shelter or has invested in a
numbers of the partner and partnership Passive Activity and At-Risk Rules, to registration-required tax shelter, it must
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enter the tax shelter registration number Report the amount allocated to interests On Schedule K, line 4c, enter the
on Schedule K-1. Also, a partnership that held as a limited partner in box 9, Code amount from Schedule D, line 22. Report
has invested in a registration-required tax D, of Schedule K-1. this amount to all partners in box 4 of
shelter must furnish a copy of its Form On Schedule K, line 3b, enter the Schedule K-1.
8271 to its partners. See Form 8271 for amount from line 8 of the worksheet
more details. Lines 5 and 6
below. This is qualified 5-year gain.
Note: The following line numbers For electing large partnerships, the
Report this amount to all partners using
correspond with Schedule K. However, alternative minimum tax (AMT)
Code Q in box 9 of Schedule K-1.
each line instruction also provides adjustments and preferences are
On Schedule K, line 3c, enter the combined at the partnership level. The
reporting information for Schedule K-1.
amount from Schedule D, line 18. Report partnership computes net AMT
Letter codes required for entries in box 9
the amount allocated to interests held as adjustments separately for passive loss
of Schedule K-1 begin on page 30.
a limited partner in box 3 of Schedule K-1. limitation activities and other activities.
Line 1—Taxable Income (Loss) Because general partners must In determining a partner’s alternative
From Passive Loss Limitation comply with the passive activity rules, minimum taxable income, a partner’s
Activities report the line 3a and 3c amounts distributive share of any net AMT
Enter the amount from Form 1065-B, allocated to interests held as a general adjustment is taken into account instead
page 1, line 25, on Schedule K, line 1a. partner separately for each activity using of making separate AMT adjustments for
Enter the income or loss without Codes A2 and A3, B2 and B3, and C2 different partnership items. The net AMT
reference to (a) the basis of the partners’ and C3, in box 9 of Schedule K-1. adjustment is determined by using the
interests in the partnership, (b) the adjustments and preferences applicable
Line 4—Net Capital Gain (Loss) to individuals for partners other than
partners’ at-risk limitations, or (c) the
passive activity limitations. These From Other Activities corporations, and by using the
limitations, if applicable, are determined On Schedule K, line 4a, enter the amount adjustments and preferences applicable
at the partner level. from Schedule D (Form 1065-B), line 23. to corporations for corporate partners.
Report this amount to all partners in box See Form 6251, Alternative Minimum
Allocate the income (loss) from
9, Code E of Schedule K-1. Tax — Individuals, and Form 4626,
passive loss limitation activities (line 1a of
On Schedule K, line 4b, enter the Alternative Minimum Tax — Corporations,
Schedule K) to interests held as a general
amount from line 9 of the worksheet to figure the partnership’s AMT
partner as follows:
below. This is qualified 5-year gain. adjustments and preferences.
Step 1. Allocate the amount reported
on line 1a to the following categories: Report this amount to all partners using The net passive AMT adjustment is
• Trade or business activities. Code Q in box 9 of Schedule K-1. reported on line 5 of Schedule K and in
• Rental real estate activities.
• Other rental activities. Qualified 5-Year Gain Worksheet
Step 2. Report on lines 1b(1), 1b(2), (Keep for your records.)
and 1b(3) of Schedule K that portion of
each amount from Step 1 that will be 1. Enter the total gains reported on line 5, column (f), of Schedule D
allocated to interests held as a general from dispositions of property held more than 5 years. Do not reduce
partner (the combined distributive shares these gains by any losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.
and any separate allocations for all
general partner interests). 2. Enter the total of all gains from dispositions of property held more
than 5 years from Form 4797, Part I, but only if Form 4797, line 7, is
General partners in an electing large more than zero. Do not reduce these gains by any losses . . . . . . . 2.
partnership must separately account for
any items attributable to passive loss 3. Enter the total of all capital gains from dispositions of property held
limitation activities to the extent more than 5 years from Form 4684, line 4 (but only if Form 4684,
necessary to comply with the passive line 15, is more than zero); Form 6252; Form 6781, Part II; and
activity rules. Form 8824. Do not reduce these gains by any losses . . . . . . . . . . 3.
Because general partners must 4. Enter the total of any qualified 5-year gain reported to the
comply with the passive activity rules, partnership from (a) a RIC or a REIT or (b) a partnership, S
report the information on lines 1b(1), corporation, estate, or trust (do not include gains from section 1231
1b(2), and 1b(3) of Schedule K separately property; take them into account on line 2 above, but only if Form
for each activity of the partnership using 4797, line 7, is more than zero) . . . . . . . . . . . . . . . . . . . . . . . . . 4.
Codes A1, B1, and C1 in box 9 of
Schedule K-1. The remaining amount on 5. Add lines 1 through 4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.
line 1d of Schedule K is reported in box 1
of Schedule K-1 for limited partners 6. Enter the part, if any, of the gain on line 5 that is attributable to
section 1202 qualified small business stock or 28% rate gain or
(including interests held as a limited included on line 6, 10, or 11 of the Unrecaptured Section 1250
partner by general partners). Gain Worksheet on page 30 . . . . . . . . . . . . . . . . . . . . . . . . . . 6.
Line 2—Taxable Income (Loss) 7. Subtract line 6 from line 5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.
From Other Activities
On Schedule K enter the amount from 8. Redetermine the amount on line 7 by taking into account only gains
Form 1065-B, Part II, line 13. Report from passive loss limitation activities. Enter on Schedule K, line 3b.
amounts for both general and limited Report this amount to all partners using Code Q in box 9 of
partners in box 2 of Schedule K-1. Schedule K-1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.

