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Contents Page Contents Page with more than 100 partners are required
Changes To Note . . . . . . . . . . 1 Specific Items and Questions . . . 20 to file Form 1065 electronically. For
details see Electronic Filing on page 3.
Photographs of Missing Children . . 1 Specific Instructions (Schedules K
Unresolved Tax Issues . . . . . . . 1 and K-1, Except as Noted) . . . 21
Special Allocations . . . . . . . . 21
Photographs of Missing
How To Get Forms and Publications 2 Children
Income (Loss) . . . . . . . . . . . 21
General Instructions . . . . . . . . 2 The Internal Revenue Service is a proud
Deductions . . . . . . . . . . . . 23
Purpose of Form . . . . . . . . . 2 partner with the National Center for
Credits . . . . . . . . . . . . . . 24
Definitions . . . . . . . . . . . . . 2 Missing and Exploited Children.
Investment Interest . . . . . . . . 24 Photographs of missing children selected
Who Must File . . . . . . . . . . 2
Self-Employment . . . . . . . . . 25 by the Center may appear in instructions
Termination of the Partnership . . 3
Adjustments and Tax Preference on pages that would otherwise be blank.
Electronic Filing . . . . . . . . . . 3 Items . . . . . . . . . . . . . . 26 You can help bring these children home
When To File . . . . . . . . . . . 3 Foreign Taxes . . . . . . . . . . 27 by looking at the photographs and calling
Where To File . . . . . . . . . . . 4 Other . . . . . . . . . . . . . . . 28 1-800-THE-LOST (1-800-843-5678) if you
Who Must Sign . . . . . . . . . . 4 recognize a child.
Analysis of Net Income (Loss) . . . 30
Penalties . . . . . . . . . . . . . 4
Accounting Methods . . . . . . . 4
Schedule L—Balance Sheets . . . . 30 Unresolved Tax Issues
Schedule M-1—Reconciliation of If the partnership has attempted to deal
Accounting Periods . . . . . . . . 5
Income (Loss) per Books With with an IRS problem unsuccessfully, it
Rounding Off to Whole Dollars . . 5 Income (Loss) per Return . . . . 30
should contact the Taxpayer Advocate.
Recordkeeping . . . . . . . . . . 5 Schedule M-2—Analysis of Partners' The Taxpayer Advocate independently
Amended Return . . . . . . . . . 5 Capital Accounts . . . . . . . . . 30 represents the partnership's interests and
Other Forms, Returns, and Codes for Principal Business Activity concerns within the IRS by protecting its
Statements That May Be Required 6 and Principal Product or Service . 32 rights and resolving problems that have
Assembling the Return . . . . . . 7 not been fixed through normal channels.
Separately Stated Items . . . . . 7 Changes To Note While the Taxpayer Advocates cannot
Elections Made by the Partnership 7 change the tax law or make a technical
● The FSC Repeal and Extraterritorial tax decision, they can clear up problems
Elections Made by Each Partner . 8 Income Exclusion Act of 2000 allows a that resulted from previous contacts and
Partner's Dealings With Partnership 8 new extraterritorial income exclusion for ensure that the partnership's case is given
Contributions to the Partnership . 8 transactions after September 30, 2000. a complete and impartial review.
Dispositions of Contributed Property 8 The exclusion is based on a partnership's The partnership's assigned personal
qualifying foreign trade income. For more advocate will listen to its point of view and
Recognition of Precontribution Gain
details and to figure the amount of the will work with the partnership to address
on Certain Partnership Distributions 8
exclusion, see new Form 8873, its concerns. The partnership can expect
Unrealized Receivables and Inventory Extraterritorial Income Exclusion. the advocate to provide:
Items . . . . . . . . . . . . . . 8 ● The partnership may need to mail its ● A “fresh look” at a new or on-going
Passive Activity Limitations . . . . 8 return to a different service center this problem.
Specific Instructions . . . . . . . 12 year because the IRS has changed the ● Timely acknowledgement.
General Information . . . . . . . . 13 filing location for several areas. If an
● The name and phone number of the
envelope was received with the tax
Income . . . . . . . . . . . . . . 13 individual assigned to its case.
package, please use it. Otherwise, see
Deductions . . . . . . . . . . . . 14 Where To File on page 4. ● Updates on progress.
Schedule A—Cost of Goods Sold . 17 ● Generally, if a partnership's average ● Timeframes for action.
Schedule B—Other Information . . . 18 annual gross receipts for the 3 prior tax ● Speedy resolution.
