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Partnership tax complications: navigating negative capital accounts and dros.

Starting with tax year 2020, the IRS is requiring partnerships to report their capital accounts using the tax basis method . Capital accounts show the equity in a partnership owned by each partner and often include initial contributions made by each partner, business profits and losses assigned to each partner, and distributions made to each partner. The tax basis method calculates these balances using tax basis principles (read more about this method here ).

Tax advisors are likely aware that a partner’s basis in the partnership interest can never be negative. However, a partner’s capital account can be negative. This generally happens when the partnership allocates losses or receives a distribution funded by debt incurred by the partnership. These actions can result in a taxable event for partners, so proactive steps need to be taken to avoid a negative balance.

At the beginning of the year, a capital account cannot begin with a negative balance, but a partner can have a negative capital account after fully accounting for all their distributed shares of losses and distributions. Generally, the partner is going to have to carry forward any losses that have been disallowed because they are higher than outside basis. From a tax planning perspective, our focus is on the outside basis amount, since this will tell us whether the partner is entitled to deduct any losses from the partnership. If there are ways to prevent a loss from being suspended, the taxpayer will want to do that before the end of the year.

In certain situations, a negative capital account balance on a Schedule K-1 (the tax form for a partner’s share of income) may not reflect whether that partner is able to take a deduction. The reason is debt basis. If a partner receives a distribution in excess of their outside basis, the partner might be required to recognize a gain. In this case, that partner may not have sufficient debt basis to claim a deduction. This is where we will likely see the most impact as a result of this IRS compliance change.

transfer of partnership interest with negative capital account

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A negative capital account can be problematic for a couple of reasons:

  • It’s more likely that the taxpayer will also have a negative outside basis, which jeopardizes their ability to deduct a loss
  • If any members of a partnership have a negative capital account, that partner is legally obligated to restore their deficit, also known as a DRO (deficit restoration obligation).

The reasoning behind a DRO is that if an event happens to impact the state of the partnership, say if one of the partners dies or if the company is liquidated, the partner with a negative capital account would need to be able to pay their deficit amount. If one partner dies, the other partner has a legal obligation to make their partner’s heirs whole, so the law requires them to pay the partnership an amount equal to that negative capital account. During the COVID-19 era, we have all seen businesses close unexpectedly, which is why the protection of a DRO exists.

A DRO is calculated by the hypothetical date before liquidation. So if we are looking at reporting for tax year 2020, we might look at the balances on December 30th and say, theoretically if the partnership were to completely liquidate tomorrow, what assets would be left, where would they get distributed, in what percentages, and who would be liable for any debts? If a partner has a negative balance on that hypothetical liquidation date, this will impact their tax liability.

To help taxpayers navigate the risks associated with negative capital accounts, tax advisors need to stay up-to-date on current tax requirements and learn to look into the future to anticipate negative consequences. Learn these skills and more by becoming a Certified Tax Planner .

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Dominique is a licensed CPA with extensive tax, accounting and consulting experience, has a bachelor’s degree in Accounting from San Diego State University, has a Masters of Law – LLM, Tax Law, from Thomas Jefferson School of Law, and is a Certified Tax Strategist.

Ms. Molina is also the Editor In Chief of Think Outside The Tax Box online magazine. She is an accomplished keynote speaker, teacher, best-selling author, and mentor to tax professionals across the United States.

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Tax issues to consider when a partnership interest is transferred.

By Colleen McHugh - Co‑Partner‑in‑Charge, Alternative Investments

Tax Issues to Consider When a Partnership Interest is Transferred

There can be several tax consequences as a result of a transfer of a partnership interest during the year. This article discusses some of those tax issues applicable to the partnership.

Adjustments to the Basis of Partnership Property Upon a transfer of a partnership interest, the partnership may elect to, or be required to, increase/decrease the basis of its assets. The basis adjustments will be for the benefit/detriment of the transferee partner only.

  • If the partnership has a special election in place, known as an IRS Section 754 election, or will make one in the year of the transfer, the partnership will adjust the basis of its assets as a result of the transfer. IRS Section 754 allows a partnership to make an election to “step-up” the basis of the assets within a partnership when one of two events occurs: distribution of partnership property or transfer of an interest by a partner.
  • The partnership will be required to adjust the basis of its assets when an interest in the partnership is transferred if the total adjusted basis of the partnership’s assets is greater than the total fair market value of the partnership’s assets by more than $250,000 at the time of the transfer.

Ordinary Income Recognized by the Transferor on the Sale of a Partnership Interest Typically, when a partnership interest is sold, the transferor (seller) will recognize capital gain/loss. However, a portion of the gain/loss could be treated as ordinary income to the extent the transferor partner exchanges all or a part of his interest in the partnership attributable to unrealized receivables or inventory items. (This is known as “Section 751(a) Property” or “hot” assets).

  • Unrealized receivables – includes, to the extent not previously included in income, any rights (contractual or otherwise) to payment for (i) goods delivered, or to be delivered, to the extent the proceeds would be treated as amounts received from the sale or exchange of property other than a capital asset, or (ii) services rendered, or to be rendered.
  • Property held primarily for sale to customers in the ordinary course of a trade or business.
  • Any other property of the partnership which would be considered property other than a capital asset and other than property used in a trade or business.
  • Any other property held by the partnership which, if held by the selling partner, would be considered of the type described above.

Example – Partner A sells his partnership interest to D and recognizes gain of $500,000 on the sale. The partnership holds some inventory property. If the partnership sold this inventory, Partner A would be allocated $100,000 of that gain. As a result, Partner A will recognize $100,000 of ordinary income and $400,000 of capital gain.

The partnership needs to provide the transferor with sufficient information in order to determine the amount of ordinary income/loss on the sale, if any.

Termination/Technical Termination of the Partnership A transfer of a partnership interest could result in an actual or technical termination of the partnership.

  • The partnership will terminate on the date of transfer if there is one tax owner left after the transfer.
  • The partnership will have a technical termination for tax purposes if within a 12-month period there is a sale or exchange of 50% or more of the total interest in the partnership’s capital and profits.

Example – D transfers its 55% interest to E. The transfer will result in the partnership having a technical termination because 50% or more of the total interest in the partnership was transferred. The partnership will terminate on the date of transfer and a “new” partnership will begin on the day after the transfer.

Allocation of Partnership Income to Transferor/Transferee Partners When a partnership interest is transferred during the year, there are two methods available to allocate the partnership income to the transferor/transferee partners: the interim closing method and the proration method.

  • Interim closing method – Under this method, the partnership closes its books with respect to the transferor partner. Generally, the partnership calculates the taxable income from the beginning of the year to the date of transfer and determines the transferor’s share of that income. Similarly, the partnership calculates the taxable income from the date after the transfer to the end of the taxable year and determines the transferee’s share of that income. (Note that certain items must be prorated.)

Example – Partner A transfers his 10% interest to H on June 30. The partnership’s taxable income for the year is $150,000. Under the interim closing method, the partnership calculates the taxable income from 1/1 – 6/30 to be $100,000 and from 7/1-12/31 to be $50,000. Partner A will be allocated $10,000 [$100,000*10%] and Partner H will be allocated $5,000 [$50,000*10%].

  • Proration method – this method is allowed if agreed to by the partners (typically discussed in the partnership agreement). Under this method, the partnership allocates to the transferor his prorata share of the amount of partnership items that would be included in his taxable income had he been a partner for the entire year. The proration may be based on the portion of the taxable year that has elapsed prior to the transfer or may be determined under any other reasonable method.

Example – Partner A transfers his 10% interest to H on June 30. The partnership’s taxable income for the year is $150,000. Under the proration method, the income is treated as earned $74,384 from 1/1 – 6/30 [181 days/365 days*$150,000] and $75,616 from 7/1-12/31 [184 days/365 days*$150,000]. Partner A will be allocated $7,438 [$74,384*10%] and Partner H will be allocated $7,562 [$75,616*10%]. Note that this is one way to allocate the income. The partnership may use any reasonable method.

Change in Tax Year of the Partnership The transfer could result in a mandatory change in the partnership’s tax year. A partnership’s tax year is determined by reference to its partners. A partnership may not have a taxable year other than:

  • The majority interest taxable year – this is the taxable year which, on each testing day, constituted the taxable year of one or more partners having an aggregate interest in partnership profits and capital of more than 50%.

Example – Partner A, an individual, transfers his 55% partnership interest to Corporation D, a C corporation with a year-end of June 30. Prior to the transfer, the partnership had a calendar year-end. As a result of the transfer, the partnership will be required to change its tax year to June 30 because Corporation D now owns the majority interest.

  • If there is no majority interest taxable year or principal partners, (a partner having a 5% or more in the partnership profits or capital) then the partnership adopts the year which results in the least aggregate deferral.

Change in Partnership’s Accounting Method A transfer of a partnership interest may require the partnership to change its method of accounting. Generally, a partnership may not use the cash method of accounting if it has a C corporation as a partner. Therefore, a transfer of a partnership interest to a C corporation could result in the partnership being required to change from the cash method to the accrual method.

As described in this article, a transfer of a partnership interest involves an analysis of several tax consequences. An analysis should always be done to ensure that any tax issues are dealt with timely.

If you or your business are involved in a transfer described above, please contact your Marcum Tax Professional for guidance on tax treatment.

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IRS Changes Deficit Restoration Obligation Rules for Partnerships

by Kim Palmer

The IRS and Treasury issued final regulations on October 4, 2019, that changed the rules on deficit restoration obligations. In short, the regulations address when a partner can, or cannot, disregard the obligation to restore their deficit balance in a capital account. In particular, the regulations discuss how bottom dollar payment obligations or a plan to circumvent a deficit restoration obligation could render the obligation invalid for income tax purposes.

Why are Deficit Restoration Obligations Important?

Deficit restoration obligations can be used to allocate recourse debt to a partner. When this occurs, two things are possible. It can potentially:

  • Protect the partner from recognizing income if their capital account goes negative (due to distributions), or 
  • Give the partner basis in order to take losses. 

In a valid deficit restoration obligation, the partner is obligated to make a payment to the partnership for the deficit balance in the partner’s capital account following the liquidation of their interest in the partnership.  Regulation 1.704-1(b)(2)(ii)(c)(4)(A) provides that a deficit restoration obligation is not respected (meaning it will not be considered recourse debt to the partner) if it’s considered a bottom dollar payment obligation, is not legally enforceable, or if facts and circumstances indicate a plan to circumvent or avoid the obligation.

Bottom Dollar Payment Obligation

What is a “bottom dollar payment obligation”? It is a payment obligation such as a guarantee, indemnity or similar arrangement (as noted above could also be an obligation to make a capital contribution or restore a deficit capital account upon liquidation) other than one in which the partner or related person is liable up to the full amount of his or her payment obligation, if, and to the extent that, any amount of the partnership’s liability is not otherwise satisfied. The Regulations note the following example of a bottom dollar payment obligation: A, B, and C are equal members of a limited liability company, ABC, that is treated as a partnership for federal tax purposes. ABC borrows $1,000 from Bank. A guaranteed payment of up to $300 of the ABC liability if any amount of the full $1,000 liability is not recovered by the Bank. B guarantees payment of up to $200, but only if the Bank otherwise recovers less than $200. Both A and B waive their rights of contribution against each other. Because A is obligated to pay up to $300 if, and to the extent that, any amount of the $1,000 partnership liability is not recovered by Bank, A’s guarantee is not a bottom dollar payment obligation and it will be considered recourse debt to A.  Because B is obligated to pay up to $200 only if and to the extent that the Bank otherwise recovers less than $200 of the $1,000 partnership liability, B’s guarantee is a bottom dollar payment obligation and is not considered recourse debt to B.

Plan to Circumvent or Avoid a Deficit Restoration Obligation

Final Regulation 1.704-1(b)(2)(ii)(c)(4)(B) provides a list of factors to indicate when a plan to circumvent or avoid a deficit restoration obligation exists, including the following non-exclusive factors:

  • The partner is not subject to commercially reasonable provisions for enforcement and collection of the obligation,
  • The partner is not required to provide commercially reasonable documentation regarding their financial condition,
  • The obligation ends or could, by its terms, be terminated before the liquidation of the partner’s interest in the partnership or when the partner’s capital account is negative, and
  • The terms of the obligation are not provided to all the partners in the partnership in a timely manner.