Line 3—Net Capital Gain (Loss) 9. Subtract line 8 from line 7. Enter on Schedule K, line 4b. Report this
From Passive Loss Limitation amount to all partners using Code Q in box 9 of Schedule K-1 . . . . 9.
Activities Note: If amounts are reported on both lines 8 and 9, add them together and report them as a
On Schedule K, line 3a, enter the amount single amount in box 9 of Schedule K-1 using Code Q.
from Schedule D (Form 1065-B), line 20.
Instructions for Form 1065-B -25-
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box 5 of Schedule K-1 for interests held Combine the following credits and Allocation Certification; and Schedule A
as a limited partner. Because general report them under “general credits” on (Form 8609), Annual Statement, to Form
partners must comply with the passive line 10. 1065-B.
activity rules, report the amounts • Credit for backup withholding on Report on line 11 the low-income
allocated to interests held as a general dividends, interest, and other types of housing credit for property placed in
partner separately for each activity in box income. service after 1989.
9 using Codes A6, B7, and C5. • Qualified electric vehicle credit (Form
8834). Because the rehabilitation credit from
The net other AMT adjustment is • Unused credits from cooperatives. rental real estate activities and
reported on line 6 of Schedule K and in • Investment credit (other than low-income housing credit for property
box 6 of Schedule K-1 for all partners. rehabilitation credits from rental real placed in service before 1990 that is
estate activities) (Form 3468). attributable to additions to qualified basis
Line 7—Guaranteed Payments • Work opportunity credit (Form 5884). of property are subject to the same
to Partners • Welfare-to-work credit (Form 8861). passive activity rules, they are combined
Guaranteed payments to partners • Credit for alcohol used as fuel (Form and reported on line 12. Complete and
include: 6478). attach Form 8586 for the low-income
• Payments for salaries, health • Credit for increasing research activities housing credit. For the rehabilitation
insurance, and interest deducted by the (Form 6765). credit, complete the lines of Form 3468,
partnership and reported on Form • Enhanced oil recovery credit (Form Investment Credit, that apply to qualified
1065-B, Part I, line 13; on a schedule 8830). rehabilitation expenditures for property
attached to line 5, Part I; or on Form • Disabled access credit (Form 8826). related to rental real estate activities of
8825; and • Renewable electricity production credit the partnership. See Form 3468 for
• Payments the partnership must (Form 8835). details on qualified rehabilitation
capitalize. See the instructions for line 13 • Empowerment zone and renewal expenditures. Attach Form 3468 to Form
on page 15. community employment credit (Form 1065-B.
Report guaranteed payments to the 8844). Report amounts from line 11 in box 8
partners receiving them in box 9 of • Indian employment credit (Form 8845). of Schedule K-1 for interests held as a
Schedule K-1 using Code F. • Credit for employer social security and limited partner. However, for interests
Medicare taxes paid on certain employee held as a general partner, credits
Line 8—Income From tips (Form 8846). allocable to passive loss limitation
Discharge of Indebtedness • Orphan drug credit (Form 8820). activities must be separately stated for
Income from the discharge of • New markets credit (Form 8874). each rental real estate activity. Provide
indebtedness is separately reported to • Credit for contributions to selected this information in box 9 of Schedule K-1
each partner. In addition, the section 108 community development corporations using Code B5 so general partners can
rules governing the income are the same (Form 8847). comply with section 469.
as for other partnerships. Elections under • Credit for small employer pension
start-up costs (Form 8881). For limited partners, report any
section 108 are made by each partner
separately. • Credit for employer-provided child care low-income housing and rehabilitation
facilities and services (Form 8882). credits from rental real estate activities
Enter the income from discharge of • New York Liberty Zone business reported on line 12 as a single
indebtedness on line 8 of Schedule K and employee credit (Form 8884). rehabilitation credit in box 9 of Schedule
in box 9 of Schedule K-1 for each partner • General credits from other electing K-1 using Code I. However, for general
using Code G. large partnerships. partners, credits allocable to passive loss
limitation activities must be separately
Line 9—Tax-Exempt Interest Exception: The refundable credit for stated for each rental real estate activity.
Income Federal tax paid on fuels and the refund For general partners, combine
or credit for tax paid on undistributed low-income housing and rehabilitation
Enter on line 9 tax-exempt interest capital gains of a regulated investment credits reported on line 12 as a single
income, including any exempt-interest company or a real estate investment trust rehabilitation credit and allocate it to
dividends received from a mutual fund or are allowed to the partnership. Thus, they partnership activities as explained above.
other regulated investment company. are not separately reported to partners. Report this information in box 9 of
Individuals must report this amount on
General credits are reported as a Schedule K-1 using Code B6 so general
line 8b of Form 1040. The adjusted basis
single figure on line 10 of Schedule K and partners can comply with section 469.
of the partner’s interest is increased by
the amount shown on this line under are reported in box 7 of Schedule K-1 for Note: Any rehabilitation credits from an
section 705(a)(1)(B). Report this amount limited partners. However, for general activity other than a rental real estate
to partners in box 9 of Schedule K-1 using partners, credits allocable to passive loss activity are included in general credits
Code H. limitation activities must be separately reported on line 10 of Schedule K.
stated for each trade or business activity,
Line 10—General Credits rental real estate activity, and rental Line 13
The term general credits means any activity other than rental real estate. The nonconventional source fuel credit is
credit other than the low-income housing Provide this information to general figured at the partnership level and then is
credit, the rehabilitation credit from rental partners in box 9 of Schedule K-1 using apportioned to the partners based on their
real estate activities, the credit for Codes A4, B4, and C4 so they can distributive shares of partnership income
producing fuel from a nonconventional comply with section 469. attributable to sales of qualified fuels.
source, and the foreign tax credit. Attach a separate schedule to the return
Lines 11 and 12 to show the computation of the credit.
General credits are separately Section 42 provides a credit that may be See section 29 for more information. For
reported to partners as a single item. A claimed by owners of low-income interests held as a limited partner, report
partner’s distributive share of general residential rental buildings. If the partners each partner’s share of the credit in box 9
credits is taken into account as a current are eligible to take the low-income of Schedule K-1 using Code J. However,
year general business credit. The tax housing credit, complete and attach Form for interests held as a general partner,
liability limit for the general business 8586, Low-Income Housing Credit; Form credits allocable to passive loss limitation
credit is applied at the partner level. 8609, Low-Income Housing Credit activities must be separately stated for
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each trade or business activity. Provide gross nonfarm income from reported on Schedule K, line 7, and
this information for general partners in self-employment. derived from a trade or business as
box 9 of Schedule K-1 using Code A5 so defined in section 1402(c). Also include
Note: For purposes of self-employment
they can comply with section 469. other ordinary income and expense items
tax, no income from an electing large
reported on Schedules K and K-1 that are
Line 14—Net Earnings From partnership is treated as fishing or
used to figure self-employment earnings
Self-Employment farming income.
under section 1402.
Schedules K-1. Do not complete box 9
General partners. General partners’ net
for any partner that is an estate, trust, Line 15—Foreign Tax Credit
earnings (loss) from self-employment do
corporation, exempt organization, or Information
not include:
individual retirement arrangement (IRA).
• Dividends on any shares of stock and Lines 15a through 15h must be
interest on any bonds, debentures, notes, Using Code K1, enter in box 9 of completed if the partnership has foreign
etc., unless the dividend or interest Schedule K-1 each individual general income, deductions, or losses or has paid
income is received in the course of a partner’s share of the amount shown on or accrued foreign taxes. See Pub. 514,
trade or business, such as a dealer in line 5 of the worksheet below and each Foreign Tax Credit for Individuals, for
stocks or securities or interest on notes or individual limited partner’s share of the more information.
accounts receivable. amount shown on line 4c of the
• Rentals from real estate, except rentals worksheet. Enter the partner’s share of Line 15a —Name of Foreign
of real estate held for sale to customers in gross nonfarm income in box 9 using Country or U.S. Possession
the course of a trade or business as a Code K2.
real estate dealer or payments for rooms Enter the name of the foreign country or
or space when significant services are Worksheet Instructions U.S. possession from which the
provided. partnership had income or to which the
Line 1b. Include on line 1b any part of
• Royalty income, except royalty income the net income (loss) from rental real
partnership paid or accrued taxes. If the
received in the course of a trade or partnership had income from, or paid or
estate activities from Schedule K, line accrued taxes to, more than one foreign
business. 1b(2) that is from:
See the instructions for Schedule SE country or U.S. possession, enter “See
(Form 1040), Self-Employment Tax, for 1. Rentals of real estate held for sale attached” and attach a schedule for each
more information. to customers in the course of a trade or country for lines 15a through 15h.
business as a real estate dealer or
Limited partners. Generally, a limited 2. Rentals for which services were Using Code L1, enter this information
partner’s share of partnership income rendered to the occupants (other than in box 9 of Schedule K-1 or on an
(loss) is not included in net earnings services usually or customarily rendered attached schedule.
(loss) from self-employment. Limited for the rental of space for occupancy
partners treat as self-employment only). The supplying of maid service is Line 15b —Gross Income From All
earnings only guaranteed payments for such a service; but the furnishing of heat Sources
services they actually rendered to, or on and light, the cleaning of public Enter the partnership’s gross income from
behalf of, the partnership to the extent entrances, exits, stairways and lobbies, all sources (both U.S. and foreign
that those payments are payment for trash collection, etc., are not considered source).
those services. services rendered to the occupants.
Schedule K. Enter on line 14a the Using Code L2, enter this information
amount from line 5 of the worksheet Line 4a. Include in the amount on line 4a in box 9 of Schedule K-1 or on an
below. On line 14b enter the amount of any guaranteed payments to partners attached schedule.

Worksheet for Figuring Net Earnings (Loss) From Self-Employment

1a Income (loss) from Schedule K, line 1b(1) 1a


b Certain rental real estate activity income (loss) from Schedule K, line 1b(2) (see
instructions) 1b
c Other rental activity income (loss) from Schedule K, line 1b(3) 1c
d Net loss from Form 4797, Part II, line 18, included on lines 1a through 1c above. Enter
as a positive amount 1d
e Combine lines 1a through 1d 1e
2 Net gain from Form 4797, Part II, line 18, included on lines 1a through 1c above 2
3a Subtract line 2 from line 1e. If line 1e is a loss, increase the loss on line 1e by the
amount on line 2 3a
b Part of line 3a allocated to estates, trusts, corporations, exempt organizations, and
IRAs 3b
c Subtract line 3b from line 3a. If line 3a is a loss, reduce the loss on line 3a by the amount on line 3b. Include
each individual general partner’s share in box 9 of Schedule K-1 3c
4a Guaranteed payments to partners (Schedule K, line 7) derived from a trade or business
as defined in section 1402(c) (see instructions) 4a
b Part of line 4a allocated to individual limited partners for other than services and to
estates, trusts, corporations, exempt organizations, and IRAs 4b
c Subtract line 4b from line 4a. Include each individual general partner’s share and each individual limited
partner’s share in box 9 of Schedule K-1 4c
5 Net earnings (loss) from self-employment. Combine lines 3c and 4c. Enter here and on Schedule K, line 14a 5