Designation of Tax Matters Partner . 19 years are $1 million or less, it may be ● Courteous service.
eligible to adopt or change to the cash When contacting the Taxpayer
Schedules K and K-1—Partners' method of accounting. If the partnership
Shares of Income, Credits, Advocate, the partnership should provide
makes this change, it will not be required the following information:
Deductions, etc. . . . . . . . . . 20 to account for inventories. Instead, the ● The partnership's name, address, and
Purpose of Schedules . . . . . . 20 partnership may treat inventory in the
same manner as costs of material and employer identification number.
Substitute Forms . . . . . . . . . 20
● The name and telephone number of an
How Income is Shared Among supplies that are not incidental. For
details, see Cost of Goods Sold on page authorized contact person and the hours
Partners . . . . . . . . . . . . . 20 he or she can be reached.
17.
Specific Instructions (Schedule K-1 ● For tax years ending on or after ● The type of tax return and year(s)
Only) . . . . . . . . . . . . . . . 20 involved.
December 31, 2000, certain partnerships
General Information . . . . . . . . 20
Cat. No. 11392V
● A detailed description of the problem. Limited Partnership
● Previous attempts to solve the problem
and the office that had been contacted. General Instructions A limited partnership is formed under a
state limited partnership law and
● A description of the hardship the composed of at least one general partner
partnership is facing (if applicable). and one or more limited partners.
The partnership may contact a Purpose of Form
Taxpayer Advocate by calling a toll-free Limited Liability Partnership
Form 1065 is an information return used
number, 1-877-777-4778. Persons who to report the income, deductions, gains, A limited liability partnership (LLP) is
have access to TTY/TDD equipment may losses, etc., from the operation of a formed under a state limited liability
call 1-800-829-4059 and ask for the partnership. A partnership does not pay partnership law. Generally, a partner in
Taxpayer Advocate. If the partnership tax on its income but “passes through” an LLP is not personally liable for the
prefers, it may call, write, or fax the any profits or losses to its partners. debts of the LLP or any other partner, nor
Taxpayer Advocate office in its area. See Partners must include partnership items is a partner liable for the acts or omissions
Pub. 1546, The Taxpayer Advocate on their tax returns. of any other partner, solely by reason of
Service of the IRS, for a list of addresses being a partner.
and fax numbers. Definitions Limited Liability Company
How To Get Forms and Partnership A limited liability company (LLC) is an
Publications entity formed under state law by filing
A partnership is the relationship between articles of organization as an LLC. Unlike
two or more persons who join to carry on a partnership, none of the members of an
Personal Computer a trade or business, with each person LLC are personally liable for its debts. An
You can access the IRS Web Site 24 contributing money, property, labor, or LLC may be classified for Federal income
hours a day, 7 days a week at skill and each expecting to share in the tax purposes either as a partnership, a
www.irs.gov to: profits and losses of the business whether corporation, or an entity disregarded as
● Download forms, instructions, and or not a formal partnership agreement is an entity separate from its owner by
publications. made. applying the rules in Regulations section
● See answers to frequently asked tax The term “partnership” includes a 301.7701-3. See Form 8832, Entity
questions. limited partnership, syndicate, group, Classification Election, for more details.
● Search publications on-line by topic or
pool, joint venture, or other Note: A domestic LLC with at least two
unincorporated organization, through or members that does not file Form 8832 is
keyword.
by which any business, financial classified as a partnership for Federal
● Send us comments or request help by
operation, or venture is carried on, that is income tax purposes.
e-mail. not, within the meaning of the regulations
● Sign up to receive local and national tax under section 7701, a corporation, trust, Nonrecourse Loans
news by e-mail. estate, or sole proprietorship.
Nonrecourse loans are those liabilities of
You can also reach us using file A joint undertaking merely to share the partnership for which no partner bears
transfer protocol at ftp.irs.gov. expenses is not a partnership. Mere the economic risk of loss.
co-ownership of property that is
CD-ROM maintained and leased or rented is not a
Order Pub. 1796, Federal Tax Products partnership. However, if the co-owners
Who Must File
on CD-ROM, and get: provide services to the tenants, a Except as provided below, every domestic
● Current year forms, instructions, and partnership exists. partnership must file Form 1065, unless
publications. it neither receives income nor incurs any
● Prior year forms, instructions, and
General Partner expenditures treated as deductions or
publications. A general partner is a partner who is credits for Federal income tax purposes.
● Popular tax forms that may be filled in personally liable for partnership debts. Generally, a foreign partnership that
electronically, printed out for submission, has gross income effectively connected
General Partnership with the conduct of a trade or business
and saved for recordkeeping.
● The Internal Revenue Bulletin.