With these final regulations in place, if you have existing deficit restoration obligations, now is the time to examine them to verify they meet the new parameters. The rules apply to all deficit restoration obligations, even those entered into before October 4 of this year. Contact Kim Palmer or a member of your service team to discuss this topic further.

Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law with your professional advisers.

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Withholding and information reporting on the transfer of private partnership interests

November 2020

Treasury and the IRS released on October 7 Final Regulations (the Final Regulations ) under Sections 1446(f) and 864(c)(8). Section 1446(f), added to the Code by the 2017 tax reform legislation, provides rules for withholding on the transfer or disposition of a partnership interest. Proposed Regulations were issued in May 2019, which laid the framework for guidance on withholding and reporting obligations under Section 1446(f) (the Proposed Regulations). The Proposed Regulations also addressed information reporting under Section 864(c)(8); these rules were finalized in September 2020. The Final Regulations retain the basic structure and guidance of the Proposed Regulations, but with various modifications. 

The Final Regulations apply to both publicly traded partnerships (PTPs) and private partnerships. This insight summarizes some of the changes applicable to PTPs but primarily focuses on private partnerships. A separate detailed Insight will be circulated with respect to PTPs. 

The Final Regulations generally are applicable to transfers occurring on or after the date that is 60 days after their publication in the Federal Register. However, the backstop withholding rules only apply to transfers that occur on or after January 1, 2022.

PTPs . Significantly, beginning January 1, 2022, the Final Regulations will require withholding under Section 1446(f) on both dispositions of and distributions by PTPs. This is a significant evolution of these rules, which to date have not been extended to PTPs due to the informational and operational challenges associated with imposing withholding taxes in respect of publicly traded securities. As will be discussed in more detail in the separate alert, these challenges result from the expansion of withholding obligations to new parties (e.g., executing brokers) that traditionally may not have been withholding agents and a substantial expansion of the qualified intermediary (QI) obligations. 

Other partnerships . The Final Regulations retain the presumption that withholding is required unless an applicable certification is provided. However, they now provide a limitation on the transferee’s liability to the extent the transferee can establish the transferor had no tax liability under Section 864(c)(8). The Final Regulations also include new or expanded exceptions to the withholding requirements. These include the ability to rely on a valid Form W-9 to prove US status as well as a new exception from withholding for partnerships that are not engaged in a US trade or business.

transfer of partnership interest with negative capital account

Download the full publication Withholding and information reporting on the transfer of private partnership interests

The takeaway.

The Final Regulation package retains the basic approach and structure of the Proposed Regulations, with some modifications. Taxpayers (particularly minority partners and taxpayers in tiered structures) who are intending to either eliminate or reduce the withholding tax should be mindful of the time restrictions in order to be compliant with a reduction or elimination of withholding and the potential difficulty in obtaining information from a partnership and should plan accordingly.

  • Final Regulations modify treatment of gain or loss on sale of partnership interest by foreign partner (October 21, 2020)
  • PwC Client Comments re Section 1446(f) Proposed Regulations (July 12, 2019)
  • Proposed regulations address tax withholding, information reporting on partnerships with US trade or business (May 31, 2019)

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Code Z. Orphan drug credit.

Code AA. Enhanced oil recovery credit.

Code AB. Renewable electricity production credit.

Code AC. Biodiesel, renewable diesel, or sustainable aviation fuels credit.

Code AD. New markets credit.

Code AE. Credit for small employer pension plan startup costs.

Code AF. Credit for small employer auto-enrollment.

Code AG. Credit for small employer military spouse retirement plan eligibility.

Code AH. Credit for employer-provided childcare facilities and services.

Code AI. Low sulfur diesel fuel production credit.

Code AJ. Qualified railroad track maintenance credit.

Code AK. Credit for oil and gas production from marginal wells.

Code AL. Distilled spirits credit.

Code AM. Energy efficient home credit.

Code AN. Alternative motor vehicle credit.

Code AO. Alternative fuel vehicle refueling property credit.

Code AP. Clean renewable energy bond credit.

Code AQ. New clean renewable energy bond credit.

Code AR. Qualified energy conservation bond credit.

Code AS. Qualified zone academy bond credit.

Code AT. Qualified school construction bond credit.

Code AU. Build America bond credit.

Code AV. Credit for employer differential wage payments.

Code AW. Carbon oxide sequestration credit.

Code AX. Carbon oxide sequestration credit recapture.

Code AY. New clean vehicle credit.

Code AZ. Qualified commercial clean vehicle credit.

Code BA. Credit for small employer health insurance premiums.

Code BB. Employer credit for paid family and medical leave.

Code BC. Eligible credits from transferor(s) under section 6418.

Codes BD through BG.

Box 16. International Transactions

Code A. Post-1986 depreciation adjustment.

Code B. Adjusted gain or loss.

Code C. Depletion (other than oil & gas).

Codes D and E. Oil, gas, & geothermal properties—gross income and deductions.

Code F. Other AMT items.

Code A. Tax-exempt interest income.

Code B. Other tax-exempt income.

Code C. Nondeductible expenses.

Code A. Cash and marketable securities.

Code B. Distribution subject to section 737.

Section 732(a)(2) basis adjustment.

Section 732(b) basis adjustment..

Code A. Investment income.

Code B. Investment expenses.

Code C. Fuel tax credit information.

Code D. Qualified rehabilitation expenditures (other than rental real estate).

Code E. Basis of energy property.

Codes F and G. Recapture of low-income housing credit.

Code H. Recapture of investment credit.

Code I. Recapture of other credits.

Code J. Look-back interest—completed long-term contracts.

Code K. Look-back interest—income forecast method.

Code L. Dispositions of property with section 179 deductions.

Code M. Recapture of section 179 deduction.

Code N. Business interest expense (BIE).

Code O. Section 453(l)(3) information.

Code P. Section 453A(c) information.

Code Q. Section 1260(b) information.

Code R. Interest allocable to production expenditures.

Code S. Capital construction fund (CCF) nonqualified withdrawals.

Code T. Depletion information—oil and gas.

Code U. Section 743(b) basis adjustment.

Code V. Unrelated business taxable income.

Code W. Precontribution gain (loss).

Code X. Payment obligations including guarantees and deficit obligations (DROs).

Code Y. Net investment income (NII).

QBI/qualified PTP items subject to partner-specific determinations.

Unadjusted basis immediately after acquisition (ubia) of qualified property., section 199a dividends., patrons of specified agricultural and horticultural cooperatives., qbi items allocable to qualified payments from specified cooperatives subject to partner-specific determinations., w-2 wages allocable to qualified payments from specified cooperatives., section 199a(g) deduction from specified cooperatives..

Code AA. Section 704(c) information.

Code AB. Section 751 gain (loss).

Code AC. Section 1(h)(5) gain.

Code AD. Deemed section 1250 unrecaptured gain.

Code AE. Excess taxable income.

Code AF. Excess business interest income (EBIE).

Code AG. Gross receipts for section 448(c).

Code AH. Noncash charitable contributions.

Code AI. Interest and tax on deferred compensation to partners.

Code AJ. Excess business loss limitation.

Code AK. Gain from mark-to-market election.

Code AL. Section 721(c) partnership.

Code AM. Section 1061 information.

Code AN. Farming and fishing business.

Code AO. PTP information.

Code AP. Inversion gain.

Code AQ. Conservation reserve program payments.

Code AR. IRA disclosure.

Code AS. Qualifying advanced coal project property and qualifying gasification project property.

Code AT. Qualifying advanced energy project property.

Code AU. Advanced manufacturing investment property.

Code AW. Reportable transactions.

Code AY. Foreign partners, Form 8990, Schedule A.

Codes AZ through BD.

Box 21. Foreign Taxes Paid or Accrued

Box 22. more than one activity for at-risk purposes, box 23. more than one activity for passive activity purposes, partner’s instructions for schedule k-1 (form 1065) (2023), partner's share of income, deductions, credits, etc. (for partner's use only).

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

Partner’s Instructions for Schedule K-1 (Form 1065) - Introductory Material

For the latest information about developments related to Schedule K-1 (Form 1065) and the Partner's Instructions for Schedule K-1 (Form 1065), such as legislation enacted after they were published, go to IRS.gov/Form1065 .

The Worksheet for Adjusting the Basis of a Partner’s Interest in the Partnership has been changed to provide more details. Specific instructions are also included.

The checkbox under item J has been expanded to include a Sale checkbox and an Exchange checkbox. The instructions outline what is considered a sale and an exchange; see Item J , later, for more information.

Item K was expanded to 3 sections: K1, K2, and K3. Item K3 is a new checkbox to indicate whether the listed liabilities are subject to guarantees or other payment obligations. See Item K3 , later.

Code I, Other income (loss), previously included a number of bulleted items. These items have been assigned individual codes. See Box 11. Other Income (Loss) , later, for the expanded list of codes.

Code W, Other deductions, previously included a number of bulleted items. These items have been assigned individual codes. See Box 13. Other Deductions , later, for the expanded list of codes.

Code P, Other credits, previously included a number of bulleted items. These items have been assigned individual codes. See Box 15. Credits , later, for the expanded list of codes and codes for new energy credits.

For 2023, partners receiving distributions of property from a partnership in a liquidating or non-liquidating distribution under certain circumstances must attach a statement to their tax return. See Box 19. Distributions , later.

Code AH, Other information, previously included a number of bulleted items. These items have been assigned individual codes. See Box 20. Other Information , later, for the expanded list of codes.

The instructions have been updated relating to section 453A information required to be provided by the partnership.

Disclosure of payment obligations including guarantees and deficit obligations (DROs).

Final regulations announced in T.D. 9960 treat domestic partnerships as aggregates of their partners for purposes of sections 951, 951A, and 956(a), and any provision that specifically applies by reference to any of those sections, for tax years of foreign corporations beginning on or after January 25, 2022, and for tax years of U.S. persons in which or with which such tax years of foreign corporations end. Domestic partnerships may apply the final regulations to tax years of foreign corporations beginning after December 31, 2017, and to tax years of the domestic partnership in which or with which such tax years of the foreign corporations end, provided certain consistency requirements are met.

If box 16 isn't checked, you should receive notification from the partnership that you won't be receiving a Schedule K-3 unless you request one.

The partnership has entered the identifying number of the IRA custodian in item E. The partnership has entered the identifying number of the IRA itself in box 20, code AR, if there is unrelated business taxable income reported in box 20, code V. The IRA partner uses this information in filing Form 990-T, Exempt Organization Business Income Tax Return.

General Instructions

The partnership uses Schedule K-1 to report your share of the partnership's income, deductions, credits, etc. Keep it for your records. Don’t file it with your tax return unless you're specifically required to do so. (See Code O under Box 15 , later.) The partnership files a copy of Schedule K-1 (Form 1065) with the IRS.

For your protection, Schedule K-1 may show only the last four digits of your identifying number (social security number (SSN), etc.). However, the partnership has reported your complete identifying number to the IRS.

Although the partnership generally isn't subject to income tax, you may be liable for tax on your share of the partnership income, whether or not distributed. Include your share on your tax return if a return is required. Use these instructions to help you report the items shown on Schedule K-1 on your tax return.

The amount of loss and deduction you may claim on your tax return may be less than the amount reported on Schedule K-1. It's the partner's responsibility to consider and apply any applicable limitations. See Limitations on Losses, Deductions, and Credits , later, for more information.

If you're a partner in a partnership that hasn't elected out of the centralized partnership audit regime enacted by the Bipartisan Budget Act of 2015 (BBA), you must report the items shown on your Schedule K-1 (and any attached statements) the same way that the partnership treated the items on its return.

If the treatment on your original or amended return is inconsistent with the partnership's treatment, or if the partnership was required to but hasn't filed a return, you must file Form 8082, Notice of Inconsistent Treatment or Administrative Adjustment Request (AAR), with your original or amended return to identify and explain any inconsistency (or to note that a partnership return hasn't been filed).

If you're required to file Form 8082 but don't do so, you may be subject to the accuracy-related penalty. This penalty is in addition to any tax that results from making your amount or treatment of the item consistent with that shown on the partnership's return. Any deficiency that results from making the amounts consistent may be assessed immediately.