Instructions for Form 1065-B -27-


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Line 15c —Gross Income Sourced Using Code L4(b), enter this Attach a schedule reporting the
at Partner Level information in box 9 of Schedule K-1 or following information:
Enter the total gross income of the on an attached schedule. 1. The total amount of foreign taxes
partnership that is required to be sourced Line 15d(3). General limitation foreign (including foreign taxes on income
at the partner level. This includes income source income (all other foreign source sourced at the partner level) relating to
from the sale of most personal property income). each category of income (see instructions
other than inventory, depreciable for line 15d).
Using Code L4(c), enter this 2. The dates on which the taxes were
property, and certain intangible property.
information in box 9 of Schedule K-1 or paid or accrued, the exchange rates
See Pub. 514 and section 865 for details.
on an attached schedule. used, and the amounts in both foreign
Attach a schedule showing the following
information: Line 15e —Deductions Allocated currency and U.S. dollars, for:
• The amount of this gross income and Apportioned at Partner Level • Taxes withheld at source on
(without regard to its source) in each interest.
category identified in the instructions for
Enter on line 15e(1) the partnership’s total • Taxes withheld at source on
interest expense (including interest dividends.
line 15d, including each of the listed
categories.
equivalents under Temporary Regulations • Taxes withheld at source on rents
section 1.861-9T(b)). Do not include
• Specifically identify gains on the sale of and royalties.
personal property other than inventory,
interest directly allocable under • Other foreign taxes paid or accrued.
Temporary Regulations section
depreciable property, and certain Using Code L8(a) for total foreign
1.861-10T to income from a specific
intangible property on which a foreign tax taxes paid, and Code L8(b) for total
property. This type of interest is allocated
of 10% or more was paid or accrued. Also foreign taxes accrued, enter this
and apportioned at the partnership level
list losses on the sale of such property if information in box 9 of Schedule K-1 or
and is included on lines 15f(1) through
the foreign country would have imposed a on an attached schedule.
(3).
10% or higher tax had the sale resulted in
a gain. See Sales or Exchanges of Using Code L5, enter the total interest Line 15h —Reduction in Taxes
Certain Personal Property in Pub. 514 expense in box 9 of Schedule K-1 or on Available for Credit
and section 865. an attached schedule. Attach a schedule showing the total
• Specify the net foreign source capital On line 15e(2), enter the total of all reductions in taxes available for credit.
gain or loss within each separate other deductions or losses that are
limitation category shown below in the Separately show the reductions for:
instructions for line 15d(2). Also, in the
required to be allocated at the partner • Taxes on foreign mineral income
level. For example, include on line 15e(2) (section 901(e)).
case of noncorporate partners, separately
identify the net foreign source gain or loss
research and experimental expenditures • Taxes on foreign oil and gas extraction
(see Regulations section 1.861-17(f)). income (section 907(a)).
within each separate limitation category
that is 28% rate gain or loss,
Using Code L6, enter this information in • Taxes attributable to boycott operations
box 9 of Schedule K-1 or on an attached (section 908).
unrecaptured section 1250 gain, and
qualified 5-year gain.
schedule. • Failure to timely file (or furnish all of the
Using Code L3, enter this information information required on) Forms 5471 and
Line 15f —Deductions Allocated 8865.
in box 9 of Schedule K-1 or on an
attached schedule.
and Apportioned at Partnership • Any other items (specify).
Level to Foreign Source Income Using Code L9 for reduction in taxes
Line 15d —Foreign Gross Income Separately report partnership deductions available for credit, enter this information
Sourced at Partnership Level that are apportioned at the partnership in box 9 of Schedule K-1 or on an
Separately report gross income from level to (1) passive foreign source attached schedule.
sources outside the United States by income, (2) each of the listed foreign
categories of income, and (3) general Line 16
category of income as follows. For
partnership and corporate partners only, limitation foreign source income (see the For line 16, attach a schedule listing other
attach a schedule identifying the total instructions for line 15d). See Pub. 514 items and amounts required to be
amount of foreign gross income in each for more information. reported separately to partners. Enter
category of income attributable to foreign each partner’s share in box 9 or on an
For partnership and corporate partners attached schedule to Schedule K-1.
branches. See Pub. 514 for information only, attach a schedule identifying the
on the categories of income. Examples of items to report include the
total amount of deductions apportioned to following:
Line 15d(1). Passive foreign source each category of income shown in the • Any information a partnership must
income. instructions for line 15d that are separately report to its disqualified
Using Code L4(a), enter this attributable to foreign branches. partners regarding its oil and gas
information in box 9 of Schedule K-1 or Using Code L7(a) for passive foreign activities. See Partnerships Holding Oil
on an attached schedule. source income, Code L7(b) for each listed and Gas Properties on page 12 for more
Line 15d(2). Attach a schedule showing foreign category of income, and Code information. Enter this information as
the amount of foreign source income L7(c) for the general limitation foreign Code M in box 9 of Schedule K-1 or on an
included in each of the following listed source income, enter this information in attached schedule.
categories of income: box 9 of Schedule K-1 or on an attached • Other tax-exempt income. On the
• Financial services income; schedule. schedule for line 16, enter all income of
• High withholding tax interest; the partnership exempt from tax other
• Shipping income; Line 15g —Total Foreign Taxes than tax-exempt interest income (e.g., life
• Dividends from each noncontrolled Enter in U.S. dollars the total foreign insurance proceeds). The adjusted basis
section 902 corporation; taxes (described in section 901 or section of the partner’s interest is increased by
• Dividends from a DISC, a former DISC, 903) that were paid or accrued by the the amount shown on this line under
an IC-DISC, or a former IC-DISC; partnership (according to its method of section 705(a)(1)(B). Enter this amount as
• Distributions from a foreign sales accounting for such taxes). Translate Code N1 in box 9 of Schedule K-1.
corporation (FSC) or a former FSC; these amounts into U.S. dollars by using • Nondeductible expenses. Enter
• Section 901(j) income; and the applicable exchange rate (see Pub. nondeductible expenses paid or incurred
• Certain income re-sourced by treaty. 514). by the partnership. Do not include capital

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expenditures or items the deduction for information as Code N6 in box 9 of corporation) may be eligible to defer his
which is deferred to a later tax year. The Schedule K-1 or on an attached schedule. or her distributive share of this gain under
adjusted basis of the partner’s interest is • Gain from the sale or exchange of section 1045 if he or she purchases other
decreased by the amount shown on this qualified small business stock (as defined qualified small business stock during the
line under section 705(a)(2)(B). Enter this in the instructions for Schedule D) that is 60-day period that began on the date the
amount as Code N2 in box 9 of Schedule eligible for the 50% section 1202 stock was sold by the partnership.
K-1. exclusion. The section 1202 exclusion Additional limitations apply at the partner
• Unrelated business taxable income. applies only to qualified small business level. Report with Code N9 on an
Any information a partner that is a stock issued after August 10, 1993, and attachment to Schedule K-1 for each sale
tax-exempt organization may need to held by the partnership for more than 5 or exchange the name of the corporation
figure that partner’s share of unrelated years. Corporate partners are not eligible that issued the stock, the partner’s share
business taxable income under section for the section 1202 exclusion. Additional of the partnership’s adjusted basis and
512(a)(1) (but excluding any modifications limitations apply at the partner level. sales price of the stock, and the dates the
required by paragraphs (8) through (15) Report each partner’s share of section stock was bought and sold.
of section 512(b)). Partners are required 1202 gain with Code N7 in box 9 of • Unrecaptured section 1250 gain. Use
to notify the partnership of their Schedule K-1. Each partner will the worksheet on page 30 to figure the
tax-exempt status. See Form 990-T, determine if he or she qualifies for the unrecaptured section 1250 gain.
Exempt Organization Business Income section 1202 exclusion. Report with Code • Any information needed by a partner to
Tax Return, for more information. Enter N7 on an attachment to Schedule K-1 for figure the interest due under section
this amount as Code N3 in box 9 of each sale or exchange the name of the 1260(b). If any portion of a constructive
Schedule K-1. corporation that issued the stock, the ownership transaction was open in any
• Amounts paid during the tax year for partner’s share of the partnership’s prior year, each partner’s tax liability must
health insurance coverage for a partner adjusted basis and sales price of the be increased by the partner’s pro rata
(including that partner’s spouse and stock, and the dates the stock was bought share of interest due on any deferral of
dependents). For 2002, a partner may be and sold. gain recognition. See section 1260(b) for
allowed to deduct up to 70% of such
amounts on Form 1040, line 30. Enter this • Gain eligible for section 1045 rollover details, including how to figure the
(replacement stock purchased by the interest.
amount as Code N4 in box 9 of Schedule
K-1. partnership). Include only gain from the • Extraterritorial income exclusion. See
the instructions on page 12 for
• Distributions of money (cash and sale or exchange of qualified small
information that is required to be reported
marketable securities). Enter the total business stock (as defined in the
instructions for Schedule D) that was in box 9 of Schedule K-1.
distributions to each partner of cash and
marketable securities that are treated as deferred by the partnership under section • Commercial revitalization deduction
money under section 731(c)(1). 1045 and reported on Schedule D. See from rental real estate activities. If the
Generally, marketable securities are the instructions for Schedule D for more deduction is for a nonrental building, it is
valued at FMV on the date of distribution. details. Corporate partners are not eligible deducted by the partnership on line 23 of
However, the value of marketable for the section 1045 rollover. Additional Form 1065-B. See the instructions for line
securities does not include the distributee limitations apply at the partner level. 23 on page 17.
partner’s share of the gain on the Report each partner’s share of the gain • Recapture of credits. Report the
securities distributed to that partner. See eligible for section 1045 rollover with recapture of any credit (other than the
section 731(c)(3)(B) for details. If this Code N8 in box 9 of Schedule K-1. Each low-income housing credit or investment
amount includes marketable securities partner will determine if he or she credit) as a separately stated item. See
treated as money, state separately on an qualifies for the rollover. Report with Code the instructions for line 26 on page 17 for
attachment (a) the partnership’s adjusted N8 on an attachment to Schedule K-1 for reporting the recapture of the low-income
basis of those securities immediately each sale or exchange the name of the housing credit and investment credit.
before the distribution and (b) the FMV of corporation that issued the stock, the • Tax shelter disclosure statement. If the
those securities on the date of distribution partner’s share of the partnership’s partnership participates in a reportable
(excluding the distributee partner’s share adjusted basis and sales price of the tax shelter transaction, attach a copy of
of the gain on the securities distributed to stock, and the dates the stock was bought the partnership’s tax shelter disclosure
that partner). Enter this information as and sold. statement to Schedule K-1 or provide the
Code N5 in box 9 of Schedule K-1 or on • Gain eligible for section 1045 rollover information each partner will need to
an attached schedule. (replacement stock not purchased by the complete a tax shelter disclosure
• Distributions of property other than partnership). Include only gain from the statement for the transaction on an
money. Enter the total distributions of sale or exchange of qualified small attachment to Schedule K-1. See Tax
property other than money. In computing business stock (as defined in the shelter disclosure statement on page 7
the amount of the distribution, use the instructions for Schedule D) the for more details.
adjusted basis of the property to the partnership held for more than 6 months • Any other information a partner may
partnership immediately before the but that was not deferred by the need to file his or her return that is not
distribution. On an attachment also partnership under section 1045. See the shown elsewhere on Schedule K-1. Enter
include the adjusted basis and FMV of instructions for Schedule D for more this information on an attachment to
each property distributed. Enter this details. A partner (other than a Schedule K-1.