A general partnership is composed only within the United States or has gross
of general partners. income derived from sources in the United
Buy the CD-ROM on the Internet at States must file Form 1065, even if its
www.irs.gov/cdorders from the National Limited Partner principal place of business is outside the
Technical Information Service (NTIS) for United States or all its members are
A limited partner is a partner in a
$21 (no handling fee), or call foreign persons. A foreign partnership
partnership formed under a state limited
1-877-CDFORMS (1-877-233-6767) toll required to file a return generally must
partnership law, whose personal liability
free to buy the CD-ROM for $21 (plus a report all of its foreign and U.S. source
for partnership debts is limited to the
$5 handling fee). income.
amount of money or other property that
By Phone and In Person the partner contributed or is required to A foreign partnership filing Form 1065
contribute to the partnership. Some solely to make an election (such as an
You can order forms and publications 24 members of other entities, such as election to amortize organization
hours a day, 7 days a week, by calling domestic or foreign business trusts or expenses) need only provide its name,
1-800-TAX-FORM (1-800-829-3676). You limited liability companies that are address, and employer identification
can also get most forms and publications classified as partnerships, may be treated number (EIN) on page one of the form
at your local IRS office. as limited partners for certain purposes. and attach a statement identifying the
See, for example, Temporary Regulations election being made. A foreign
section 1.469-5T(e)(3), which treats all partnership filing Form 1065 solely to
members with limited liability as limited make an election must obtain an EIN if it
partners for purposes of section does not already have one.
469(h)(2).
conduits (REMICs) must file Form 1066, ● Pub. 1525, Validation Criteria and Day Air, UPS Next Day Air Saver, UPS
U.S. Real Estate Mortgage Investment Record Layouts for the 1065 e-File 2nd Day Air, UPS 2nd Day Air A.M.
Conduit (REMIC) Income Tax Return. Program, U.S. Return of Partnership The private delivery service can tell you
Certain publicly traded partnerships Income, for Tax Year 2000; how to get written proof of the mailing
treated as corporations under section ● Pub. 3416, Electronic Filing of Form date.
7704 must file Form 1120. 1065 (Publication 1525 Supplement) for
Tax Year 2000; and Extension
Termination of the ● Pub. 3225, Test Package for Electronic If you need more time to file a partnership
Filers of U.S. Partnership Return of return, file Form 8736, Application for
Partnership Income, for Tax Year 2000. Automatic Extension of Time To File U.S.
A partnership terminates when: Return for a Partnership, REMIC, or for
1. All its operations are discontinued To order these forms and Certain Trusts, for an automatic 3-month
and no part of any business, financial publications, or for more extension. File Form 8736 by the regular
operation, or venture is continued by any information on filing electronically: due date of the partnership return. The
of its partners in a partnership, or automatic 3-month extension period
● Call the Electronic Filing Section at the includes any 2-month extension granted
2. At least 50% of the total interest in Memphis Service Center at 901-546-2690 to partnerships that keep their records
partnership capital and profits is sold or (not a toll-free call) or and books of account outside the United
States and Puerto Rico.
Instructions for Form 1065 Page 3
If, after you have filed Form 8736, you Alaska, Arizona, Arkansas, partnership return. The penalty is $50 for
still need more time to file the partnership California (counties of Alpine, each month or part of a month (for a
return, file Form 8800, Application for Amador, Butte, Calaveras, maximum of 5 months) the failure
Colusa, Contra Costa, Del
Additional Extension of Time To File U.S. Norte, El Dorado, Glenn,
continues, multiplied by the total number
Return for a Partnership, REMIC, or for Humboldt, Lake, Lassen, of persons who were partners in the
Certain Trusts, for an additional extension Marin, Mendocino, Modoc, partnership during any part of the
of up to 3 months. The partnership must Napa, Nevada, Placer, partnership's tax year for which the return
Plumas, Sacramento, San
provide a full explanation of the reasons Joaquin, Shasta, Sierra, Ogden, UT is due. This penalty will not be imposed
for requesting the extension in order to Siskiyou, Solano, Sonoma, 84201-0011 on partnerships for which the answer to
get this additional extension. Form 8800 Sutter, Tehama, Trinity, Yolo, Question 4 on Schedule B of Form 1065
and Yuba), Colorado, Hawaii,
must be filed by the extended due date Idaho, Iowa, Louisiana, is No, provided all partners have timely
of the partnership return. Minnesota, Mississippi, filed income tax returns fully reporting
Missouri, Montana, their shares of the income, deductions,
Period Covered Nebraska, Nevada, North and credits of the partnership. See page
Dakota, Oregon, South
Form 1065 is an information return for Dakota, Texas, Utah, 19 of the instructions for further
calendar year 2000 and fiscal years Washington, Wyoming information.