If you believe the partnership has made an error on your Schedule K-1, notify the partnership and ask for a corrected Schedule K-1. Don't change any items on your copy of Schedule K-1. Be sure that the partnership sends a copy of the corrected Schedule K-1 to the IRS.

If you're the executor of an estate and you have received a decedent's Schedule K-1, then you have the responsibility to notify the partnership of the name and taxpayer identification number (TIN) of the decedent's estate if the partnership interest is part of the decedent's estate. If a decedent died in a prior year and the partnership continues to send the decedent a Schedule K-1 after being notified of the decedent's death, then you should request that the partnership send a corrected Schedule K-1. If you receive an interest in a partnership by reason of a former partner's death, you must provide the partnership with your name and TIN. For treatment of partnership income upon the death of a partner, see Pub. 559, Survivors, Executors, and Administrators.

Generally, a partner who sells or exchanges a partnership interest in a section 751(a) exchange must notify the partnership, in writing, within 30 days of the exchange (or, if earlier, by January 15 of the calendar year following the calendar year in which the exchange occurred). A section 751(a) exchange is any sale or exchange of a partnership interest in which any money or other property received by the partner in exchange for that partner's interest is attributable to unrealized receivables (as defined in section 751(c)) or inventory items (as defined in section 751(d)).

The written notice to the partnership must include the names and addresses of both parties to the exchange, the identifying numbers of the transferor and (if known) of the transferee, and the exchange date.

An exception to this rule is made for sales or exchanges of publicly traded partnership interests for which a broker is required to file Form 1099-B, Proceeds From Broker and Barter Exchange Transactions.

If a partner is required to notify the partnership of a section 751(a) exchange but fails to do so, the partner will be subject to a penalty for each such failure. However, no penalty will be imposed if the partner can show that the failure was due to reasonable cause and not willful neglect. See Form 8308, Report of a Sale or Exchange of Certain Partnership Interests, and its instructions, for additional information.

Any person who holds, directly or indirectly, an interest in a partnership as a nominee for another person must furnish a written statement to the partnership by the last day of the month following the end of the partnership's tax year. This statement must include the name, address, and identifying number of the nominee and such other person; description of the partnership interest held as nominee for that person; and other information required by Temporary Regulations section 1.6031(c)-1T. A nominee that fails to furnish this statement must furnish to the person for whom the nominee holds the partnership interest a copy of Schedule K-1 and related information within 30 days of receiving it from the partnership.

A nominee who fails to furnish all the information required by Temporary Regulations section 1.6031(c)-1T when due, or who furnishes incorrect information, is subject to a $310 penalty for each failure. The maximum penalty is $3,783,000 for all such failures during a calendar year. If the nominee intentionally disregards the requirement to report correct information, each $310 penalty increases to $630 or, if greater, 10% of the aggregate amount of items required to be reported, and there is no limit to the amount of the penalty.

Definitions

A general partner is a partner who is personally liable for partnership debts.

A limited partner is a partner in a partnership formed under a state limited partnership law, whose personal liability for partnership debts is limited to the amount of money or other property that the partner contributed or is required to contribute to the partnership. Some members of other entities, such as domestic or foreign business trusts or limited liability companies (LLCs) that are classified as partnerships, may be treated as limited partners for certain purposes.

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

Nonrecourse loans are those liabilities of the partnership for which no partner or related person bears the economic risk of loss.

Generally, the partnership decides how to figure taxable income from its operations. However, certain elections are made by you separately on your income tax return and not by the partnership. These elections are made under the following code sections.

Section 59(e) (deduction of certain qualified expenditures ratably over the period of time specified in that section). For details, see the instructions for code J in box 13.

Section 108(b)(5) (election related to reduction of tax attributes due to exclusion from gross income of discharge of indebtedness).

Section 263A(d) (preproductive expenses). See the instructions for code P in box 13.

Section 617 (deduction and recapture of certain mining exploration expenditures).

Section 901 (foreign tax credit). See Schedule K-3.

To get forms and publications, see the instructions for your tax return or go to IRS.gov .

Limitations on Losses, Deductions, and Credits

There are potential limitations on partnership losses that you can deduct on your return. These limitations and the order in which you must apply them are as follows: the basis limitations, the at-risk limitations, and the passive activity limitations. These limitations are discussed below.

Other limitations may apply to specific deductions (for example, the section 179 expense deduction). Generally, specific limitations apply before the at-risk and passive loss limitations.

Generally, partners may only claim their share of a partnership loss (including a capital loss) to the extent it doesn’t exceed their adjusted basis in the partnership at the end of the partnership’s tax year. Any losses and deductions not allowed can be carried forward.

It’s the partner’s responsibility to track and maintain the information necessary to figure their adjusted basis in the partnership (also known as outside basis). Regulations section 1.705–1(a)(1) requires partners to determine the adjusted basis in their partnership interest as necessary to determine their tax liability. For example, a determination is required when a partner sells or exchanges all or part of their partnership interest or when a partner’s entire partnership interest is liquidated. In general, a partner’s adjusted basis is determined under the principles of subchapter K, including sections 705, 722, 733, and 742.

Although the partnership provides an analysis of the partner’s capital account on item L of Schedule K-1, that information is based on the partnership’s books and records and can’t be used to figure the partner’s adjusted basis.

Use the Worksheet for Adjusting the Basis of a Partner’s Interest in the Partnership to figure the basis of your interest in the partnership.

For partnership tax years beginning after 2017, a partner's share of the adjusted basis in partnership charitable contributions (defined in section 170(c)) and taxes, described in section 901, paid or accrued to foreign countries and to U.S. territories is subject to this basis limitation (defined in section 704(d)).

Partnership Basis Worksheet Specific Instructions

There may be some transactions or certain distributions that require you to determine the adjusted basis of your partnership interest at the point in time of the transaction or distribution rather than in the order and amounts specified in these instructions.

Part I—Partner Basis

Enter your adjusted basis at the beginning of the partnership’s tax year. This will equal your adjusted basis at the end of the prior year. Basis can’t be less than zero.

Enter the purchase price of any partnership interests acquired during the year, plus the amount of money or cash equivalents contributed to the partnership and the adjusted basis of property contributed to the partnership less any liabilities associated with the property. If liabilities associated with the property are greater than your adjusted basis in the property, then include the excess liabilities as liabilities assumed by the partnership on line 9b. Include the fair market value (FMV) of any partnership interests received in exchange for services provided to the partnership. Don’t include the FMV of services performed in exchange for guaranteed payments.

Enter the total ending liabilities from your Schedule K-1, item K1.

Enter the total beginning liabilities from your Schedule K-1, item K1.

Subtract line 3b from line 3a.

Enter the amount of partnership liabilities you assumed during the tax year. See Regulations section 1.752-1(d).

Add lines 3c and 3d. If the sum is negative, enter the amount on line 9a. If the sum is zero or positive, enter the amount on line 3e.

Enter on lines 4a through 4n all separately figured and non-separately figured items of income from Schedule K-1. See below for special line item instructions.

Enter only positive amounts from Schedule K-1 on line 4. Negative amounts (decreases to basis) are entered on lines 8 through 10.

Reduce interest income reported on this line by any amount included in interest income with respect to the credit to holders of clean renewable energy bonds.

Enter the business interest expense (BIE) reported in box 20, code N, of Schedule K-1, or the amount by which BIE reduced positive ordinary income amounts in box 1, 2, or 3 of Schedule K-1, if less.

Enter the sum of the amounts on lines 4a through 4n.

Enter any gain recognized on contributions of property during the year. For example, a contribution to a partnership which would be treated as an investment company if it were incorporated would be subject to gain and that gain increases basis. Don’t include gain from the transfer of liabilities.

Enter the amount by which your cumulative depletion deduction (other than oil and gas depletion) exceeds your proportionate share of basis in the property subject to depletion.

Add lines 1, 2, 3e, 4o, 5, and 6.

Enter the cash and marketable securities distributed to you by the partnership as reported in box 19, code A, of Schedule K-1.

Enter the property distributed subject to recognition of precontribution gain under section 737 as reported in box 19, code B, of Schedule K-1. Don’t include the amount of property distributions included in your taxable income.

Enter the partnership’s adjusted basis in the property distributed or, if less, your remaining outside basis assigned to the property. See Pub. 541.

Add lines 8a, 8b, and 8c.

If the sum of lines 3c and 3d is negative, enter the amount here; otherwise, enter zero.

Enter the amount of your individual liabilities that the partnership assumed during the tax year.

Add lines 9a and 9b.

Add lines 8d and 9c.

Add lines 7 and 10. If the amount is negative, enter zero on line 11a and enter the amount as a positive number on line 11b.

See the instructions for line 11a. The amount reported on this line represents a taxable gain on distributions in excess of basis. Report the gain on your tax return.

Part II—Allowable Loss and Deduction Items

A partner's distributive share of partnership losses and deduction items in a given tax year are only allowed to the extent of the partner’s adjusted basis in their partnership interest following the adjustments described in Part I. When basis is insufficient, and there is more than one category of loss or deduction items (for example, short-term capital loss and long-term capital loss) that reduces basis, the amount of each category of loss or deduction item that's disallowed is determined on a pro rata basis.

A partner's loss and deduction items in excess of basis are suspended and carried forward for use in the next tax year in which the partner has adjusted basis in their partnership interest available. See Regulations section 1.704-1(d).

Part II shows the pro rata allocation for each category of loss or deduction that's suspended and tracks this information. Enter numbers as negative amounts.

Positive amounts (increases to basis) are entered on line 4.

Enter as a negative amount any nondeductible expenses reported in box 18 of Schedule K-1.

Enter as a negative amount the current year deduction for depletion of any partnership oil and gas property, not to exceed your allocable share of the adjusted basis of the property.

Enter any prior-year loss or deduction items that were suspended due to basis limitations and carried forward to the current tax year.

Enter the sum of line 12, columns A and B.

Enter the sum of line 13, columns A and B.

If the sum of lines 12 and 13, column C, doesn’t exceed the amount on line 11a, then enter the amount of line 12, column C, in the corresponding line of column D. If the sum of lines 12 and 13, column C, exceeds the amount of basis remaining on line 11a, then you must allocate the remaining basis proportionately in column D between lines 12 and 13, column C.

If the sum of lines 12 and 13, column C, doesn’t exceed the amount on line 11a, then enter the amount of line 13, column C. If the sum of lines 12 and 13, column C, exceeds the amount of basis remaining on line 11a, then you must allocate the remaining basis proportionately in column D between lines 12 and 13, column C.

If the sum of lines 12 and 13, column C, exceeds the amount of basis remaining on line 11a, subtract line 12, column D, from line 12, column C, and enter the result in column E.

If the sum of lines 12 and 13, column C, exceeds the amount of basis remaining on line 11a, subtract line 13, column D, from line 13, column C, and enter the result in column E.

Reduce line 11a by the amounts on lines 12 and 13, column D, and enter on line 14.

Enter the loss and deduction amounts for each item as reported on your Schedule K-1. See below for special line item instructions.

Exclude BIE that was included in reporting losses in box 1, 2, or 3 of Schedule K-1. BIE is included as a separate loss class on line 15r.

Include your share of the partnership's section 179 expense deduction for the year even if you can’t deduct all of it due to limitations.

Enter excess business interest expense (EBIE).

Enter BIE reported in box 20, code N, of Schedule K-1.

Note that BIE is a separate loss class under Regulations section 1.163(j)-6(h)(1). To the extent basis is proportionately allocated to this loss class (consisting of lines 15n and 15q), interest expense is absorbed by applying currently deductible BIE (line 15q) to basis first. Once line 15q has been fully absorbed by basis, any remaining basis proportionately allocated to the BIE class is then absorbed by applying it to EBIE on line 15n. EBIE is only applicable to partnerships subject to section 163(j). BIE is a separate loss class whether or not the taxpayer is subject to the section 163(j) limitation. See Regulations sections 1.704-1(d)(2) and 1.163(j)-6(h)(1). If any of the suspended loss consists of BIE, EBIE, or negative section 163(j) expense carryover (which will be reflected as EBIE carryforward on line 15n, columns B (prior year) and D (current year disallowed carryforward)), see the Instructions for Form 8990, Limitation on Business Interest Expense Under Section 163(j), regarding the allocation of these three items.