Instructions for Form 1065-B -29-


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during the tax year as the smaller of (a) • Code A2 — General partner’s net
Instructions for the the amount from line 26 or line 37 of Form capital gain (loss) from trade or business
6252 (whichever applies) or (b) the total activities.
Unrecaptured Section 1250 unrecaptured section 1250 gain for the • Code A3 — General partner’s 28% rate
Gain Worksheet sale reduced by all gain reported in prior gain (loss) from trade or business
years (excluding section 1250 ordinary activities.
Lines 1 through 3. If the partnership had
more than one property described on line
income recapture). However, if the • Code A4 — General partner’s general
partnership chose not to treat all of the credits from trade or business activities.
1, complete lines 1 through 3 for each
property on a separate worksheet. Enter
gain from payments received after May 6, • Code A5 — General partner’s
1997, and before August 24, 1999, as nonconventional source fuel credit from
the total of the line 3 amounts for all unrecaptured section 1250 gain, use only trade or business activities.
properties on line 3 and go to line 4.
Line 4. The total unrecaptured section
the amount the partnership chose to treat • Code A6 — General partner’s
as unrecaptured section 1250 gain for alternative minimum tax adjustment from
1250 gain for an installment sale of those payments to reduce the total trade or business activities.
property held more than 1 year is figured
for the year of sale in a manner similar to
unrecaptured section 1250 gain • Code B1 — General partner’s taxable
remaining to be reported for the sale. income (loss) from rental real estate
that used to figure line 3 of the worksheet.
However, the unrecaptured section 1250 activities.
gain must be allocated to the installment Box 9 Codes (Schedule • Code B2 — General partner’s net
payments received from the sale. To do capital gain (loss) from rental real estate
so, the partnership generally must treat
K-1) activities.
the gain allocable to each installment The following codes should be used to • Code B3 — General partner’s 28% rate
payment as unrecaptured section 1250 describe the information located in box 9. gain (loss) from rental real estate
gain until all such gain has been used in • Code A1 — General partner’s taxable activities.
full. Figure the unrecaptured section 1250 income (loss) from trade or business • Code B4 — General partner’s general
gain for installment payments received activities. credits from rental real estate activities.
Unrecaptured Section 1250 Gain Worksheet—Line 16

If any of the following apply, the partnership does not have to complete all of the worksheet. Instead, follow
the instructions below:

● Go to line 4 if the partnership’s only unrecaptured section 1250 gain is from an installment sale of trade or business
property held more than 1 year that the partnership is reporting on Form 6252.
● Go to line 5 if the partnership’s only unrecaptured section 1250 gain is from a Schedule K-1 reporting such gain from
another partnership.
● Go to line 10 if the partnership’s only unrecaptured section 1250 gain is from the sale or exchange of an interest in
another partnership.
● Go to line 11 if the partnership’s only unrecaptured section 1250 gain is from a Schedule K-1, Form 1099-DIV, or
Form 2439 reporting such gain from an estate, trust, real estate investment trust, or regulated investment company
(including a mutual fund).
1. If the partnership had a section 1250 property in Part III of Form 4797 for which there was an
entry in Part I of Form 4797 (but not on Form 6252), enter the smaller of line 22 or line 24 of
Form 4797 for that property. If the partnership had more than one such property, see
instructions 1.
2. Enter the amount from Form 4797, line 26g, for the property for which the partnership made
an entry on line 1 2.
3. Subtract line 2 from line 1 3.
4. Enter the total unrecaptured section 1250 gain included on line 26 or 37 of Form(s) 6252 from
installment sales of trade or business property held more than 1 year (see instructions) 4.
5. Enter the total of any amounts reported to the partnership on Schedules K-1 from another
partnership as “unrecaptured section 1250 gain” 5.
6. Add lines 3 through 5 6.
7. Enter the smaller of line 6 or the gain, if any, from Form 4797, line 7 7.
8. Enter the amount, if any, from Form 4797, line 8 8.
9. Subtract line 8 from line 7. If zero or less, enter -0- 9.
10. Enter the gain from the sale or exchange of an interest in another partnership attributable to
unrecaptured section 1250 gain. See Regulations section 1.1(h)-1 and attach the statement
required under Regulations section 1.1(h)-1(e) 10.
11. Enter the total of any amounts reported to the partnership on Schedule K-1, Form 1099-DIV,
or Form 2439 as “unrecaptured section 1250 gain” from an estate, trust, real estate investment
trust, or mutual fund (or other regulated investment company) 11.
12. Add lines 9 through 11. This is the partnership’s “unrecaptured section 1250 gain.” Report
each partner’s distributive share with Code O in box 9 of Schedule K-1 12.

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• Code B5 — General partner’s • Code N4 — Health insurance. 6. Classify as “passive” all limited
low-income housing credit (for property • Code N5 — Distributions of money partners and LLC members in a
placed in service after 1989) from rental (cash and marketable securities). partnership whose principal activity is a
real estate activities. • Code N6 — Distributions of property trade or business or rental activity.
• Code B6 — General partner’s other than money. 7. If the partnership cannot make a
rehabilitation credit from rental real estate • Code N7 — Gain eligible for section reasonable determination whether a
activities. partner’s participation in a trade or
1202 exclusion.
• Code B7 — General partner’s
alternative minimum tax adjustment from • Code N8 — Gain eligible for section business activity is material or whether a
1045 rollover – stock replaced. partner’s participation in a rental real
rental real estate activities. estate activity is active, classify the
• Code C1 — General partner’s taxable • Code N9 — Gain eligible for section partner as “passive.”
income (loss) from other rental activities. 1045 rollover – stock not replaced.
• Code C2 — General partner’s net • Code O — Unrecaptured section 1250
capital gain (loss) from other rental gain.
activities. • Code P1 — Foreign trading gross Schedule L—Balance
• Code C3 — General partner’s 28% rate receipts.
gain (loss) from other rental activities. • Code P2 — Extraterritorial income Sheet per Books
• Code C4 — General partner’s general exclusion.
credits from other rental activities. • Code Q — Qualified 5-year gain. The balance sheets should agree with the
• Code C5 — General partner’s • Code R — Commercial revitalization partnership’s books and records. Attach a
alternative minimum tax adjustment from deduction. statement explaining any differences.
other rental activities.
• Code D — 28% rate gain (loss) from Partnerships reporting to the Interstate
passive activities. Commerce Commission (ICC) or to any
• Code E — 28% rate gain (loss) from Analysis of Net Income national, state, municipal, or other public
other activities. (Loss) officer may send copies of their balance
• Code F — Guaranteed payments. sheets prescribed by the ICC or national,
• Code G — Income from discharge of state, or municipal authorities, as of the
indebtedness. For each type of partner shown, enter the beginning and end of the tax year, instead
• Code H — Tax-exempt interest income. portion of the amount shown on line 1 that of completing Schedule L. However,
• Code I — Rehabilitation credit from was allocated to that type of partner. statements filed under this procedure
rental real estate activities. Report all amounts for limited liability must contain sufficient information to
• Code J — Nonconventional source fuel company members on the line for limited enable the IRS to reconstruct a balance
credit. partners. The sum of the amounts shown sheet similar to that contained on Form
• Code K1 — Net earnings (loss) from on line 2 must equal the amount shown 1065-B without contacting the partnership
self-employment. on line 1. In addition, the amount on line 1 during processing.
• Code K2 — Gross nonfarm income. must equal the amount on line 9,
• Code L1 — Name of foreign country or Schedule M-1. All amounts on the balance sheet
U.S. possession. should be reported in U.S. dollars. If the
In classifying partners who are
• Code L2 — Gross income from all individuals as “active” or “passive,” the partnership’s books and records are kept
sources. in a foreign currency, the balance sheet
partnership should apply the rules below.
• Code L3 — Gross income sourced at In applying these rules, a partnership should be translated in accordance with
partner level. U.S. generally accepted accounting
should classify each partner to the best of
• Code L4(a) — Passive foreign source its knowledge and belief. It is assumed principles (GAAP).
income. that in most cases the level of a particular
• Code L4(b) — Listed foreign categories partner’s participation in an activity will be
Exception. If the partnership or any
of income. qualified business unit of the partnership
apparent:
• Code L4(c) — General limitation foreign uses the United States dollar approximate
source income. 1. If the partnership’s principal activity separate transactions method, Schedule
• Code L5 — Interest expense allocated is a trade or business, classify a general L should reflect the tax balance sheet
and apportioned at the partner level. partner as “active” if the partner materially prepared and translated into U.S. dollars
• Code L6 — Other expenses allocated participated in all partnership trade or according to Regulations section
and apportioned at the partner level. business activities; otherwise, classify a 1.985-3(d), and not a U.S. GAAP balance
• Code L7(a) — Deductions allocated and general partner as “passive.” sheet.
apportioned at partnership level to 2. If the partnership’s principal activity
consists of a working interest in an oil or Line 5—Tax-Exempt Securities
passive foreign source income.
• Code L7(b) — Deductions allocated and gas well, classify a general partner as Include on this line:
apportioned at partnership level to listed “active.” 1. State and local government
foreign categories of income. 3. If the partnership’s principal activity obligations, the interest on which is
• Code L7(c) — Deductions allocated and is a rental real estate activity, classify a excludable from gross income under
apportioned at partnership level to general partner as “active” if the partner section 103(a) and
general limitation foreign source income. actively participated in all of the 2. Stock in a mutual fund or other
• Code L8(a) — Total foreign taxes paid. partnership’s rental real estate activities; regulated investment company that
• Code L8(b) — Total foreign taxes otherwise, classify a general partner as distributed exempt-interest dividends
accrued. “passive.” during the tax year of the partnership.
• Code L9 — Reduction in taxes available 4. Classify as “passive” all partners in
for credit. a partnership whose principal activity is a
• Code M — Oil and gas activities. rental activity other than a rental real Line 18—All Nonrecourse
• Code N1 — Other tax-exempt income. estate activity. Loans
• Code N2 — Nondeductible expenses. 5. If the partnership’s principal activity Nonrecourse loans are those liabilities of
• Code N3 — Unrelated business taxable is a portfolio activity, classify all partners the partnership for which no partner bears
income. as “active.” the economic risk of loss.