beginning in 2000 and ending in 2001. If Fresno, CA
the return is for a fiscal year or a short tax California (all other counties) 93888-0011
Failure To Furnish Information
year, fill in the tax year space at the top Timely
Kansas City, MO
of the form. Illinois 64999-0011 For each failure to furnish Schedule K-1
The 2000 Form 1065 may also be used to a partner when due and each failure to
Memphis, TN
if: Alabama, Tennessee 37501-0011
include on Schedule K-1 all the
1. The partnership has a tax year of information required to be shown (or the
less than 12 months that begins and ends Philadelphia, PA inclusion of incorrect information), a $50
Virginia 19255-0011
in 2001; and penalty may be imposed with respect to
2. The 2001 Form 1065 is not A partnership without a principal office each Schedule K-1 for which a failure
available by the time the partnership is or agency or principal place of business occurs. The maximum penalty is
required to file its return. in the United States must file its return $100,000 for all such failures during a
with the Internal Revenue Service Center, calendar year. If the requirement to report
However, the partnership must show its correct information is intentionally
2001 tax year on the 2000 Form 1065 and Philadelphia, PA 19255-0011.
disregarded, each $50 penalty is
incorporate any tax law changes that are increased to $100 or, if greater, 10% of
effective for tax years beginning after Who Must Sign the aggregate amount of items required
2000. to be reported, and the $100,000
General Partner or LLC Member
maximum does not apply.
Where To File Form 1065 is not considered to be a
return unless it is signed. One general Trust Fund Recovery Penalty
File Form 1065 at the applicable IRS
address listed below. partner or LLC member must sign the This penalty may apply if certain excise,
return. If a receiver, trustee in bankruptcy, income, social security, and Medicare
If the partnership's or assignee controls the organization's taxes that must be collected or withheld
Use the following
principal business,
Internal Revenue
property or business, that person must are not collected or withheld, or these
office, or agency is sign the return.
Service Center address taxes are not paid. These taxes are
located in
Paid Preparer's Information generally reported on:
● Form 720, Quarterly Federal Excise
New York (New York City
If someone prepares the return and does Tax Return;
and counties of Nassau, Holtsville, NY not charge the partnership, that person ● Form 941, Employer's Quarterly
Rockland, Suffolk, and 00501-0011 should not sign the partnership return.
Westchester) Federal Tax Return;
Generally, anyone who is paid to ● Form 943, Employer's Annual Tax
New York (all other prepare the partnership return must:
counties), Connecticut, Return for Agricultural Employees; or
Andover, MA ● Sign the return, by hand, in the space
Maine, Massachusetts, New ● Form 945, Annual Return of Withheld
05501-0011 provided for the preparer's signature.
Hampshire, Rhode Island,
Vermont Signature stamps or labels are not Federal Income Tax.
acceptable. The trust fund recovery penalty may
Atlanta, GA
Florida, Georgia 39901-0011 ● Fill in the other blanks in the Paid
be imposed on all persons who are
Preparer's Use Only area of the return. determined by the IRS to have been
Delaware, District of responsible for collecting, accounting for,
Columbia, Indiana, Kentucky, ● Give the partnership a copy of the
Maryland, Michigan, New
and paying over these taxes, and who
Cincinnati, OH return in addition to the copy to be filed acted willfully in not doing so. The penalty
Jersey, North Carolina, Ohio,
Pennsylvania, South
45999-0011 with the IRS. is equal to the unpaid trust fund tax. See
Carolina, West Virginia, the Instructions for Form 720, Pub. 15,
Wisconsin Penalties Circular E, Employer's Tax Guide, or Pub.
Kansas, New Mexico, Austin, TX 51, Circular A, Agricultural Employer's
Oklahoma 73301-0011 Late Filing of Return Tax Guide, for more details, including the
A penalty is assessed against the definition of a responsible person.
partnership if it is required to file a
partnership return and it (a) fails to file the Accounting Methods
return by the due date, including Figure ordinary income using the method
extensions, or (b) files a return that fails of accounting regularly used in keeping
to show all the information required, the partnership's books and records.
unless such failure is due to reasonable Generally, permissible methods include:
cause. If the failure is due to reasonable
● Cash,
cause, attach an explanation to the
Activities That Are Not Passive stocks, bonds, and other securities. See property available during defined
Temporary Regulations section business hours for nonexclusive use by
Activities
1.469-1T(e)(6). various customers.