Enter any prior-year loss and deduction items suspended due to basis limitations that were carried forward to the current tax year.

Add each line, column A and column B, and enter the amount in the corresponding line of column C.

If Part II, line 14, is zero, skip column D. If basis, as reported on Part II, line 14, is greater than line 15s, column C, enter the amount for each line in column C in column D. If basis as reported on Part II, line 14, is less than line 15s, column C, enter the pro rata amount on the corresponding line in column D. The total allocation amount reported in line 15s, column D, can’t exceed the amount report on Part II, line 14.

This represents the amount of loss or deduction items you’re allowed to report on your return from the partnership this tax year, as limited by your basis. This amount may not match the amount reported on your current year Schedule K-1.

For each line, subtract column D from column C and enter the amount in column E.

Enter the amount from line 15s, column D.

If you had unutilized EBIE and disposed of a portion or all of your partnership interest, enter the increase in basis on line 17. See Regulations section 1.163(j)-6(h)(3).

Add lines 14, 16, and 17. This amount represents your basis in your partnership interest at the end of the year.

Basis adjustments computed in different manner than specified in these instructions.

Your adjusted basis may be increased under section 961(a) for amounts that you’re required to include in income with respect to a controlled foreign corporation (CFC) under sections 951(a) (for example, subpart F income) and 951A (global intangible low-taxed income (GILTI)) because you’re a U.S. shareholder of the CFC and you own (within the meaning of section 958(a)(2)) stock of the CFC through the partnership.

For purposes of section 951(a), if the partnership is a domestic partnership, then you’ll be treated as owning (within the meaning of section 958(a)) stock of a CFC through the partnership (a) for a tax year of the foreign corporation that begins before January 25, 2022, only if the partnership applies Regulations section 1.958-1(d)(1) to treat it as not owning stock of the foreign corporation within the meaning of section 958(a) for purposes of section 951; and (b) for any tax year of the foreign corporation that begins on or after January 25, 2022. See the Partner’s Instructions for Schedule K-3 for more information on sections 951(a) and 951A inclusions.

Your adjusted basis may be decreased under section 961(b)(1) by the sum of (a) the dollar basis in previously taxed earnings and profits (PTEP) in your annual PTEP accounts that you exclude from your gross income under section 959(a) by reason of a distribution made to the partnership, and (b) the dollar amount of any foreign income taxes allowed as a credit under section 960(b) with respect to such PTEP.

Generally, if you have (a) a loss or other deduction from any activity carried on as a trade or business or for the production of income by the partnership, and (b) amounts in the activity for which you aren’t at risk, you’ll have to complete Form 6198, At-Risk Limitations, to figure your allowable loss for the activity.

The at-risk rules generally limit the amount of loss and other deductions that you can claim to the amount you could actually lose in the activity. These losses and deductions include a loss on the disposition of assets and the section 179 expense deduction. However, if you acquired your partnership interest before 1987, the at-risk rules don't apply to losses from an activity of holding real property placed in service before 1987 by the partnership. The activity of holding mineral property doesn't qualify for this exception. The partnership should identify on a statement attached to Schedule K-1 any losses that aren't subject to the at-risk limitations.

Generally, you aren't at risk for amounts such as the following.

Nonrecourse loans used to finance the activity, to acquire property used in the activity, or to acquire your interest in the activity that aren't secured by your own property (other than the property used in the activity). See the instructions for item K1, later, for the exception for qualified nonrecourse financing secured by real property.

Cash, property, or borrowed amounts used in the activity (or contributed to the activity, or used to acquire your interest in the activity) that are protected against loss by a guarantee, a stop-loss agreement, or other similar arrangement (excluding casualty insurance and insurance against tort liability).

Amounts borrowed for use in the activity from a person who has an interest in the activity, other than as a creditor, or who is related, under section 465(b)(3), to a person (other than you) having such an interest.

You should get a separate statement of income, expenses, and other items for each activity from the partnership.

Box 22 of Schedule K-1, Part III, will be checked when a statement is attached.

Passive Activity Limitations

Section 469 provides rules that limit the deduction of certain losses and credits. These rules apply to partners who:

Are individuals, estates, trusts, closely held C corporations, or personal service corporations; and

Have a passive activity loss or credit for the tax year.

Generally, passive activities include the following.

Trade or business activities in which you didn't materially participate.

Activities that meet the definition of rental activities under Temporary Regulations section 1.469-1T(e)(3) and Regulations section 1.469-1(e)(3).

Passive activities don't include the following.

Trade or business activities in which you materially participated.

Rental real estate activities in which you materially participated if you were a real estate professional for the tax year. You were a real estate professional only if you met both of the following conditions.

More than half of the personal services you performed in trades or businesses were performed in real property trades or businesses in which you materially participated.

You performed more than 750 hours of services in real property trades or businesses in which you materially participated.

For purposes of this rule, each interest in rental real estate is a separate activity, unless you elect to treat all interests in rental real estate as one activity. For details on making this election, see the Instructions for Schedule E (Form 1040), Supplemental Income and Loss.

If you're married filing jointly, either you or your spouse must separately meet both (a) and (b) of the above conditions, without taking into account services performed by the other spouse.

A real property trade or business is any real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage trade or business. Services you performed as an employee aren't treated as performed in a real property trade or business unless you owned more than 5% of the stock (or more than 5% of the capital or profits interest) in the employer.

Working interests in oil or gas wells if you were a general partner.

The rental of a dwelling unit any partner used for personal purposes during the year for more than the greater of 14 days or 10% of the number of days that the residence was rented at fair rental value.

Activities of trading personal property for the account of owners of interests in the activities.

If you're an individual, an estate, or a trust, and you have a passive activity loss or credit, use Form 8582, Passive Activity Loss Limitations, to figure your allowable passive losses and Form 8582-CR, Passive Activity Credit Limitations, to figure your allowable passive credits. For a corporation, use Form 8810, Corporate Passive Activity Loss and Credit Limitations. See the instructions for these forms for details.

If the partnership had more than one activity, it’ll attach a statement to your Schedule K-1 that identifies each activity (trade or business activity, rental real estate activity, rental activity other than rental real estate, and other activity) and specifies the income (loss), deductions, and credits from each activity.

Box 23 of Schedule K-1, Part III, will be checked when a statement is attached.

Material participation.

You must determine if you materially participated (a) in each trade or business activity held through the partnership, and (b) if you were a real estate professional (defined earlier) in each rental real estate activity held through the partnership. All determinations of material participation are based on your participation during the partnership's tax year.

Material participation standards for partners who are individuals are listed below. Special rules apply to certain retired or disabled farmers and to the surviving spouses of farmers. See the Instructions for Form 8582 for details.

Corporations should refer to the Instructions for Form 8810 for the material participation standards that apply to them.

If you're an individual (either a general partner or a limited partner who owned a general partnership interest at all times during the tax year), you materially participated in an activity only if one or more of the following apply.

You participated in the activity for more than 500 hours during the tax year.

Your participation in the activity for the tax year constituted substantially all the participation in the activity of all individuals (including individuals who aren't owners of interests in the activity).

You participated in the activity for more than 100 hours during the tax year, and your participation in the activity for the tax year wasn't less than the participation in the activity of any other individual (including individuals who weren't owners of interests in the activity) for the tax year.

The activity was a significant participation activity for the tax year, and you participated in all significant participation activities (including activities outside the partnership) during the year for more than 500 hours. A significant participation activity is any trade or business activity in which you participated for more than 100 hours during the year and in which you didn't materially participate under any of the material participation tests (other than this test).

You materially participated in the activity for any 5 tax years (whether or not consecutive) during the 10 tax years that immediately precede the tax year.

The activity was a personal service activity and you materially participated in the activity for any 3 tax years (whether or not consecutive) preceding the tax year. A personal service activity involves the performance of personal services in the field of health, law, engineering, architecture, accounting, actuarial science, performing arts, or consulting, or any other trade or business in which capital isn't a material income-producing factor.

Based on all the facts and circumstances, you participated in the activity on a regular, continuous, and substantial basis during the tax year.

If you're a limited partner, you must meet item 1, 5, or 6 above to qualify as having materially participated.

Generally, any work that you or your spouse does in connection with an activity held through a partnership (where you own your partnership interest at the time the work is done) is counted toward material participation. However, work in connection with the activity isn't counted toward material participation if either of the following applies.

The work isn't the type of work that owners of the activity would usually do and one of the principal purposes of the work that you or your spouse does is to avoid the passive loss or credit limitations.

You do the work in your capacity as an investor and you aren't directly involved in the day-to-day operations of the activity. Examples of work done as an investor that would not count toward material participation include:

Studying and reviewing financial statements or reports on operations of the activity,

Preparing or compiling summaries or analyses of the finances or operations of the activity for your own use, and

Monitoring the finances or operations of the activity in a non-managerial capacity.

Income (loss), deductions, and credits from an activity are nonpassive if you determine that:

You materially participated in a trade or business activity of the partnership, or

You were a real estate professional (defined earlier) in a rental real estate activity of the partnership.

If you determine that you didn't materially participate in a trade or business activity of the partnership or if you have income (loss), deductions, or credits from a rental activity of the partnership (other than a rental real estate activity in which you materially participated as a real estate professional), the amounts from that activity are passive. Report passive income (losses), deductions, and credits as follows.

If you have an overall gain (the excess of income over deductions and losses, including any prior year unallowed loss) from a passive activity, report the income, deductions, and losses from the activity as indicated in these instructions.

If you have an overall loss (the excess of deductions and losses, including any prior year unallowed loss, over income) or credits from a passive activity, report the income, deductions, losses, and credits from all passive activities using the Instructions for Form 8582 or the Instructions for Form 8582-CR (or Form 8810) to see if your deductions, losses, and credits are limited under the passive activity rules.

The passive activity limitations are applied separately for items (other than the low-income housing credit and the rehabilitation credit) from each PTP. Thus, a net passive loss from a PTP may not be deducted from other passive income. Instead, a passive loss from a PTP is suspended and carried forward to be applied against passive income from the same PTP in later years. If the partner's entire interest in the PTP is completely disposed of, any unused losses are allowed in full in the year of disposition.

If you have an overall gain from a PTP, the net gain is nonpassive income. In addition, the nonpassive income is included in investment income to figure your investment interest expense deduction.

Don't report passive income, gains, or losses from a PTP on Form 8582. Instead, use the following rules to figure and report on the proper form or schedule your income, gains, and losses from passive activities that you held through each PTP you owned during the tax year.

Combine any current year income, gains, and losses, and any prior year unallowed losses to see if you have an overall gain or loss from the PTP. Include only the same types of income and losses you would include in your net income or loss from a non-PTP passive activity. See Pub. 925, Passive Activity and At-Risk Rules, for more details.

If you have an overall gain, the net gain portion (total gain minus total losses) is nonpassive income. On the form or schedule you normally use, report the net gain portion as nonpassive income and the remaining income and the total losses as passive income and loss. To the left of the entry space, enter “From PTP.” It's important to identify the nonpassive income because the nonpassive portion is included in modified adjusted gross income (MAGI) for purposes of figuring on Form 8582 the special allowance for active participation in a non-PTP rental real estate activity. In addition, the nonpassive income is included in investment income when figuring your investment interest expense deduction on Form 4952, Investment Interest Expense Deduction.

If you have Schedule E (Form 1040) income of $8,000, and a Form 4797, Sales of Business Property, prior year unallowed loss of $3,500 from the passive activities of a particular PTP, you have a $4,500 overall gain ($8,000 − $3,500). On Schedule E (Form 1040), line 28, report the $4,500 net gain as nonpassive income in column (k). In column (h), report the remaining Schedule E (Form 1040) gain of $3,500 ($8,000 − $4,500). On the appropriate line of Form 4797, report the prior year unallowed loss of $3,500. Be sure to enter “From PTP” to the left of each entry space.

If you have an overall loss (but didn't dispose of your entire interest in the PTP to an unrelated person in a fully taxable transaction during the year), the losses are allowed to the extent of the income, and the excess loss is carried forward to use in a future year when you have income to offset it. Report as a passive loss on the schedule or form you normally use the portion of the loss equal to the income. Report the income as passive income on the form or schedule you normally use.