Instructions for Form 1065-B -31-


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M-2. If the beginning and ending capital Line 6—Distributions


Schedule M-1— accounts reported under these rules differ
Line 6a — Cash. Enter on line 6a the
from the amounts reported on Schedule
Reconciliation of Income L, attach a statement reconciling any amount of money distributed to each
differences. partner by the partnership.
(Loss) per Books With Line 6b — Property. Enter on line 6b the
Income (Loss) per Return Line 2—Capital Contributed
amount of property distributed to each
partner by the partnership as reflected on
During Year the partnership’s books and records.
Line 3—Guaranteed Payments Include on line 2a the amount of money Include withdrawals from inventory for the
Include on this line guaranteed payments contributed and on line 2b the amount of personal use of a partner.
shown on Schedule K, line 7. property contributed by each partner to
Line 4b—Travel and the partnership as reflected on the
partnership’s books and records.
Entertainment
Include on this line:
• Meal and entertainment expenses not Line 3—Net Income (Loss) per
deductible under section 274(n). Books
• Expenses for the use of an Enter on line 3 the net income (loss)
entertainment facility. shown on the partnership books from
• The part of business gifts over $25. Schedule M-1, line 1.
• Expenses of an individual allocable to
conventions on cruise ships over $2,000. Paperwork Reduction Act Notice. We ask for the information on this form to carry out the Internal
• Employee achievement awards over Revenue laws of the United States. You are required to give us the information. We need it to ensure
$400. that you are complying with these laws and to allow us to figure and collect the right amount of tax.
• The part of the cost of entertainment You are not required to provide the information requested on a form that is subject to the Paperwork
tickets that exceeds face value (also Reduction Act unless the form displays a valid OMB control number. Books or records relating to a form
subject to 50% limit). or its instructions must be retained as long as their contents may become material in the administration
• The part of the cost of skyboxes that of any Internal Revenue law. Generally, tax returns and return information are confidential, as required
exceeds the face value of nonluxury box by section 6103.
seat tickets.
• The part of the cost of luxury water The time needed to complete and file this form and related schedules will vary depending on individual
circumstances. The estimated average times are:
travel expenses not deductible under
section 274(m).
• Expenses for travel as a form of Form Recordkeeping Learning
about the law
Preparing
the form
Copying,
assembling, and
education. or the form sending the form
• Nondeductible club dues. to the IRS
• Other travel and entertainment
expenses not allowed as a deduction. Form 1065-B 50 hr., 50 min. 22 hr., 12 min. 33 hr., 21 min. 2 hr., 40 min.
Schedule D
(Form 1065-B) 13 hr., 23 min. 2 hr., 47 min. 3 hr., 7 min.
Schedule M-2—Analysis Schedule K-1
(Form 1065-B) 9 hr., 5 min. 7 hr., 31 min. 11 hr., 43 min.
of Partners’ Capital
Schedule L
Accounts (Form 1065-B) 15 hr., 46 min. 12 min. 27 min.
Schedule M-1
(Form 1065-B) 3 hr., 21 min. 12 min. 15 min.
Show what caused the changes during
Schedule M-2
the tax year in the partners’ capital
(Form 1065-B) 3 hr., 6 min. 6 min. 9 min.
accounts as reflected on the partnership’s
books and records.
If you have comments concerning the accuracy of these time estimates or suggestions for making these
The partnership may, but is not forms simpler, we would be happy to hear from you. You can write to the Tax Forms Committee,
required to, use the rules in Regulations Western Area Distribution Center, Rancho Cordova, CA 95743-0001. Do not send the tax form to this
section 1.704-1(b)(2)(iv) to determine the address. Instead, see Where To File on page 3.
partners’ capital accounts in Schedule

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Codes for Principal Business Activity and Code Code


Principal Product or Service Beverage and Tobacco Product
Manufacturing
Primary Metal Manufacturing
331110 Iron & Steel Mills & Ferroalloy
312110 Soft Drink & Ice Mfg Mfg
This list of Principal Business Activities and their associated codes is 312120 Breweries 331200 Steel Product Mfg from
designed to classify an enterprise by the type of activity in which it is 312130 Wineries Purchased Steel
engaged to facilitate the administration of the Internal Revenue Code. 312140 Distilleries 331310 Alumina & Aluminum
These Principal Business Activity Codes are based on the North American 312200 Tobacco Manufacturing Production & Processing
Industry Classification System. 331400 Nonferrous Metal (except
Textile Mills and Textile Product Aluminum) Production &
Using the list of activities and codes below, determine from which activity Mills Processing
the business derives the largest percentage of its “total receipts.” Total 313000 Textile Mills 331500 Foundries
receipts is defined as the sum of gross receipts or sales (Part I, line 1a), all 314000 Textile Product Mills
other income or net gain reported on Part I, lines 5–10, and Part II, Fabricated Metal Product
lines 1–5, and income or net gain reported on Form 8825, lines 2, 19, and Apparel Manufacturing Manufacturing
20a. If the business purchases raw materials and supplies them to a 315100 Apparel Knitting Mills 332110 Forging & Stamping
subcontractor to produce the finished product, but retains title to the 315210 Cut & Sew Apparel 332210 Cutlery & Handtool Mfg
product, the business is considered a manufacturer and must use one of Contractors 332300 Architectural & Structural
the manufacturing codes (311110–339900). 315220 Men’s & Boys’ Cut & Sew Metals Mfg
Apparel Mfg 332400 Boiler, Tank, & Shipping
Once the Principal Business Activity is determined, enter the six-digit 315230 Women’s & Girls’ Cut & Sew Container Mfg
code from the list below on page 1, item C. Also enter a brief description of Apparel Mfg 332510 Hardware Mfg
the business activity in item A and the principal product or service of the 315290 Other Cut & Sew Apparel Mfg 332610 Spring & Wire Product Mfg
business in item B. 315990 Apparel Accessories & Other 332700 Machine Shops; Turned
Apparel Mfg Product; & Screw, Nut, & Bolt
Mfg
Leather and Allied Product
Manufacturing 332810 Coating, Engraving, Heat
Agriculture, Forestry, Fishing Utilities Treating, & Allied Activities
316110 Leather & Hide Tanning &
and Hunting Code Finishing 332900 Other Fabricated Metal
Product Mfg
Code 221100 Electric Power Generation, 316210 Footwear Mfg (including
Transmission & Distribution rubber & plastics) Machinery Manufacturing
Crop Production 316990 Other Leather & Allied
221210 Natural Gas Distribution 333100 Agriculture, Construction, &
111100 Oilseed & Grain Farming Product Mfg Mining Machinery Mfg
221300 Water, Sewage & Other
111210 Vegetable & Melon Farming Systems 333200 Industrial Machinery Mfg
(including potatoes & yams) Wood Product Manufacturing
321110 Sawmills & Wood 333310 Commercial & Service
111300 Fruit & Tree Nut Farming Industry Machinery Mfg
111400 Greenhouse, Nursery, & Construction Preservation
321210 Veneer, Plywood, & 333410 Ventilation, Heating,
Floriculture Production Construction of Buildings Air-Conditioning, &
111900 Other Crop Farming (including 236110 Residential Building Engineered Wood Product
Mfg Commercial Refrigeration
tobacco, cotton, sugarcane, Construction Equipment Mfg
hay, peanut, sugar beet & all 236200 Nonresidential Building 321900 Other Wood Product Mfg
333510 Metalworking Machinery Mfg
other crop farming) Construction Paper Manufacturing 333610 Engine, Turbine & Power
Animal Production Heavy and Civil Engineering 322100 Pulp, Paper, & Paperboard Transmission Equipment Mfg
112111 Beef Cattle Ranching & Construction Mills 333900 Other General Purpose
Farming 237100 Utility System Construction 322200 Converted Paper Product Mfg Machinery Mfg
112112 Cattle Feedlots 237210 Land Subdivision Computer and Electronic Product
Printing and Related Support
112120 Dairy Cattle & Milk Production 237310 Highway, Street, & Bridge Activities Manufacturing
112210 Hog & Pig Farming Construction 323100 Printing & Related Support 334110 Computer & Peripheral
112300 Poultry & Egg Production 237990 Other Heavy & Civil Activities Equipment Mfg
112400 Sheep & Goat Farming Engineering Construction 334200 Communications Equipment
112510 Animal Aquaculture (including Petroleum and Coal Products Mfg
shellfish & finfish farms & Specialty Trade Contractors Manufacturing 334310 Audio & Video Equipment Mfg
hatcheries) 238100 Foundation, Structure, & 324110 Petroleum Refineries
Building Exterior Contractors 334410 Semiconductor & Other
112900 Other Animal Production (including integrated) Electronic Component Mfg
(including framing carpentry, 324120 Asphalt Paving, Roofing, &
Forestry and Logging masonry, glass, roofing, & 334500 Navigational, Measuring,
Saturated Materials Mfg Electromedical, & Control
113110 Timber Tract Operations siding) 324190 Other Petroleum & Coal
238210 Electrical Contractors Instruments Mfg
113210 Forest Nurseries & Gathering Products Mfg 334610 Manufacturing & Reproducing
of Forest Products 238220 Plumbing, Heating, &
Air-Conditioning Contractors Chemical Manufacturing Magnetic & Optical Media
113310 Logging
238290 Other Building Equipment 325100 Basic Chemical Mfg Electrical Equipment, Appliance, and
Fishing, Hunting and Trapping Contractors 325200 Resin, Synthetic Rubber, & Component Manufacturing
114110 Fishing 238300 Building Finishing Contractors Artificial & Synthetic Fibers & 335100 Electric Lighting Equipment
114210 Hunting & Trapping (including drywall, insulation, Filaments Mfg Mfg
painting, wallcovering, 325300 Pesticide, Fertilizer, & Other 335200 Household Appliance Mfg
Support Activities for Agriculture and flooring, tile, & finish Agricultural Chemical Mfg
Forestry 335310 Electrical Equipment Mfg
carpentry) 325410 Pharmaceutical & Medicine
115110 Support Activities for Crop 335900 Other Electrical Equipment &
238900 Other Specialty Trade Mfg Component Mfg
Production (including cotton Contractors (including site 325500 Paint, Coating, & Adhesive
ginning, soil preparation, preparation) Mfg Transportation Equipment
planting, & cultivating) Manufacturing
325600 Soap, Cleaning Compound, &
115210 Support Activities for Animal Toilet Preparation Mfg 336100 Motor Vehicle Mfg
Production Manufacturing
325900 Other Chemical Product & 336210 Motor Vehicle Body & Trailer
115310 Support Activities For Food Manufacturing Preparation Mfg Mfg
Forestry 311110 Animal Food Mfg 336300 Motor Vehicle Parts Mfg
311200 Grain & Oilseed Milling Plastics and Rubber Products
Manufacturing 336410 Aerospace Product & Parts
Mining 311300 Sugar & Confectionery Mfg
Product Mfg 326100 Plastics Product Mfg
211110 Oil & Gas Extraction 336510 Railroad Rolling Stock Mfg
311400 Fruit & Vegetable Preserving 326200 Rubber Product Mfg
212110 Coal Mining 336610 Ship & Boat Building
& Specialty Food Mfg Nonmetallic Mineral Product 336990 Other Transportation
212200 Metal Ore Mining 311500 Dairy Product Mfg
212310 Stone Mining & Quarrying Manufacturing Equipment Mfg
311610 Animal Slaughtering and 327100 Clay Product & Refractory
212320 Sand, Gravel, Clay, & Ceramic Processing Furniture and Related Product
& Refractory Minerals Mining Mfg
311710 Seafood Product Preparation Manufacturing
& Quarrying 327210 Glass & Glass Product Mfg
& Packaging 337000 Furniture & Related Product
212390 Other Nonmetallic Mineral 327300 Cement & Concrete Product Manufacturing
311800 Bakeries & Tortilla Mfg Mfg
Mining & Quarrying
311900 Other Food Mfg (including 327400 Lime & Gypsum Product Mfg
213110 Support Activities for Mining coffee, tea, flavorings & 327900 Other Nonmetallic Mineral
seasonings) Product Mfg