Passive activities do not include: ● The partnership provides property for
1. Trade or business activities in Trade or Business Activities
use in a nonrental activity of a partnership
which the partner materially participated A trade or business activity is an activity or joint venture in its capacity as an owner
for the tax year. (other than a rental activity or an activity of an interest in such partnership or joint
2. Any rental real estate activity in treated as incidental to an activity of venture. Whether the partnership provides
which the partner materially participated holding property for investment) that: property used in an activity of another
if the partner met both of the following 1. Involves the conduct of a trade or partnership or of a joint venture in the
conditions for the tax year: business (within the meaning of section partnership's capacity as an owner of an
a. More than half of the personal 162), interest in the partnership or joint venture
services the partner performed in trades 2. Is conducted in anticipation of is determined on the basis of all the facts
or businesses were performed in real starting a trade or business, or and circumstances.
property trades or businesses in which he 3. Involves research or experimental In addition, a guaranteed payment
or she materially participated and expenditures deductible under section described in section 707(c) is not income
b. The partner performed more than 174 (or that would be if you chose to from a rental activity under any
750 hours of services in real property deduct rather than capitalize them). circumstances.
trades or businesses in which he or she If the partner does not materially Average period of customer use.
materially participated. participate in the activity, a trade or Figure the average period of customer
Note: For a partner that is a closely held business activity held through a use for a class of property by dividing the
C corporation (defined in section partnership is generally a passive activity total number of days in all rental periods
465(a)(1)(B)), the above conditions are of the partner. by the number of rentals during the tax
treated as met if more than 50% of the Each partner must determine if he or year. If the activity involves renting more
corporation's gross receipts are from real she materially participated in an activity. than one class of property, multiply the
As a result, while the partnership's overall average period of customer use of each
may not be permissible: Under Temporary Regulations section the sale, exchange, or other disposition
● A single activity, 1.469-2T(f) and Regulations section of the rental property during the tax year.
● The use of the item of property in the
● A movie theater activity and a bakery 1.469-2(f), net passive income from
certain passive activities must be treated rental activity started less than 12 months
activity,
as nonpassive income. Net passive before the date of disposition. The use of
● A Baltimore activity and a Philadelphia
income is the excess of an activity's an item of rental property begins on the
activity, or first day that (a) the partnership owns an
passive activity gross income over its
● Four separate activities. interest in the property; (b) substantially
passive activity deductions (current year
Once the partnership chooses a deductions and prior year unallowed all of the property is either rented or held
grouping under these rules, it must losses). out for rent and ready to be rented; and
continue using that grouping in later tax Income from the following six sources (c) no significant value-enhancing
years unless a material change in the is subject to recharacterization. Note that services remain to be performed.
facts and circumstances makes it clearly any net passive income recharacterized ● The partner materially or significantly
inappropriate. as nonpassive income is treated as participated for any tax year in an activity
The IRS may regroup the partnership's investment income for purposes of that involved performing services to
activities if the partnership's grouping fails figuring investment interest expense enhance the value of the property (or any
to reflect one or more appropriate limitations if it is from (a) an activity of other item of property, if the basis of the
economic units and one of the primary renting substantially nondepreciable property disposed of is determined in
purposes of the grouping is to avoid the property from an equity-financed lending whole or in part by reference to the basis
passive activity limitations. activity or (b) an activity related to an of that item of property).
Limitation on grouping certain interest in a pass-through entity that Because the partnership cannot
activities. The following activities may licenses intangible property. determine a partner's level of
not be grouped together: 1. Significant participation passive participation, the partnership must identify
1. A rental activity with a trade or activities. A significant participation net income from property described
business activity unless the activities passive activity is any trade or business above (without regard to the partner's
being grouped together make up an activity in which the partner both level of participation) as income that may
appropriate economic unit and participates for more than 100 hours be subject to recharacterization.
a. The rental activity is insubstantial during the tax year and does not 5. Rental of property to a
relative to the trade or business activity materially participate. Because each nonpassive activity. If a taxpayer rents
or vice versa or partner must determine the partner's level property to a trade or business activity in
b. Each owner of the trade or of participation, the partnership will not be which the taxpayer materially participates,
business activity has the same able to identify significant participation the taxpayer's net rental activity income
proportionate ownership interest in the passive activities. from the property is nonpassive income.
rental activity. If so, the portion of the 2. Certain nondepreciable rental 6. Acquisition of an interest in a
rental activity involving the rental of property activities. Net passive income pass-through entity that licenses
property to be used in the trade or from a rental activity is nonpassive intangible property. Generally, net
business activity may be grouped with the income if less than 30% of the unadjusted royalty income from intangible property is
trade or business activity. basis of the property used or held for use nonpassive income if the taxpayer
2. An activity involving the rental of by customers in the activity is subject to acquired an interest in the pass-through
real property with an activity involving the depreciation under section 167. entity after the pass-through entity
rental of personal property (except 3. Passive equity-financed lending created the intangible property or
personal property provided in connection activities. If the partnership has net performed substantial services, or
with the real property or vice versa). income from a passive equity-financed incurred substantial costs in developing
lending activity, the smaller of the net or marketing the intangible property. “Net
3. Any activity with another activity in royalty income” means the excess of
a different type of business and in which passive income or the equity-financed
interest income from the activity is passive activity gross income from
the partnership holds an interest as a licensing or transferring any right in
limited partner or as a limited nonpassive income.