You have a Schedule E (Form 1040) loss of $12,000 (current year losses plus prior year unallowed losses) and a Form 4797 gain of $7,200. Report the $7,200 gain on the appropriate line of Form 4797. On Schedule E (Form 1040), line 28, report $7,200 of the losses as a passive loss in column (g). Carry forward the unallowed loss of $4,800 ($12,000 − $7,200).

If you have unallowed losses from more than one activity of the PTP or from the same activity of the PTP that must be reported on different forms, you must allocate the unallowed losses on a pro rata basis to figure the amount allowed from each activity or on each form.

If you have an overall loss and you disposed of your entire interest in the PTP to an unrelated person in a fully taxable transaction during the year, your losses (including prior year unallowed losses) allocable to the activity for the year aren't limited by the passive loss rules. A fully taxable transaction is one in which you recognize all your realized gain or loss. Report the income and losses on the forms and schedules you normally use.

Special allowance for a rental real estate activity.

If you actively participated in a rental real estate activity, you may be able to deduct up to $25,000 of the loss from the activity from nonpassive income. This special allowance is an exception to the general rule disallowing losses in excess of income from passive activities. The special allowance isn't available if you were married, file a separate return for the year, and didn't live apart from your spouse at all times during the year.

Only individuals, qualifying estates, and qualifying revocable trusts that made a section 645 election can actively participate in a rental real estate activity. Estates (other than qualifying estates), trusts (other than qualifying revocable trusts that made a section 645 election), and corporations can't actively participate. Limited partners can't actively participate unless future regulations provide an exception.

You aren't considered to actively participate in a rental real estate activity if, at any time during the tax year, your interest (including your spouse's interest) in the activity was less than 10% (by value) of all interests in the activity.

Active participation is a less stringent requirement than material participation. You may be treated as actively participating if you participated, for example, in making management decisions or arranging for others to provide services (such as repairs) in a significant and bona fide sense. Management decisions that can count as active participation include approving new tenants, deciding rental terms, approving capital or repair expenditures, and other similar decisions.

An estate is a qualifying estate if the decedent would have satisfied the active participation requirement for the activity for the tax year the decedent died. A qualifying estate is treated as actively participating for tax years ending less than 2 years after the date of the decedent's death.

The maximum special allowance that single individuals and married individuals filing a joint return can qualify for is $25,000. The maximum is $12,500 for married individuals who file separate returns and who lived apart at all times during the year. The maximum special allowance for which an estate can qualify is $25,000 reduced by the special allowance for which the surviving spouse qualifies.

If your MAGI (defined below) is $100,000 or less ($50,000 or less if married filing separately), your loss is deductible up to the maximum special allowance referred to in the preceding paragraph. If your MAGI is more than $100,000 (more than $50,000 if married filing separately), the special allowance is limited to 50% of the difference between $150,000 ($75,000 if married filing separately) and your MAGI. When MAGI is $150,000 or more ($75,000 or more if married filing separately), there is no special allowance.

This is your adjusted gross income (AGI) from Form 1040 or 1040-SR, line 11, figured without taking into account:

The taxable amount of social security or equivalent tier 1 railroad retirement benefits,

The deductible contributions to traditional IRAs and section 501(c)(18) pension plans,

The exclusion from income of interest from series EE or I U.S. savings bonds used to pay higher education expenses,

The exclusion of amounts received under an employer's adoption assistance program,

Any passive activity income or loss included on Form 8582,

Any rental real estate loss allowed to real estate professionals,

Any overall loss from a PTP (see Publicly Traded Partnerships (PTPs) in the Instructions for Form 8582),

The deduction allowed for one-half of self-employment tax,

The deduction allowed for interest paid on student loans, and

The deduction allowed for foreign-derived intangible income and GILTI.

If you have net income (loss), deductions, or credits from any activity to which special rules apply, the partnership will identify the activity and all amounts relating to it on Schedule K-1 or on an attached statement.

If you have net income subject to recharacterization under Temporary Regulations section 1.469-2T(f) and Regulations sections 1.469-2(f)(5) and (6), report such amounts according to the Instructions for Form 8582 (or Form 8810).

If you have net income (loss), deductions, or credits from any of the following activities, treat such amounts as nonpassive and report them as indicated in these instructions.

Working interests in oil and gas wells if you're a general partner.

Trading personal property for the account of owners of interests in the activity.

The partnership will report any self-charged interest income or expense that resulted from loans between you and the partnership (or between the partnership and another partnership or S corporation if both entities have the same owners with the same proportional ownership interest in each entity). If there was more than one activity, the partnership will provide a statement allocating the interest income or expense with respect to each activity. The self-charged interest rules don't apply to your partnership interest if the partnership made an election under Regulations section 1.469-7(g) to avoid the application of these rules. See the Instructions for Form 8582 for details.

Your distributive share of losses attributable to all of the partnership's trades or businesses may be limited under section 461(l). See Form 461, Limitation on Business Losses, and its instructions for more information.

Specific Instructions

Part i. information about the partnership.

If the box in item D is checked, you're a partner in a PTP and must follow the rules discussed earlier under Publicly traded partnerships .

Part II. Information About the Partner

If the partner is an individual, the partnership will enter the partner's SSN or individual taxpayer identification number (ITIN). For all other partners, the partnership will enter the partner's employer identification number (EIN). In the case of a disregarded entity (DE), the partnership will enter the TIN of the beneficial owner of the DE in item E and the beneficial owner's address in item F.

If the partner is an IRA, the partnership will enter the identifying number of the custodian of the IRA.

For your protection, this form may show only the last four digits of the TIN in items E and H2, as noted under Purpose of Schedule K-1 , earlier. However, the partnership has reported your complete identification number to the IRS.

If the partner is a DE, such as a single-member LLC that didn’t elect to be treated as a corporation, the partnership will check the DE box and enter the name and TIN of the DE.

Generally, the amounts reported in item J are based on the partnership agreement. If your interest commenced after the beginning of the partnership's tax year, the partnership will have entered, in the Beginning column, the percentages that existed for you immediately after admission. If your interest terminated before the end of the partnership's tax year, the partnership will have entered, in the Ending column, the percentages that existed immediately before termination.

The ending percentage share shown on the Capital line is the portion of the capital you would receive if the partnership was liquidated at the end of its tax year by the distribution of undivided interests in the partnership's assets and liabilities. If your capital account is negative or zero, the partnership will have entered zero on this line.

There are two options the partnership can use to indicate the source of a decrease: sale or exchange. The Sale checkbox will be checked if you sold all or part of your partnership interest to a new or pre-existing partner during this tax year, regardless of whether you recognized gain or loss on the transaction(s). The Exchange checkbox will be checked if you exchanged all or part of your partnership interest with a new or pre-existing partner during this tax year, regardless of whether you recognized gain or loss on the transaction(s). You may have realized a gain or loss on the transfer or disposition of your interest. See codes AB, AC, and AD on line 20 for items that have special gain or loss treatment. For more information, see Disposition of Partner's Interest and Partnership Distributions in Pub. 541.

Item K1 should show your share of the partnership's nonrecourse liabilities, partnership-level qualified nonrecourse financing, and other recourse liabilities at the beginning and the end of the partnership's tax year. If you terminated your interest in the partnership during the tax year, item K1 should show the share that existed immediately before the total disposition. A partner's recourse liability is any partnership liability for which a partner is personally liable.

If this partnership invested in other partnerships, item K1 will include your share of partnership liabilities from those other partnerships, except to the extent the liabilities from those other partnerships are owed to this partnership.

Use the total of the three amounts for figuring the adjusted basis of your partnership interest.

Generally, you may use only the amounts shown next to Qualified nonrecourse financing and Recourse to figure your amount at risk. Don't include any amounts that aren't at risk if such amounts are included in either of these categories.

If your partnership is engaged in two or more different types of activities subject to the at-risk provisions, or a combination of at-risk activities and any other activity, the partnership should give you a statement showing your share of nonrecourse liabilities, partnership-level qualified nonrecourse financing, and other recourse liabilities for each activity.

Qualified nonrecourse financing secured by real property used in an activity of holding real property that's subject to the at-risk rules is treated as an amount at risk. Qualified nonrecourse financing generally includes financing for which no one is personally liable for repayment that's borrowed for use in an activity of holding real property and that's loaned or guaranteed by a federal, state, or local government or borrowed from a qualified person.

Qualified persons include any persons actively and regularly engaged in the business of lending money, such as a bank or savings and loan association. Qualified persons generally don't include related parties (unless the nonrecourse financing is commercially reasonable and on substantially the same terms as loans involving unrelated persons), the seller of the property, or a person who receives a fee for the partnership's investment in the real property.

See Pub. 925 for more information on qualified nonrecourse financing.

Both the partnership and you must meet the qualified nonrecourse rules on this debt before you can include the amount shown next to Qualified nonrecourse financing in your at-risk computation.

See Limitations on Losses, Deductions, and Credits , earlier, for more information on the at-risk limitations.

If the box in item K3 is checked, see the instructions for box 20, code X, for additional information.

The partnership must report your beginning capital account and ending capital account for the year using the tax-basis method, including the amount of capital you contributed to the partnership during the year, your share of the partnership's current year net income or loss as computed for tax purposes, any withdrawals and distributions made to you by the partnership, and any other increases or decreases to your capital account determined in a manner generally consistent with figuring the partner's adjusted tax basis in its partnership interest (without regard to partnership liabilities), taking into account the rules and principles of sections 705, 722, 733, and 742. See the Instructions for Form 1065 for more details.

For many reasons, your ending capital account as reported to you by the partnership in item L may not equal the adjusted tax basis in your partnership interest. Generally, this is because a partner's adjusted tax basis in its partnership interest includes the partner's share of partnership liabilities (and capital accounts determined by using the tax-basis method don't). In addition, your partnership may not have all the necessary information from you to accurately figure the adjusted tax basis in your partnership interest due to partner-level adjustments. You're responsible for maintaining an annual record of the adjusted tax basis in your partnership interest as determined under the principles and provisions of subchapter K, including, for example, those under sections 705, 722, 733, and 742. Regulations section 1.705-1(a)(1) provides that a partner is required to determine the adjusted basis of its interest in a partnership when necessary to determine its tax liability or that of any other person. For example, a determination is required in ascertaining the extent to which a partner's share of loss is allowed, when there is a sale or exchange of all or part of a partnership interest, and when a partner's entire partnership interest is liquidated. The adjusted basis of a partner's interest in a partnership is determined without regard to any amount shown in the partnership books as the partner's capital, equity, or similar account.

If you’ve contributed property with a built-in gain or loss during the tax year, the partnership will check the “Yes” box. Also, the partnership will attach a statement showing the property contributed, the date of the contribution, and the amount of any built-in gain or loss. A built-in gain or loss is the difference between the FMV of the property and your adjusted basis in the property at the time it was contributed to the partnership. If you contributed more than 10 properties on a single date during the tax year, the statement may instead show the number of properties contributed on that date, the total amount of built-in gain, and the total amount of built-in loss.

The partnership is providing this for your information. Contributions of property with a built-in gain or loss could affect a partner's tax liability (in matters concerning precontribution gain or loss, and distributions subject to section 737) and may also affect how the partnership allocated certain items on your Schedule K-1. For information on precontribution gain or loss, see the instructions for box 20, code W. For information on distributions subject to section 737, see the instructions for box 19, code B.

If you're allocated a share of section 704(c) gain or loss, the partnership will report your net unrecognized section 704(c) gain or loss both at the beginning and at the end of the partnership's tax year in item N. The partnership can use any reasonable method in reporting net unrecognized section 704(c) built-in gain or loss to you. You'll be allocated unrecognized section 704(c) gain or loss if:

You contributed property with FMV in excess of adjusted tax basis (built-in gain property);

You contributed property with FMV less than adjusted tax basis (built-in loss property); or

The partnership elected, under certain circumstances, to revalue property (book-up or book-down) on its books to reflect changes in the FMV of such property. These revaluations are sometimes referred to as “reverse section 704(c) allocations.”

The partnership is providing this for your information. If the partnership disposes of the property or there are special allocations due to depreciation, depletion, or amortization, the partnership will report these items on other parts of Schedule K-1.