Instructions for Form 1065-B -33-


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Code Code Code Code


Miscellaneous Manufacturing Electronics and Appliance Stores Nonstore Retailers Broadcasting (except Internet)
339110 Medical Equipment & 443111 Household Appliance Stores 454110 Electronic Shopping & 515100 Radio & Television
Supplies Mfg 443112 Radio, Television, & Other Mail-Order Houses Broadcasting
339900 Other Miscellaneous Electronics Stores 454210 Vending Machine Operators 515210 Cable & Other Subscription
Manufacturing 443120 Computer & Software Stores 454311 Heating Oil Dealers Programming
443130 Camera & Photographic 454312 Liquefied Petroleum Gas Internet Publishing and Broadcasting
Wholesale Trade Supplies Stores (Bottled Gas) Dealers
516110 Internet Publishing &
454319 Other Fuel Dealers Broadcasting
Merchant Wholesalers, Durable Goods Building Material and Garden
Equipment and Supplies Dealers 454390 Other Direct Selling
Establishments (including Telecommunications
423100 Motor Vehicle & Motor Vehicle 444110 Home Centers door-to-door retailing, frozen
Parts & Supplies 517000 Telecommunications
444120 Paint & Wallpaper Stores food plan providers, party (including paging, cellular,
423200 Furniture & Home Furnishing 444130 Hardware Stores plan merchandisers, & satellite, cable & other
423300 Lumber & Other Construction 444190 Other Building Material coffee-break service program distribution,
Materials Dealers providers) resellers, & other
423400 Professional & Commercial 444200 Lawn & Garden Equipment & telecommunications)
Equipment & Supplies Supplies Stores
423500 Metal & Mineral (except
Transportation and Internet Service Providers, Web
Petroleum) Food and Beverage Stores Warehousing Search Portals, and Data Processing
445110 Supermarkets and Other Air, Rail, and Water Transportation Services
423600 Electrical & Electronic Goods
Grocery (except Convenience) 481000 Air Transportation 518111 Internet Service Providers
423700 Hardware, & Plumbing &
Heating Equipment & Stores 518112 Web Search Portals
482110 Rail Transportation
Supplies 445120 Convenience Stores 518210 Data Processing, Hosting, &
483000 Water Transportation
423800 Machinery, Equipment, & 445210 Meat Markets Related Services
Supplies 445220 Fish & Seafood Markets Truck Transportation
Other Information Services
423910 Sporting & Recreational 445230 Fruit & Vegetable Markets 484110 General Freight Trucking,
Local 519100 Other Information Services
Goods & Supplies 445291 Baked Goods Stores (including news syndicates &
423920 Toy & Hobby Goods & 445292 Confectionery & Nut Stores 484120 General Freight Trucking, libraries)
Supplies 445299 All Other Specialty Food Long-distance
423930 Recyclable Material Stores 484200 Specialized Freight Trucking
423940 Jewelry, Watch, Precious 445310 Beer, Wine, & Liquor Stores Finance and Insurance
Transit and Ground Passenger
Stone, & Precious Metal Transportation Depository Credit Intermediation
423990 Other Miscellaneous Durable Health and Personal Care Stores 522110 Commercial Banking
446110 Pharmacies & Drug Stores 485110 Urban Transit Systems
Goods 522120 Savings Institutions
446120 Cosmetics, Beauty Supplies, 485210 Interurban & Rural Bus
Merchant Wholesalers, Nondurable Goods Transportation 522130 Credit Unions
& Perfume Stores
485310 Taxi Service 522190 Other Depository Credit
446130 Optical Goods Stores Intermediation
424100 Paper & Paper Product 446190 Other Health & Personal Care 485320 Limousine Service
424210 Drugs & Druggists’ Sundries Stores 485410 School & Employee Bus Nondepository Credit Intermediation
424300 Apparel, Piece Goods, & Transportation 522210 Credit Card Issuing
Notions Gasoline Stations 485510 Charter Bus Industry 522220 Sales Financing
424400 Grocery & Related Product 447100 Gasoline Stations (including 485990 Other Transit & Ground
convenience stores with gas) 522291 Consumer Lending
424500 Farm Product Raw Material Passenger Transportation 522292 Real Estate Credit (including
424600 Chemical & Allied Products Clothing and Clothing Accessories Pipeline Transportation mortgage bankers &
424700 Petroleum & Petroleum Stores 486000 Pipeline Transportation originators)
Products 448110 Men’s Clothing Stores 522293 International Trade Financing
424800 Beer, Wine, & Distilled 448120 Women’s Clothing Stores Scenic & Sightseeing Transportation 522294 Secondary Market Financing
Alcoholic Beverage 448130 Children’s & Infants’ Clothing 487000 Scenic & Sightseeing 522298 All Other Nondepository
424910 Farm Supplies Stores Transportation Credit Intermediation
424920 Book, Periodical, & 448140 Family Clothing Stores
Newspaper Support Activities for Transportation Activities Related to Credit
448150 Clothing Accessories Stores 488100 Support Activities for Air Intermediation
424930 Flower, Nursery Stock, & 448190 Other Clothing Stores
Florists’ Supplies Transportation 522300 Activities Related to Credit
448210 Shoe Stores 488210 Support Activities for Rail Intermediation (including loan
424940 Tobacco & Tobacco Product 448310 Jewelry Stores Transportation brokers, check clearing, &
424950 Paint, Varnish, & Supplies 448320 Luggage & Leather Goods money transmitting)
488300 Support Activities for Water
424990 Other Miscellaneous Stores Transportation
Nondurable Goods Securities, Commodity Contracts,
Sporting Goods, Hobby, Book, and 488410 Motor Vehicle Towing and Other Financial Investments and
Wholesale Electronic Markets and Music Stores 488490 Other Support Activities for Related Activities
Agents and Brokers 451110 Sporting Goods Stores Road Transportation 523110 Investment Banking &
425110 Business to Business 451120 Hobby, Toy, & Game Stores 488510 Freight Transportation Securities Dealing
Electronic Markets Arrangement 523120 Securities Brokerage
451130 Sewing, Needlework, & Piece
425120 Wholesale Trade Agents & Goods Stores 488990 Other Support Activities for 523130 Commodity Contracts Dealing
Brokers Transportation
451140 Musical Instrument & Supplies
Stores Couriers and Messengers 523140 Commodity Contracts
Retail Trade 451211 Book Stores 492110 Couriers Brokerage
Motor Vehicle and Parts Dealers 451212 News Dealers & Newsstands 492210 Local Messengers & Local 523210 Securities & Commodity
451220 Prerecorded Tape, Compact Delivery Exchanges
441110 New Car Dealers
Disc, & Record Stores Warehousing and Storage 523900 Other Financial Investment
441120 Used Car Dealers Activities (including portfolio
441210 Recreational Vehicle Dealers General Merchandise Stores 493100 Warehousing & Storage
(except lessors of management & investment
441221 Motorcycle Dealers 452110 Department stores advice)
miniwarehouses & self-
441222 Boat Dealers 452900 Other General Merchandise storage units)
441229 All Other Motor Vehicle Stores Insurance Carriers and Related
Dealers Activities
441300 Automotive Parts, Miscellaneous Store Retailers Information 524140 Direct Life, Health, & Medical
Accessories, & Tire Stores 453110 Florists Publishing Industries (except Internet) Insurance & Reinsurance
453210 Office Supplies & Stationery Carriers
511110 Newspaper Publishers
Furniture and Home Furnishings Stores 524150 Direct Insurance &
Stores 511120 Periodical Publishers Reinsurance (except Life,
453220 Gift, Novelty, & Souvenir 511130 Book Publishers
442110 Furniture Stores Stores Health & Medical) Carriers
442210 Floor Covering Stores 511140 Directory & Mailing List, 524210 Insurance Agencies &
453310 Used Merchandise Stores Publishers
442291 Window Treatment Stores 453910 Pet & Pet Supplies Stores Brokerages
511190 Other Publishers 524290 Other Insurance Related
442299 All Other Home Furnishings 453920 Art Dealers
Stores 511210 Software Publishers Activities (including
453930 Manufactured (Mobile) Home third-party administration of
Dealers Motion Picture and Sound Recording
Industries insurance and pension funds)
453990 All Other Miscellaneous Store
Retailers (including tobacco, 512100 Motion Picture & Video
candle, & trophy shops) Industries (except video
rental)
512200 Sound Recording Industries