Note: The amount of income from the intangible property over passive activity
entrepreneur (as defined in section deductions (current year deductions and
464(e)(2)) if that other activity engages in activities in paragraphs 1 through 3 that
any partner will be required to prior year unallowed losses) that are
holding, producing, or distributing motion reasonably allocable to the intangible
picture films or videotapes; farming; recharacterize as nonpassive income may
be limited under Temporary Regulations property.
leasing section 1245 property; or
exploring for or exploiting oil and gas section 1.469-2T(f)(8). Because the See Temporary Regulations section
resources or geothermal deposits. partnership will not have information 1.469-2T(f)(7)(iii) for exceptions to this
regarding all of a partner's activities, it rule.
sale or exchange of at least 50% of the information on how to report expenses ● Percentage of gross profits to gross
total interests in partnership capital and related to tax-exempt income. sales.
profits. If the partnership has had debt ● Amount collected.
discharged resulting from a title 11 ● Gross profit on amount collected.
Items A and C bankruptcy proceeding or while insolvent,
Enter the applicable activity name and the see Form 982, Reduction of Tax Line 2—Cost of Goods Sold
code number from the list beginning on Attributes Due to Discharge of See the instructions for Schedule A on
page 32. Indebtedness, and Pub. 908, Bankruptcy page 17.
For example, if, as its principal Tax Guide.
business activity, the partnership (a) Line 4—Ordinary Income (Loss)
purchases raw materials, (b) subcontracts Line 1a—Gross Receipts or Sales From Other Partnerships, Estates,
out for labor to make a finished product Enter the gross receipts or sales from all and Trusts
from the raw materials, and (c) retains title trade or business operations except those
that must be reported on lines 4 through Enter the ordinary income (loss) shown
to the goods, the partnership is
7. For example, do not include gross on Schedule K-1 (Form 1065) or
considered to be a manufacturer and
receipts from farming on this line. Instead, Schedule K-1 (Form 1041), or other
must enter “Manufacturer” in item A and
show the net profit (loss) from farming on ordinary income (loss) from a foreign
enter in item C one of the codes (311110
partnership, estate, or trust. Show the
partnership's, estate's, or trust's name,
Instructions for Form 1065 Page 13
address, and EIN on a separate Ordinary gains or losses from the sale, Schedule K.
statement attached to this return. If the exchange, or involuntary conversion of ● Deductions allocable to portfolio
amount entered is from more than one rental activity assets are reported income. Report these deductions on line
source, identify the amount from each separately on line 19 of Form 8825 or line 10 of Schedules K and K-1.
source. 3 of Schedules K and K-1, generally as a ● Nondeductible expenses (e.g.,
Do not include portfolio income or part of the net income (loss) from the expenses connected with the production
rental activity income (loss) from other rental activity. of tax-exempt income). Report
partnerships, estates, or trusts on this A partnership that is a partner in nondeductible expenses on line 21 of
line. Instead, report these amounts on the another partnership must include on Schedules K and K-1.
applicable lines of Schedules K and K-1, Form 4797, Sales of Business Property, ● Qualified expenditures to which an
or on line 20a of Form 8825 if the amount its share of ordinary gains (losses) from election under section 59(e) may apply.
is from a rental real estate activity. sales, exchanges, or involuntary The instructions for lines 18a and 18b of
Ordinary income or loss from another conversions (other than casualties or Schedules K and K-1 explain how to
partnership that is a publicly traded thefts) of the other partnership's trade or report these amounts.
partnership is not reported on this line. business assets. ● Items the partnership must state
Instead, report the amount separately on Do not include any recapture of section separately that require separate
line 7 of Schedules K and K-1. 179 expense deduction. See the computations by the partners. Examples
Treat shares of other items separately instructions for line 25, Supplemental include expenses incurred for the
reported on Schedule K-1 issued by the Information, item 4, and the Instructions production of income instead of in a trade
other entity as if the items were realized for Form 4797 for more information. or business, charitable contributions,
or incurred by this partnership. foreign taxes paid, intangible drilling and
Line 7—Other Income (Loss)
If there is a loss from another development costs, soil and water
partnership, the amount of the loss that Enter on line 7 trade or business income conservation expenditures, amortizable
may be claimed is subject to the at-risk (loss) that is not included on lines 1a basis of reforestation expenditures, and
and basis limitations as appropriate. through 6. Examples of such income exploration expenditures. The distributive
If the tax year of your partnership does include: shares of these expenses are reported
not coincide with the tax year of the other 1. Interest income derived in the separately to each partner on Schedule
partnership, estate, or trust, include the ordinary course of the partnership's trade K-1.