Although the partnership is reporting the beginning and ending balances on an aggregate net basis, it's generally required to keep records of this information on a property-by-property basis.

Part III. Partner's Share of Current Year Income, Deductions, Credits, and Other Items

The amounts shown in boxes 1 through 21 reflect your share of income, loss, deductions, credits, and other items from partnership business or rental activities without reference to limitations on losses or adjustments that may be required of you because of:

The adjusted basis of your partnership interest,

The amount for which you're at risk, and

The passive activity limitations.

For information on these provisions, see Limitations on Losses, Deductions, and Credits , earlier.

If you're an individual and the passive activity rules don't apply to the amounts shown on your Schedule K-1, take the amounts shown and enter them on the appropriate lines of your tax return. If the passive activity rules do apply, report the amounts shown as indicated in these instructions.

If you aren't an individual, report the amounts in each box as instructed on your tax return.

If you file your tax return on a calendar-year basis, but your partnership files a return for a fiscal year, report the amounts on your tax return for the year in which the partnership's fiscal year ends. For example, if the partnership's tax year ends in February 2024, report the amounts on your 2024 tax return.

If you have losses, deductions, or credits from a prior year that weren’t deductible or usable because of certain limitations, such as the basis limitations or the at-risk limitations, take them into account in determining your net income, loss, or credits for this year. However, except for passive activity losses and credits, don't combine the prior year amounts with any amounts shown on this Schedule K-1 to get a net figure to report on any supporting schedules, statements, or forms attached to your return. Instead, report the amounts on the attached schedule, statement, or form on a year-by-year basis.

If the partnership reports a section 743(b) adjustment to partnership items, report these adjustments as separate items on Form 1040 or 1040-SR in accordance with the reporting instructions for the partnership item being adjusted. A section 743(b) adjustment increases or decreases your share of income, deduction, gain, or loss for a partnership item. For example, if the partnership reports a section 743(b) adjustment to depreciation for property used in its trade or business, report the adjustment on Schedule E (Form 1040), line 28, in accordance with the instructions for box 1 of Schedule K-1.

In box 11, boxes 13 through 15, and boxes 17 through 20, the partnership will identify each item by entering a code in the column to the left of the dollar amount entry space. These codes are identified under List of Codes and References Used in Schedule K-1 (Form 1065) at the end of these instructions.

The partnership will enter an asterisk (*) after the code, if any, in the column to the left of the dollar amount entry space for each item for which it has attached a statement providing additional information. For those informational items that can’t be reported as a single dollar amount, the partnership will enter an asterisk (*) in the left column and enter “STMT” in the dollar amount entry space to indicate the information is provided on an attached statement.

Income (Loss)

The amount reported in box 1 is your share of the ordinary income (loss) from trade or business activities of the partnership. Generally, where you report this amount on Form 1040 or 1040-SR depends on whether the amount is from an activity that's a passive activity to you. If you're an individual partner filing a 2023 Form 1040 or 1040-SR, find your situation below and report your box 1 income (loss) as instructed, after applying the basis and at-risk limitations on losses. If the partnership had more than one trade or business activity, it will attach a statement identifying the income or loss from each activity.

Report box 1 income (loss) from partnership trade or business activities in which you materially participated on Schedule E (Form 1040), line 28, column (i) or (k).

Report box 1 income (loss) from partnership trade or business activities in which you didn't materially participate, as follows.

If income is reported in box 1, report the income on Schedule E (Form 1040), line 28, column (h). However, if the box in item D is checked, report the income following the rules for Publicly traded partnerships , earlier.

If a loss is reported in box 1, follow the Instructions for Form 8582 to figure how much of the loss can be reported on Schedule E (Form 1040), line 28, column (g). However, if the box in item D is checked, report the loss following the rules for Publicly traded partnerships , earlier.

Generally, the income (loss) reported in box 2 is a passive activity amount for all partners. However, the income (loss) in box 2 isn't from a passive activity if you were a real estate professional (defined earlier) and you materially participated in the activity. If the partnership had more than one rental real estate activity, it'll attach a statement identifying the income or loss from each activity.

If you're filing a 2023 Form 1040 or 1040-SR, use the following instructions to determine where to report a box 2 amount.

If you have a loss from a passive activity in box 2 and you meet all the following conditions, report the loss on Schedule E (Form 1040), line 28, column (g).

You actively participated in the partnership rental real estate activities. See Special allowance for a rental real estate activity , earlier.

Rental real estate activities with active participation were your only passive activities.

You have no prior year unallowed losses from these activities.

Your total loss from the rental real estate activities wasn't more than $25,000 (not more than $12,500 if married filing separately and you lived apart from your spouse all year).

If you're a married person filing separately, you lived apart from your spouse all year.

You have no current or prior year unallowed credits from a passive activity.

Your MAGI wasn’t more than $100,000 (not more than $50,000 if married filing separately and you lived apart from your spouse all year).

Your interest in the rental real estate activity wasn't held as a limited partner.

If you have a loss from a passive activity in box 2 and you don't meet all the conditions in (1) above, follow the Instructions for Form 8582 to figure how much of the loss you can report on Schedule E (Form 1040), line 28, column (g). However, if the box in item D is checked, report the loss following the rules for Publicly traded partnerships , earlier.

If you were a real estate professional and you materially participated in the activity, report box 2 income (loss) on Schedule E (Form 1040), line 28, column (i) or (k).

If you have income from a passive activity in box 2, report the income on Schedule E (Form 1040), line 28, column (h). However, if the box in item D is checked, report the income following the rules for Publicly traded partnerships , earlier.

The amount in box 3 is a passive activity amount for all partners. If the partnership had more than one rental activity, it'll attach a statement identifying the income or loss from each activity. Report the income or loss as follows.

If box 3 is a loss, follow the Instructions for Form 8582 to figure how much of the loss can be reported on Schedule E (Form 1040), line 28, column (g). However, if the box in item D is checked, report the loss following the rules for Publicly traded partnerships , earlier.

If income is reported in box 3, report the income on Schedule E (Form 1040), line 28, column (h). However, if the box in item D is checked, report the income following the rules for Publicly traded partnerships , earlier.

Guaranteed payments are payments made by a partnership to a partner that are determined without regard to the partnership's income. Generally, amounts on this line aren't passive income, and you should report them on Schedule E (Form 1040), line 28, column (k) (for example, guaranteed payments for personal services).

These are guaranteed payments other than for services, such as for the use of capital or attributable to section 736(a)(2) payments for unrealized receivables or goodwill. Amounts on this line should be reported on Schedule E (Form 1040), line 28, column (k) (for example, guaranteed payments for capital).

Amounts on this line include total guaranteed payments paid to you by the partnership.

Portfolio Income

Portfolio income or loss (shown in boxes 5 through 9b and in box 11, code A) isn't subject to the passive activity limitations. Portfolio income includes income (not derived in the ordinary course of a trade or business) from interest, ordinary dividends, annuities or royalties, and gain or loss on the sale of property that produces such income or is held for investment.

Report interest income on Form 1040 or 1040-SR, line 2b. If the amount of interest income included in box 5 includes interest from the credit for holders of clean renewable energy bonds, the partnership will attach a statement to Schedule K-1 showing your share of interest income from these credits. Because the basis of your interest in the partnership has been increased by your share of the interest income from these credits, you must reduce your basis by the same amount. See the line 4d instructions for the Worksheet for Adjusting the Basis of a Partner’s Interest in the Partnership.

Report ordinary dividends on Form 1040 or 1040-SR, line 3b.

Some of the amounts reported in this box may be attributable to PTEP in annual PTEP accounts that you have with respect to a foreign corporation and are therefore excludable from your gross income. Don't include the amount attributable to PTEP in your annual PTEP accounts on Form 1040 or 1040-SR, line 3b. Use Schedule K-3, Part V, to determine your share of distributions by foreign corporations to the partnership that are attributable to PTEP in your annual PTEP accounts with respect to the foreign corporations.

Report any qualified dividends on Form 1040 or 1040-SR, line 3a.

Some of the amounts reported in this box may be attributable to PTEP in annual PTEP accounts that you have with respect to a foreign corporation and are therefore excludable from your gross income. Don't include the amount attributable to PTEP in your annual PTEP accounts on Form 1040 or 1040-SR, line 3a. Use Schedule K-3, Part V, to determine your share of distributions by foreign corporations to the partnership that are attributable to PTEP in your annual PTEP accounts with respect to the foreign corporations.

Attach a statement to the Schedule K-1 identifying the dividends included in box 6a or 6b that are:

Eligible for the deduction for dividends received under section 243(a), (b), or (c);

Eligible for the deduction for dividends received under section 245;

Eligible for the deduction for dividends received under section 245A; and

Hybrid dividends as defined in section 245A(e)(4).

Dividend equivalents aren't reported on Form 1040 or 1040-SR. This information is provided for persons that aren't U.S. persons, who are generally required to treat dividend equivalents as U.S. source dividends, and domestic partnerships with partners who may need this information. The ordinary dividends amount in box 6a doesn't include the amount of dividend equivalents.

Report royalties on Schedule E (Form 1040), line 4.

Report the net short-term capital gain (loss) on Schedule D (Form 1040), line 5.

Report the net long-term capital gain (loss) on Schedule D (Form 1040), line 12.

Report collectibles gain or loss on line 4 of the 28% Rate Gain Worksheet—Line 18 in the Instructions for Schedule D (Form 1040).

There are three types of unrecaptured section 1250 gain. Report your share of this unrecaptured gain on the Unrecaptured Section 1250 Gain Worksheet—Line 19 in the Instructions for Schedule D (Form 1040) as follows.

Report unrecaptured section 1250 gain from the sale or exchange of the partnership's business assets on line 5.

Report unrecaptured section 1250 gain from the sale or exchange of an interest in a partnership on line 10.

Report unrecaptured section 1250 gain from an estate, trust, regulated investment company (RIC), or real estate investment trust (REIT) on line 11.

If the partnership reports only unrecaptured section 1250 gain from the sale or exchange of its business assets, it'll enter a dollar amount in box 9c. If it reports the other two types of unrecaptured gain, it'll provide an attached statement that shows the amount for each type of unrecaptured section 1250 gain.

The amount in box 10 is generally passive if it's from a:

Rental activity, or

Trade or business activity in which you didn't materially participate.

However, an amount from a rental real estate activity isn't from a passive activity if you were a real estate professional (defined earlier) and you materially participated in the activity.

If the amount is either (a) a loss that isn't from a passive activity or (b) a gain, report it in Form 4797, line 2, column (g). Don't complete Form 4797, line 2, columns (b) through (f). Instead, enter “From Schedule K-1 (Form 1065)” across these columns.

If the amount is a loss from a passive activity, see Passive Loss Limitations in the Instructions for Form 4797. Report the loss following the Instructions for Form 8582 to figure how much of the loss is allowed on Form 4797. However, if the box in item D is checked, report the loss following the rules for Publicly traded partnerships , earlier. If the partnership had net section 1231 gain (loss) from more than one activity, it’ll attach a statement that will identify the section 1231 gain (loss) from each activity.

Box 11. Other Income (Loss)

The partnership will report portfolio income other than interest, ordinary dividend, royalty, and capital gain (loss) income, and attach a statement to tell you what kind of portfolio income is reported.

If the partnership held a residual interest in a real estate mortgage investment conduit (REMIC), it’ll report on the statement your share of REMIC taxable income (net loss) that you report in Schedule E (Form 1040), line 38, column (d). The statement will also report your share of any excess inclusion that you report in Schedule E (Form 1040), line 38, column (c), and your share of section 212 expenses that you report in Schedule E (Form 1040), line 38, column (e).

This is your net gain (loss) from involuntary conversions due to casualty or theft. The partnership will give you a statement that shows the amounts to be reported in Form 4684, Casualties and Thefts, line 34, columns (b)(i), (b)(ii), and (c).

If there was a gain (loss) from a casualty or theft to property not used in a trade or business or for income-producing purposes, the partnership will provide you with the information you need to complete Form 4684.

The partnership will report any net gain or loss from section 1256 contracts. Report this amount on Form 6781, Gains and Losses From Section 1256 Contracts and Straddles.