-34- Instructions for Form 1065-B


Page 35 of 36 Instructions for Form 1065-B 14:20 - 24-JAN-2003

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Code Code Code Code


Funds, Trusts, and Other Financial Specialized Design Services Health Care and Social 713900 Other Amusement &
Vehicles 541400 Specialized Design Services Assistance Recreation Industries
525100 Insurance & Employee Benefit (including interior, industrial, (including golf courses, skiing
Offices of Physicians and Dentists facilities, marinas, fitness
Funds graphic, & fashion design)
621111 Offices of Physicians (except centers, & bowling centers)
525910 Open-End Investment Funds Computer Systems Design and mental health specialists)
(Form 1120-RIC) Related Services 621112 Offices of Physicians, Mental
525920 Trusts, Estates, & Agency 541511 Custom Computer Health Specialists Accommodation and Food
Accounts Programming Services 621210 Offices of Dentists Services
525930 Real Estate Investment Trusts 541512 Computer Systems Design Accommodation
(Form 1120-REIT) Services Offices
of Other Health Practitioners
721110 Hotels (except casino hotels)
525990 Other Financial Vehicles 541513 Computer Facilities 621310
Offices of Chiropractors & Motels
(including closed-end Management Services 621320
Offices of Optometrists
investment funds) 721120 Casino Hotels
541519 Other Computer Related 621330
Offices of Mental Health 721191 Bed & Breakfast Inns
“Offices of Bank Holding Companies” Services Practitioners (except
and “Offices of Other Holding Physicians) 721199 All Other Traveler
Companies” are located under Other Professional, Scientific, and Accommodation
621340 Offices of Physical,
Management of Companies (Holding Technical Services Occupational & Speech 721210 RV (Recreational Vehicle)
Companies) below. 541600 Management, Scientific, & Therapists, & Audiologists Parks & Recreational Camps
Technical Consulting Services 621391 Offices of Podiatrists 721310 Rooming & Boarding Houses
Real Estate and Rental and 541700 Scientific Research & 621399 Offices of All Other Food Services and Drinking Places
Leasing Development Services Miscellaneous Health 722110 Full-Service Restaurants
541800 Advertising & Related Practitioners
Real Estate 722210 Limited-Service Eating Places
Services
531110 Lessors of Residential Outpatient Care Centers 722300 Special Food Services
541910 Marketing Research & Public (including food service
Buildings & Dwellings Opinion Polling 621410 Family Planning Centers
531114 Cooperative Housing 621420 Outpatient Mental Health & contractors & caterers)
541920 Photographic Services 722410 Drinking Places (Alcoholic
531120 Lessors of Nonresidential 541930 Translation & Interpretation Substance Abuse Centers
Buildings (except 621491 HMO Medical Centers Beverages)
Services
Miniwarehouses) 541940 Veterinary Services 621492 Kidney Dialysis Centers
531130 Lessors of Miniwarehouses & 541990 All Other Professional, 621493 Freestanding Ambulatory Other Services
Self-Storage Units Scientific, & Technical Surgical & Emergency Repair and Maintenance
531190 Lessors of Other Real Estate Services Centers
Property 811110 Automotive Mechanical &
621498 All Other Outpatient Care Electrical Repair &
531210 Offices of Real Estate Agents Centers Maintenance
& Brokers Management of Companies
Medical and Diagnostic Laboratories 811120 Automotive Body, Paint,
531310 Real Estate Property (Holding Companies) Interior, & Glass Repair
Managers 621510 Medical & Diagnostic
551111 Offices of Bank Holding Laboratories 811190 Other Automotive Repair &
531320 Offices of Real Estate Companies Maintenance (including oil
Appraisers Home Health Care Services change & lubrication shops &
551112 Offices of Other Holding
531390 Other Activities Related to Companies 621610 Home Health Care Services car washes)
Real Estate 811210 Electronic & Precision
Other Ambulatory Health Care Equipment Repair &
Rental and Leasing Services Administrative and Support Services
532100 Automotive Equipment Rental Maintenance
and Waste Management and 621900 Other Ambulatory Health Care 811310 Commercial & Industrial
& Leasing Services (including
532210 Consumer Electronics & Remediation Services ambulance services & blood
Machinery & Equipment
Appliances Rental (except Automotive &
Administrative and Support Services & organ banks) Electronic) Repair &
532220 Formal Wear & Costume 561110 Office Administrative Services Maintenance
Rental Hospitals
561210 Facilities Support Services 811410 Home & Garden Equipment &
532230 Video Tape & Disc Rental 622000 Hospitals
561300 Employment Services Appliance Repair &
532290 Other Consumer Goods 561410 Document Preparation Nursing and Residential Care Maintenance
Rental Services Facilities 811420 Reupholstery & Furniture
532310 General Rental Centers 561420 Telephone Call Centers 623000 Nursing & Residential Care Repair
532400 Commercial & Industrial 561430 Business Service Centers Facilities 811430 Footwear & Leather Goods
Machinery & Equipment (including private mail centers Repair
Rental & Leasing & copy shops) Social Assistance
811490 Other Personal & Household
561440 Collection Agencies 624100 Individual & Family Services Goods Repair & Maintenance
Lessors of Nonfinancial Intangible 624200 Community Food & Housing,
Assets (except copyrighted works) 561450 Credit Bureaus
& Emergency & Other Relief Personal and Laundry Services
533110 Lessors of Nonfinancial 561490 Other Business Support Services
Services (including 812111 Barber Shops
Intangible Assets (except 624310 Vocational Rehabilitation
copyrighted works) repossession services, court 812112 Beauty Salons
reporting, & stenotype Services 812113 Nail Salons
services) 624410 Child Day Care Services 812190 Other Personal Care Services
Professional, Scientific, and 561500 Travel Arrangement & (including diet & weight
Technical Services Reservation Services Arts, Entertainment, and reducing centers)
561600 Investigation & Security 812210 Funeral Homes & Funeral
Legal Services Recreation Services
541110 Offices of Lawyers Services
561710 Exterminating & Pest Control Performing Arts, Spectator Sports, 812220 Cemeteries & Crematories
541190 Other Legal Services and Related Industries
Services 812310 Coin-Operated Laundries &
Accounting, Tax Preparation, 561720 Janitorial Services 711100 Performing Arts Companies Drycleaners
Bookkeeping, and Payroll Services 561730 Landscaping Services 711210 Spectator Sports (including 812320 Drycleaning & Laundry
541211 Offices of Certified Public sports clubs & racetracks) Services (except
561740 Carpet & Upholstery Cleaning
Accountants Services 711300 Promoters of Performing Arts, Coin-Operated)
541213 Tax Preparation Services Sports, & Similar Events 812330 Linen & Uniform Supply
561790 Other Services to Buildings &
541214 Payroll Services Dwellings 711410 Agents & Managers for 812910 Pet Care (except Veterinary)
541219 Other Accounting Services Artists, Athletes, Entertainers, Services
561900 Other Support Services & Other Public Figures
(including packaging & 812920 Photofinishing
Architectural, Engineering, and labeling services, & 711510 Independent Artists, Writers, 812930 Parking Lots & Garages
Related Services convention & trade show & Performers 812990 All Other Personal Services
541310 Architectural Services organizers) Museums, Historical Sites, and Religious, Grantmaking, Civic,
541320 Landscape Architecture Similar Institutions
Services Waste Management and Professional, and Similar
Remediation Services 712100 Museums, Historical Sites, & Organizations
541330 Engineering Services Similar Institutions
541340 Drafting Services 562000 Waste Management & 813000 Religious, Grantmaking, Civic,
Remediation Services Amusement, Gambling, and Professional, & Similiar
541350 Building Inspection Services
Recreation Industries Organizations (including
541360 Geophysical Surveying & condominium and
Mapping Services Educational Services 713100 Amusement Parks & Arcades
homeowners associations)
541370 Surveying & Mapping (except 611000 Educational Services 713200 Gambling Industries
Geophysical) Services (including schools, colleges, &
541380 Testing Laboratories universities)