ordinary income (loss) from the other or business, such as interest charged on
entity in the tax year in which the other receivable balances. Limitations on Deductions
entity's tax year ends. 2. Recoveries of bad debts deducted Section 263A uniform capitalization
in earlier years under the specific rules. The uniform capitalization rules of
Line 5—Net Farm Profit (Loss) charge-off method. section 263A require partnerships to
Enter the partnership's net farm profit 3. Taxable income from insurance capitalize or include in inventory costs,
(loss) from Schedule F (Form 1040), proceeds. certain costs incurred in connection with:
Profit or Loss From Farming. Attach ● The production of real and tangible
4. The amount of credit figured on
Schedule F (Form 1040) to Form 1065. Form 6478, Credit for Alcohol Used as personal property held in inventory or held
Do not include on this line any farm profit Fuel. for sale in the ordinary course of
(loss) from other partnerships. Report 5. All section 481 income adjustments business.
those amounts on line 4. In figuring the resulting from changes in accounting ● Real property or personal property
partnership's net farm profit (loss), do not methods. Show the computation of the (tangible and intangible) acquired for
include any section 179 expense section 481 adjustments on an attached resale.
deduction; this amount must be schedule. ● The production of real property and
separately stated. tangible personal property by a
6. The amount of any deduction
Also report the partnership's fishing previously taken under section 179A that partnership for use in its trade or business
income on this line. is subject to recapture. See Pub. 535, or in an activity engaged in for profit.
For a special rule concerning the Business Expenses, for details, including The costs required to be capitalized
method of accounting for a farming how to figure the recapture. under section 263A are not deductible
partnership with a corporate partner and 7. The recapture amount for section until the property to which the costs relate
for other tax information on farms, see 280F if the business use of listed property is sold, used, or otherwise disposed of by
Pub. 225, Farmer's Tax Guide. drops to 50% or less. To figure the the partnership.
Note: Because the election to deduct the recapture amount, the partnership must Exceptions: Section 263A does not
expenses of raising any plant with a complete Part IV of Form 4797. apply to:
preproductive period of more than 2 years Do not include items requiring separate ● Inventory of a cash method partnership
is made by the partner and not the computations that must be reported on that does not account for inventories. See
partnership, farm partnerships that are not Schedules K and K-1. See the instructions Pub. 553 for details.
required to use an accrual method should for Schedules K and K-1 later in these ● Personal property acquired for resale if
not capitalize such expenses. Instead, instructions. the partnership's average annual gross
state them separately on an attachment
Do not report portfolio or rental receipts for the 3 prior tax years were $10
to Schedule K, line 24, and on Schedule
activity income (loss) on this line. million or less.
K-1, line 25, Supplemental Information.
● Timber.
See Temporary Regulations section
1.263A-4T for more information. Deductions ● Most property produced under a
long-term contract.
Line 6—Net Gain (Loss) From Form Report only trade or business ● Certain property produced in a farming
4797 ! activity deductions on lines 9
CAUTION through 21.
business. See the note at the end of the
instructions for line 5.
Include only ordinary gains or Do not report the following expenses The partnership must report the
! losses from the sale, exchange, or
CAUTION involuntary conversion of assets
on lines 9 through 21: following costs separately to the partners
● Rental activity expenses. Report these
used in a trade or business activity. for purposes of determinations under
expenses on Form 8825 or line 3b of section 59(e):
an attachment to Schedule K-1 the on line 7 of Schedules K and K-1. recapture property (see Form 4797) and
amount attributable to each activity. Line 4f. Report and identify other other items to which section 1252 applies.
portfolio income or loss on an attachment ● Gains from the disposition of an interest
Line 3—Net Income (Loss) From Other for line 4f. in oil, gas, geothermal, or other mineral
Rental Activities For example, income reported to the properties (section 1254).
On Schedule K, line 3a, enter gross partnership from a real estate mortgage ● Any net gain or loss from section 1256
income from rental activities other than investment conduit (REMIC), in which the contracts from Form 6781, Gains and
those reported on Form 8825. See page partnership is a residual interest holder, Losses From Section 1256 Contracts and
9 of these instructions and Pub. 925 for would be reported on an attachment for Straddles.
the definition of rental activities. Include line 4f. If the partnership holds a residual ● Recoveries of tax benefit items (section
on line 3a, the gain (loss) from line 18 of interest in a REMIC, report on the 111).