The partnership will give you a statement that shows the information needed to recapture certain mining exploration costs (section 617). See the 2022 Pub. 535, Business Expenses, for details.

Generally, this cancellation of debt (COD) amount is included in your gross income (Schedule 1 (Form 1040), line 8c). Under section 108(b)(5), you may elect to apply any portion of the COD amount excluded from gross income to the reduction of the basis of depreciable property. See Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness, for more details.

The partnership will use this code to report the net positive income adjustment resulting from all section 743(b) basis adjustments. The partnership will provide your section 743(b) adjustment net of cost recovery at year end by asset grouping in box 20, code U.

Reserved for future use.

If the partnership is a domestic partnership that doesn't apply Regulations sections 1.958-1(d)(1) through (3) to a tax year of a foreign corporation that begins before January 25, 2022, to treat it as not owning stock of the foreign corporation within the meaning of section 958(a) for purposes of section 951, and is a U.S. shareholder of the foreign corporation, then any section 951(a) income inclusions with respect to the foreign corporation and such tax year are section 951(a) income inclusions of the partnership, a distributive share of which you generally include in gross income. The partnership will use this code to report your share of its section 951(a) income inclusions. Additionally, if the partnership has a distributive share of a lower-tier partnership's section 951(a) income inclusions, the partnership will use this code to report your share of that inclusion.

In all other cases, the partnership will report information needed for you to determine section 951(a) income inclusions with respect to CFCs owned by the partnership, directly or indirectly, on Schedule K-3, Part VI.

The partnership will attach a statement to the Schedule K-1 identifying any subpart F inclusion attributable to:

The sale or exchange by a CFC of stock in another foreign corporation described in section 964(e)(4), or

Hybrid dividends of tiered corporations under section 245A(e)(2).

The partnership will attach a statement that provides a description of the property; your share of the amount realized from the disposition; your share of the partnership's adjusted basis in the property (for other than oil or gas properties); and your share of the total intangible drilling costs, development costs, and mining exploration costs (section 59(e) expenditures) passed through for the property. You must figure your gain or loss from the disposition by increasing your share of the adjusted basis by the intangible drilling costs, development costs, or mine exploration costs for the property that you capitalized (that is, costs that you didn't elect to deduct under section 59(e)). Report a loss on Form 4797, Part I. Report a gain on Form 4797, Part III, in accordance with the instructions for line 28. See Regulations section 1.1254-5 for details.

A tax benefit item is an amount you deducted in a prior tax year that reduced your income tax. Report this amount on Schedule 1 (Form 1040), line 8z, to the extent it reduced your tax in the prior tax year.

If the partnership wasn't engaged in the trade or business of gambling, (a) report gambling winnings on Schedule 1 (Form 1040), line 8b; and (b) deduct gambling losses to the extent of winnings on Schedule A (Form 1040), line 16.

If the partnership was engaged in the trade or business of gambling, (a) report gambling winnings on Schedule E (Form 1040), line 28, column (k); and (b) deduct gambling losses (to the extent of winnings) on Schedule E (Form 1040), line 28, column (i).

Report this amount on Form 4797, line 10.

Code M. Gain eligible for section 1045 rollover (replacement stock purchased by partnership).

The partnership should give you (a) the name of the corporation that issued the qualified small business (QSB) stock, (b) your share of the partnership's adjusted basis and sales price of the QSB stock, (c) the dates the QSB stock was bought and sold, (d) your share of gain from the sale of the QSB stock, and (e) your share of the gain that was deferred by the partnership under section 1045. Corporate partners aren't eligible for the section 1045 rollover. To qualify for the section 1045 rollover:

You must have held an interest in the partnership during the entire period in which the partnership held the QSB stock (more than 6 months prior to the sale), and

Your share of the gain eligible for the section 1045 rollover can't exceed the amount that would have been allocated to you based on your interest in the partnership at the time the QSB stock was acquired.

See the Instructions for Schedule D (Form 1040) and the Instructions for Form 8949 for details on how to report the gain and the amount of the allowable postponed gain.

You can opt out of the partnership's section 1045 election and either (a) recognize the gain, or (b) elect to purchase different replacement QSB stock, either directly or through ownership of a different partnership that acquired replacement QSB stock. You satisfy the requirement to purchase replacement QSB stock if you own an interest in a partnership that purchases QSB stock during the 60-day period. You must also notify the partnership, in writing, if you opt out of the partnership's section 1045 election. If you recognize gain, you must notify the partnership, in writing, of the amount of the gain that you're recognizing.

Code N. Gain eligible for section 1045 rollover (replacement stock not purchased by the partnership).

The partnership should give you (a) the name of the corporation that issued the QSB stock, (b) your share of the partnership's adjusted basis and sales price of the QSB stock, (c) the dates the QSB stock was bought and sold, and (d) your share of gain from the sale of the QSB stock. Corporate partners aren't eligible for the section 1045 rollover. To qualify for the section 1045 rollover:

You must have held an interest in the partnership during the entire period in which the partnership held the QSB stock,

Your share of the gain eligible for the section 1045 rollover can't exceed the amount that would have been allocated to you based on your interest in the partnership at the time the QSB stock was acquired, and

You must purchase other QSB stock (as defined in the Instructions for Schedule D (Form 1040)) during the 60-day period that began on the date the QSB stock was sold by the partnership.

You make a section 1045 election on a timely filed return for the tax year during which the partnership's tax year ends. See the Instructions for Form 8949 and the Instructions for Schedule D (Form 1040) for more information. Attach to your Schedule D (Form 1040) a statement that includes the following information for each amount of gain that you don't recognize under section 1045.

The name of the corporation that issued the QSB stock.

The name and EIN of the selling partnership.

The dates the QSB stock was purchased and sold.

The amount of gain that isn't recognized under section 1045.

If a partner purchases QSB stock, the name of the corporation that issued the replacement QSB stock, the date the stock was purchased, and the cost of the stock.

If a partner treats the partner's interest in QSB stock that's purchased by a purchasing partnership as the partner's replacement QSB stock, the name and EIN of the purchasing partnership, the name of the corporation that issued the replacement QSB stock, the partner's share of the cost of the QSB stock that was purchased by the partnership, the computation of the partner's adjustment to basis with respect to that QSB stock, and the date the stock was purchased by the partnership.

You must recognize gain upon a distribution of replacement QSB stock to another partner that reduces your share of the replacement QSB stock held by a partnership. The amount of gain that you must recognize is based on the amount of gain that you would recognize upon a sale of the distributed replacement QSB stock for its FMV on the date of the distribution, but not to exceed the amount you previously deferred under section 1045 with respect to the distributed replacement QSB stock. If the partnership distributed your share of replacement QSB stock to another partner, the partnership should give you (a) the name of the corporation that issued the replacement QSB stock, (b) the date the replacement QSB stock was distributed to another partner or partners, and (c) your share of the partnership's adjusted basis and FMV of the replacement QSB stock on such date.

For more information, see Regulations section 1.1045-1.

Gain from the sale or exchange of QSB stock (as defined in the Instructions for Schedule D (Form 1065)) that's eligible for a section 1202 exclusion. The partnership should also give you (a) the name of the corporation that issued the QSB stock, (b) your share of the partnership's adjusted basis and sales price of the QSB stock, and (c) the dates the QSB stock was bought and sold. Corporate partners aren't eligible for the section 1202 exclusion. The following additional limitations apply at the partner level.

You must have held an interest in the partnership when the partnership acquired the QSB stock and at all times thereafter until the partnership disposed of the QSB stock.

Your share of the eligible section 1202 gain can't exceed the amount that would have been allocated to you based on your interest in the partnership at the time the QSB stock was acquired.

See the Instructions for Schedule D (Form 1040) and the Instructions for Form 8949 for details on how to report the gain and the amount of the allowable exclusion.

Partnership gains from the disposition of farm recapture property (see the instructions for Form 4797, line 27) and other items to which section 1252 applies.

Gain or loss attributable to the sale or exchange of qualified preferred stock of the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). The partnership will report on an attached statement the amount of gain or loss attributable to the sale or exchange of the qualified preferred stock, the date the stock was acquired by the partnership, and the date the stock was sold or exchanged by the partnership. If the partner isn’t a financial institution, report the gain or loss on Schedule D (Form 1040), line 5 or line 12, in accordance with the Instructions for Schedule D (Form 1040) and the Instructions for Form 8949. If a partner is a financial institution referred to in section 582(c)(2) or a depositary institution holding company (as defined in section 3(w)(1) of the Federal Deposit Insurance Act), report the gain or loss in accordance with the Instructions for Form 4797, and Rev. Proc. 2008-64, 2008-47 I.R.B. 1195.

Net short-term capital gain (loss) and net long-term capital gain (loss) from Schedule D (Form 1065) that aren’t portfolio income. An example is gain or loss from the disposition of nondepreciable personal property used in a trade or business activity of the partnership. Report total net short-term gain (loss) on Schedule D (Form 1040), line 5. Report the total net long-term gain (loss) on Schedule D (Form 1040), line 12.

Any other information you may need to file your tax return.

Report loss items that are passive activity amounts to you following the Instructions for Form 8582. However, if the box in item D is checked, report the loss following the rules for Publicly traded partnerships , earlier.

Use this amount, along with the total cost of section 179 property placed in service during the year from other sources, to complete Part I of Form 4562, Depreciation and Amortization. The partnership will report on an attached statement your allowable share of the cost of any qualified enterprise zone or qualified real property it placed in service during the tax year. Report the amount from Form 4562, line 12, allocable to a passive activity using the Instructions for Form 8582. If the amount isn't a passive activity deduction, report it on Schedule E (Form 1040), line 28, column (j). However, if the box in item D is checked, report this amount following the rules for Publicly traded partnerships , earlier.

Box 13. Other Deductions

The partnership will give you a statement that shows charitable contributions subject to the 100%, 60%, 50%, 30%, and 20% AGI limitations. For more details, see Pub. 526, Charitable Contributions, and the Instructions for Schedule A (Form 1040). If your contributions are subject to more than one of the AGI limitations, see Worksheet 2 in Pub. 526.

Charitable contribution deductions aren't taken into account in figuring your passive activity loss for the year. Don't include them on Form 8582.

Report this amount, subject to the 60% AGI limitation, on Schedule A (Form 1040), line 11.

Report this amount, subject to the 30% AGI limitation, on Schedule A (Form 1040), line 11.

Code C. Noncash contributions (50%).

If property other than cash is contributed, and if the claimed deduction for one item or group of similar items of property exceeds $500, the partnership must give you a copy of Form 8283, Noncash Charitable Contributions, to attach to your tax return. Don't deduct the amount shown on Form 8283. It's the partnership's contribution. Instead, deduct the amount identified by code C in box 13, subject to the 50% AGI limitation, on Schedule A (Form 1040), line 12.

If the partnership provides you with information that the contribution was property other than cash and doesn't give you a Form 8283, see the Instructions for Form 8283 for filing requirements. Don't file Form 8283 unless the total claimed deduction for all contributed items of property exceeds $500.

The partnership will report on an attached statement your share of qualified food inventory contributions. The food inventory contribution isn't included in the amount reported in box 13 using code C. The partnership will also report your share of the partnership's net income from the business activities that made the food inventory contribution(s). Your deduction for food inventory contributions made during 2023 can't exceed 15% of your aggregate net income for the tax year from the business activities from which the food inventory contribution was made (including your share of net income from partnership or S corporation businesses that made food inventory contributions). Amounts that exceed the 15% limitation may be carried over for up to 5 years. Report this amount, subject to the 50% AGI limitation, on Schedule A (Form 1040), line 12.

You must fill out your own Form 8283 with the information the partnership provides you. If the partnership is the entity where the noncash charitable contribution was originally reported, insert the entity name and identifying number on your own Form 8283. See the Instructions for Form 8283 for more details. If the partnership isn't the entity where the noncash charitable contribution was originally reported, the partnership will provide you the entity name and identifying number that the noncash charitable contribution was originally reported. Insert this information on your own Form 8283.