Instructions for Form 1065-B -35-


Page 36 of 36 Instructions for Form 1065-B 14:20 - 24-JAN-2003

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Index

A Special Rules: Items for Special R


Accounting Methods: Entertainment Treatment . . . . . . . . . . . . 21 Recordkeeping . . . . . . . . . . . 5
Change in accounting facilities . . . . . . . . . . 17 Constructive sale Rental Activities . . . . . . . . . . . 9
method . . . . . . . . . . . . . 5 Meals and treatment . . . . . . . . . . . 21
Mark-to-Market Accounting entertainment . . . . . . 17 Rollover of Gain from
Membership dues . . . . . 17 Empowerment Zone S
Method:
Dealers in commodities, Travel . . . . . . . . . . . . . 17 Asset . . . . . . . . . . . . . . 22 Schedule A – Cost of Goods
and traders in Taxes and Licenses . . . . . 16 Rollover of Gain from Sold . . . . . . . . . . . . . . . . 18
securities and commodities Definitions . . . . . . . . . . . . . . 2 Qualified Stock . . . . . . . 22 Schedule D – Capital Gains
................. 4 Depreciation . . . . . . . . . . . . 16 Special Rules for Trader in and Losses . . . . . . . . . . . 20
Mark-to-Market Accounting Securities . . . . . . . . . . . 21 Specific Instructions . . . . . 22
Discharge of Indebtedness . . 26
Method: . . . . . . . . . . . . . 4 Schedule K and K-1,
Dispositions of Contributed
Accounting Periods . . . . . . . . 5 Partner’s Shares of
Property . . . . . . . . . . . ... 9 L
Activities of Electing Large Income, Credits, Deductions,
Distributions . . . . . . . . . . . . 32 Limited Liability Company . . . . 3
Partnerships . . . . . . . . . . . 9 etc. . . . . . . . . . . . . . . . . 23
Limited Liability Partnership . . . 3
Administrative Adjustment Schedule L, Balance Sheet
E Limited Partner . . . . . . . . . . . 2 per Books . . . . . . . . . . . . 31
Requests:
Elections: Limited Partnership . . . . . . . . 3 Schedule M-1, Reconciliation
Form 8082 . . . . . . . . . . . . 5
By each partner . . . ...... 8 of Income (Loss) . . . . . . . 32
Analysis of Net Income
By the partnership . ...... 8 M Schedule M-2, Analysis of
(Loss) . . . . . . . . . . . . . . . 31
Extension . . . . . . . . . ...... 3 Miscellaneous Itemized Partners’ Capital
Assembling the Return . . . . . . 7
Extraterritorial income Deductions . . . . . . . . . . . 18 Accounts . . . . . . . . . . . . . 32
exclusion . . . . . . . . . . 12, 29 Section 179 Expense
B Deduction . . . . . . . . . . . . 16
Business Start-Up N
F Section 263A uniform
Expenses . . . . . . . . . . . . 15 Net Earnings From
Foreign Accounts . . . . . . . . 20 capitalization rules . . . . . . 14
Self-Employment . . . . . . . 27
Foreign Partners . . . . . . . . . 20 Separately Stated Items . . . . . 8
Nonrecourse Loans . . . . . . 3, 31
C Substitute Forms . . . . . . . . . 23
Foreign Partnership . . . . . . . . 2
Capital Assets . . . . . . . . . . . 20 Syndication Costs . . . . . . . . 15
Foreign Tax Credit . . . . . . . . 27 O
Capital Gains and Losses . . . 20 Forms and publications, How Ordinary dividends . . . . . . . . 18
Codes: to Get . . . . . . . . . . . . . . .. 2 T
Schedule K-1, Box 9 . . . . . 30 Organization Costs . . . . . . . 15
Forms, Returns, and Tax . . . . . . . . . . . . . . . . . . 17
Contributions to the Overview of Large
Statements That May Be Tax Issues, Unresolved . . . . . 1
Partnership . . . . . . . . . . . . 8 Partnership
Required . . . . . . . . . . . . .. 5 Tax Shelter Disclosure
Cost of Goods Sold . . . . . . . 18 Provisions . . . . . . . . . . . 7, 20
Statement . . . . . . . . . . . 7, 29
Inventory . . . . . . . . . . . . . 19
G Tax Shelter Registration
Other Costs . . . . . . . . . . . 19 P
General Credits . . . . . . . . . . 26 Number . . . . . . . . . . . . . 24
Purchases . . . . . . . . . . . . 19 Paid Preparer Authorization . .. 3
General Partner . . . . . . . .... 2 Tax-Exempt Interest
Paid Preparer’s Information . .. 3 Income . . . . . . . . . . . . . . 26
General Partnership . . . . .... 2
D Paperwork Reduction Act Tax-Exempt Partners . . . . . . 12
Guaranteed Payments to Notice . . . . . . . . . . . . . . . 32
Deductions: Tax-Exempt Securities . . . . . 31
Partners . . . . . . . . . . . 15, 32
Bad Debts . . . . . . . . . . . . 15 Partner’s Share of Liabilities Termination of the
Depletion . . . . . . . . . . . . 16 (Schedule K-1) . . . . . . . . . 24 Partnership . . . . . . . . . . . . 3
Depreciation . . . . . . . . . . 16 I Partnership Holding: Trade or Business Activities . . . 9
Employee Benefit Income: Oil and Gas Properties . . . 12
Programs . . . . . . . . . . . 16 Transactions Between
Gross Receipts or Sales . . 13 Residual Interests in Real
Guaranteed Payments to Related Taxpayers . . . . . . 15
Net Farm Profit (Loss) . . . . 14 Estate Mortgage
Partners . . . . . . . . . . . . 15 Net Gain (Loss) From Form Investment Conduits Travel and Entertainment . . . 32
Interest . . . . . . . . . . . . . . 16 4797 . . . . . . . . . . . . . . 14 (REMICs) . . . . . . . . . . . 12
Limitations . . . . . . . . . . . . 14 Net Income (Loss) From Passive Activity Reporting U
Other Deductions . . . . . . . 17 Rental Real Estate Requirements . . . . . . . . . 10 Unrealized Receivables and
Rent . . . . . . . . . . . . . . . . 15 Activities . . . . . . . . . . . 13 Passive Loss Limitation Inventory Items . . . . . . . . . 9
Repairs and Ordinary Income (Loss) Activities . . . . . . . . . . . . .. 9 Unrecaptured section
Maintenance . . . . . . . . . 15 From Other 1250 gain . . . . . . . . . . 29, 30
Penalties:
Retirement Plans, etc. . . . . 16 Partnerships, Estates, and Failure To Furnish
Salaries and Wages . . . . . 15 Trusts . . . . . . . . . . . . . 14 Information Timely . . . . .. 4 W
Section 179 Expense . . . . 16 Other Income (Loss) . . . . . 14 Late Filing of Return . . . . .. 4
Section 263A uniform Interest charged . . . . . . . . . . 4 Where To File . . . . . . . . . . . . 3
Late Payment of Tax . . . . .. 4
capitalization rules . . . . . 14 Interest Income . . . . . . . . 11, 18 Who Must Sign . . . . . . . . . . . 3
Trust Fund Recovery
Inventory Valuation Penalty . . . . . . . . . . . .. 4 ■
Methods . . . . . . . . . . . . . 19 Private Delivery Services . . .. 3
Investment Interest . . . . . . . 18 Publicly Traded
Partnerships . . . . . . . . . . 12

-36- Instructions for Form 1065-B

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