Form 4797 that is attributable to the sale, attachment for line 4f the partner's share
● Gambling gains and losses subject to
exchange, or involuntary conversion of an of the following:
the limitations in section 165(d).
asset used in a rental activity other than ● Taxable income (net loss) from the
● Any income, gain, or loss to the
a rental real estate activity. REMIC (line 1b of Schedules Q (Form
1066)). partnership under section 751(b).
On line 3b of Schedule K, enter the
● Specially allocated ordinary gain (loss).
deductible expenses of the activity. Attach ● “Excess inclusion” (line 2c of Schedules
a schedule of these expenses to Form ● Net gain (loss) from involuntary
Q (Form 1066)).
1065. ● Section 212 expenses (line 3b of
conversions due to casualty or theft. The
Enter the net income (loss) on line 3c Schedules Q (Form 1066)). Do not report amount for this line is shown on Form
of Schedule K. Enter each partner's share these section 212 expenses on line 10 of 4684, Casualties and Thefts, line 38a,
on line 3 of Schedule K-1. Schedules K and K-1. 38b, or 39.
If the partnership has more than one Because Schedule Q (Form 1066) is a Each partner's share must be entered
rental activity reported on line 3, identify quarterly statement, the partnership must on Schedule K-1. Give each partner a
on an attachment to Schedule K-1 the follow the Schedule Q instructions to schedule that shows the amounts to be
amount from each activity. figure the amounts to report to the partner reported on the partner's Form 4684, line
for the partnership's tax year. 34, columns (b)(i), (b)(ii), and (c).
Lines 4a Through 4f—Portfolio Income If there was a gain (loss) from a
(Loss) Line 5—Guaranteed Payments to casualty or theft to property not used in a
Enter portfolio income (loss) on lines 4a Partners trade or business or for income-producing
through 4f. Guaranteed payments to partners include: purposes, notify the partner. The
See page 10 of these instructions for a ● Payments for salaries, health
partnership should not complete Form
definition of portfolio income. Do not insurance, and interest deducted by the 4684 for this type of casualty or theft.
reduce portfolio income by deductions partnership and reported on Form 1065, Instead, each partner will complete his or
allocable to it. Report such deductions page 1, line 10; Form 8825; or on her own Form 4684.
(other than interest expense) on line 10 ● Gain from the sale or exchange of
Schedule K, line 3b; and
of Schedules K and K-1. Interest expense ● Payments the partnership must
qualified small business stock (as defined
allocable to portfolio income is generally capitalize. See the Instructions for Form in the instructions for Schedule D) that is
investment interest expense and is 1065, line 10. eligible for the 50% section 1202
reported on line 14a of Schedules K and exclusion. The section 1202 exclusion
Generally, amounts reported on line 5 applies only to qualified small business
K-1. are not considered to be related to a
Lines 4a and 4b. Enter only taxable stock issued after August 10, 1993, and
passive activity. For example, guaranteed held by the partnership for more than 5
interest and ordinary dividends on these payments for personal services paid to a
lines. Taxable interest is interest from all years. Corporate partners are not eligible
partner would not be passive activity for the section 1202 exclusion. Additional
sources except interest exempt from tax income. Likewise, interest paid to any
and interest on tax-free covenant bonds. limitations apply at the partner level.
partner is not passive activity income. Report each partner's share of section
Lines 4d, 4e(1), and 4e(2). Enter on line
Line 6—Net Section 1231 Gain (Loss) 1202 gain on Schedule K-1. Each partner
4d of Schedule K the gain or loss from
(Other Than Due to Casualty or Theft) will determine if he or she qualifies for the
line 5 of Schedule D (Form 1065) plus any
section 1202 exclusion. Report on an
short-term capital gain (loss) that is Enter on line 6 the net section 1231 gain attachment to Schedule K-1 for each sale
specially allocated to partners. Report (loss) from Form 4797, line 7, column (g). or exchange the name of the corporation
each partner's share on line 4d of Do not include specially allocated ordinary that issued the stock, the partner's share
Schedule K-1. gains and losses or net gains or losses of the partnership's adjusted basis and
Enter on line 4e(1) the gain or loss from from involuntary conversions due to sales price of the stock, and the dates the
line 11 of Schedule D (Form 1065) plus casualties or thefts on this line. Instead, stock was bought and sold.
any 28% rate gain (loss) that is specially report them on line 7. If the partnership ● Gain eligible for section 1045 rollover
allocated to partners. Enter on line 4e(2) has more than one activity, attach a
statement to Schedule K-1 that identifies (replacement stock purchased by the
the gain or loss from line 12 of Schedule
the activity to which the section 1231 gain partnership). Include only gain from the
D (Form 1065) plus any long-term capital
(loss) relates. sale or exchange of qualified small
business stock (as defined in the