The partnership will report your share of qualified conservation contributions of property. In general, each partner’s claim of a charitable contribution deduction for a conservation contribution is disallowed if the amount of the partnership’s contribution of a qualified real property interest exceeds 2.5 times the sum of each partner’s relevant basis in the partnership. See Qualified Conservation Contribution in Pub. 526 and Disallowance of conservation contribution deductions by certain pass-through entities in the Instructions for Form 8283. You must fill out your own Form 8283 and attach the Form 8283 the partnership provides you. See the Instructions for Form 8283 for more details. The partnership will provide you your relevant basis. You must report this on your own Form 8283, line 3, column (h). The partnership may need information from you to calculate relevant basis.

Report this amount, subject to the 30% AGI limitation, on Schedule A (Form 1040), line 12.

Report this amount, subject to the 30% AGI limitation, on Schedule A (Form 1040), line 12. See Worksheet 2 in Pub. 526.

Report this amount, subject to the 20% AGI limitation, on Schedule A (Form 1040), line 12.

Code G. Contributions (100%).

The partnership will report your distributive share of the following contributions (both cash and noncash) that may be subject to the 100% AGI limitation.

The partnership will report your share of qualified conservation contributions of property used in agriculture or livestock production. This contribution isn't included in the amount reported in box 13 using code C. If you're a farmer or rancher, you qualify for a 100% AGI limitation for this contribution. Otherwise, your deduction for this contribution is subject to a 50% AGI limitation. Report this amount on Schedule A (Form 1040), line 12. See Pub. 526 for more information on qualified conservation contributions.

Include this amount on Form 4952, line 1. If the partnership has investment income or other investment expense, it'll report your share of these items in box 20 using codes A and B. Include investment income and expenses from other sources to figure how much of your total investment interest is deductible. You'll also need this information to figure your investment interest expense deduction.

If the partnership paid or accrued interest on debts properly allocable to investment property, the amount of interest you're allowed to deduct may be limited.

For more information on the special provisions that apply to investment interest expense, see Form 4952 and Pub. 550, Investment Income and Expenses.

Include deductions allocable to royalties on Schedule E (Form 1040), line 19. For this type of expense, enter “From Schedule K-1 (Form 1065).”

These deductions aren't taken into account in figuring your passive activity loss for the year. Don't enter them on Form 8582.

On an attached statement, the partnership will show the type and the amount of qualified expenditures for which you may make a section 59(e) election. The statement will also identify the property for which the expenditures were paid or incurred. If there is more than one type of expenditure, the amount of each type will also be listed.

If you deduct these expenditures in full in the current year, they're treated as adjustments or tax preference items for purposes of alternative minimum tax (AMT). However, you may elect to amortize these expenditures over the number of years in the applicable period rather than deducting the full amount in the current year. If you make this election, these items aren't treated as adjustments or tax preference items.

Under the election, you can deduct circulation expenditures ratably over a 3-year period. Research and experimental expenditures and mining exploration and development costs can be amortized over a 10-year period. Intangible drilling and development costs can be amortized over a 60-month period. The amortization period begins with the month in which such costs were paid or incurred.

Make the election on Form 4562. If you make the election, report the current year amortization of section 59(e) expenditures from Form 4562, Part VI, on Schedule E (Form 1040), line 28. If you don't make the election, report the section 59(e)(2) expenditures on Schedule E (Form 1040), line 28, and figure the resulting adjustment or tax preference item (see Form 6251, Alternative Minimum Tax—Individuals). Whether you deduct the expenditures or elect to amortize them, report the amount on a separate line of Schedule E, line 28, column (i), if you materially participated in the partnership activity. If you didn't materially participate, follow the Instructions for Form 8582 to figure how much of the deduction can be reported in column (g) of Schedule E, line 28.

If the partnership reports EBIE to the partner, the partner is required to file Form 8990. See the Instructions for Form 8990 for additional information.

For tax years beginning after 2017, the partner’s basis in its partnership interest at the end of the tax year is reduced (but not below zero) by the amount of excess business interest allocated to the partner for the tax year, even if the partner isn't allowed a deduction for the allocated excess business interest in the year of the basis reduction. If the partner disposes of a partnership interest in which the basis has been reduced before all of the allocated excess business interest was used, the partner increases its basis immediately before the sale for the amount not yet deducted.

Generally, you should report these amounts on Schedule A (Form 1040), line 16. See the instructions for Schedule A, line 16, for details. These deductions aren't taken into account in figuring your passive activity loss for the year. Don't enter them on Form 8582.

Any amounts paid during the tax year for insurance that constitutes medical care for you, your spouse, your dependents, and your children under age 27 who aren't dependents. On Schedule 1 (Form 1040), line 17, you may be allowed to deduct such amounts, even if you don't itemize deductions. If you do itemize deductions, enter on Schedule A (Form 1040), line 1, any amounts not deducted on Schedule 1 (Form 1040), line 17.

Deduct your educational assistance benefits on a separate line of Schedule E (Form 1040), line 28, up to the $5,250 limitation. If your benefits exceed $5,250, you may be able to use the excess amount on Form 8863 to figure the education credits.

The partnership will report the dependent care benefits you received. You must use Form 2441, Part III, to figure the amount, if any, of the benefits you may exclude from your income.

You may be able to deduct these expenses currently or you may need to capitalize them under section 263A. See Pub. 225, Farmer's Tax Guide, and Regulations section 1.263A-4 for details.

Payments made on your behalf to an IRA, a qualified plan, a simplified employee pension (SEP), or a SIMPLE IRA plan. See the instructions for Schedule 1 (Form 1040), line 20, to figure your IRA deduction. Enter payments made to a qualified plan, SEP, or SIMPLE IRA plan on Schedule 1 (Form 1040), line 16. If the payments to a qualified plan were to a defined benefit plan, the partnership should give you a statement showing the amount of the benefit accrued for the current tax year.

The partnership will provide a statement that describes the qualified timber property for these reforestation expenses. The expense deduction is limited to $10,000 ($5,000 if married filing separately) for each qualified timber property, including your share of the partnership's expense and any reforestation expenses you separately paid or incurred during the tax year.

If you didn't materially participate in the activity, use Form 8582 to figure the amount to report on Schedule E (Form 1040), line 28, column (g). If you materially participated in the reforestation activity, report the deduction on Schedule E (Form 1040), line 28, column (i).

The partnership will use this code to report the net negative income adjustment resulting from all section 743(b) basis adjustments. The partnership will provide your section 743(b) adjustment net of cost recovery at year end by asset grouping in box 20, code U.

Soil and water conservation expenditures and endangered species recovery expenditures. See section 175 for limitations on the amount you're allowed to deduct.

The partnership will provide a statement that describes the film, television, or live theatrical production generating these expenses. Generally, if the aggregate cost of the production exceeds $15 million, you aren't entitled to the deduction. The limitation is $20 million for productions in certain areas (see section 181 for details). If you didn't materially participate in the activity, use Form 8582 to determine the amount that can be reported on Schedule E (Form 1040), line 28, column (g). If you materially participated in the production activity, report the deduction on Schedule E (Form 1040), line 28, column (i).

Expenditures for the removal of architectural and transportation barriers to the elderly and disabled that the partnership elected to treat as a current expense. The deductions are limited by section 190(c) to $15,000 per year from all sources.

Itemized deductions that Form 1040 or 1040-SR filers report on Schedule A (Form 1040).

The deduction for a CCF investment isn't taken on Schedule E (Form 1040). Instead, you subtract the deduction from the amount that would normally be entered as taxable income on Form 1040 or 1040-SR, line 15. In the margin to the left of line 15, enter "CCF" and the amount of the deduction.

Report this amount on Schedule 1 (Form 1040), line 18.

The manner in which you report such interest expense depends on your use of the distributed debt proceeds. If the proceeds were used in a trade or business activity, report the interest on Schedule E (Form 1040), line 28. In column (a), enter the name of the partnership and “interest expense.” If you materially participated in the trade or business activity, enter the interest expense in column (i). If you didn't materially participate in the activity, follow the Instructions for Form 8582 to figure the interest expense you can report in column (g). See the definition of material participation, earlier. If the proceeds were used in an investment activity, report the interest on Form 4952. If the proceeds are used for personal purposes, the interest is generally not deductible.

Interest paid or accrued on debt properly allocable to your share of a working interest in any oil or gas property (if your liability isn't limited). If you didn't materially participate in the oil or gas activity, this interest is investment interest reportable as described earlier under Code H ; otherwise, it's trade or business interest. If you didn't materially participate in the oil or gas activity, this interest is investment interest expense and should be reported on Form 4952. If you materially participated in the activity, report the interest on Schedule E (Form 1040), line 28. On a separate line, enter “interest expense” and the name of the partnership in column (a) and the amount in column (i).

Formerly deductible by individuals under section 67 subject to the 2% AGI floor. For taxpayers other than individuals, deduct amounts that are clearly and directly allocable to portfolio income (other than investment interest expense and section 212 expenses from a REMIC).

The partnership will give you a description and the amount of your share for each of these items.

Box 14. Self-Employment Earnings (Loss)

If you and your spouse are both partners, each of you must complete and file your own Schedule SE (Form 1040), Self-Employment Tax, to report your partnership net earnings (loss) from self-employment.

If you're a general partner, reduce this amount before entering it on Schedule SE (Form 1040) by any section 179 expense deduction claimed, unreimbursed partnership expenses claimed, and depletion claimed on oil and gas properties. Don't reduce net earnings from self-employment by any separately stated deduction for health insurance expenses.

If the amount on this line is a loss, enter only the deductible amount on Schedule SE (Form 1040). See Limitations on Losses, Deductions, and Credits , earlier.

If your partnership is an options dealer or a commodities dealer, see section 1402(i).

If your partnership is an investment club, see Rev. Rul. 75-525, 1975-2 C.B. 350.

If you're an individual partner, enter the amount from this line, as an item of information, on Schedule E (Form 1040), line 42. Also use this amount to figure net earnings from self-employment under the farm optional method on Schedule SE (Form 1040), Part II.

If you're an individual partner, use this amount to figure net earnings from self-employment under the nonfarm optional method on Schedule SE (Form 1040), Part II.

Box 15. Credits

If you have credits that are passive activity credits to you, you must complete Form 8582-CR (or Form 8810 for corporations) in addition to the credit forms identified below. See Passive Activity Limitations , earlier, and the Instructions for Form 8582-CR (or Form 8810) for details.

You're claiming the investment credit (Form 3468) or the biodiesel, renewable diesel, or sustainable aviation fuels credit (Form 8864).

The taxpayer is an estate or trust and the source credit can be allocated to beneficiaries. For more details, see the instructions for box 13 of Schedule K-1 (Form 1041), Beneficiary’s Share of Income, Deductions, Credits, etc.

The taxpayer is a cooperative and the source credit can or must be allocated to patrons. For more details, see the instructions for Form 1120-C, U.S. Income Tax Return for Cooperative Associations, Schedule J, line 5c.

Report this amount on Form 7213, Part II; or Form 3800, Part III, line 1u.

Report this amount on Form 7213, Part I; or Form 3800, Part III, line 1cc.

If section 42(j)(5) applies, the partnership will report your share of the low-income housing credit using code C. If section 42(j)(5) doesn't apply, your share of the credit will be reported using code D. Any allowable low-income housing credit reported using code C or D is reported on Form 8586, line 4; or Form 3800, Part III, line 4d.

Keep a separate record of the low-income housing credit from each separate source so that you can correctly figure any recapture of low-income housing credit that may result from the disposition of all or part of your partnership interest. For more information on recapture, see the instructions for Form 8611, Recapture of Low-Income Housing Credit.

The partnership will report your share of the qualified rehabilitation expenditures and other information you need to complete Form 3468 related to rental real estate activities using code E. Your share of qualified rehabilitation expenditures from property not related to rental real estate activities will be reported in box 20 using code D. See the Instructions for Form 3468 for details. If the partnership is reporting expenditures from more than one activity, the attached statement will separately identify the expenditures from each activity.

Combine the expenditures (for Form 3468 reporting) from box 15, code E, and box 20, code D. The expenditures related to rental real estate activities (box 15, code E) are reported on Schedule K-1 separately from other qualified rehabilitation expenditures (box 20, code D) because they're subject to different passive activity limitation rules. See the Instructions for Form 8582-CR for details.

The partnership will identify the type of credit and any other information you need to figure these credits from rental real estate activities (other than the low-income housing credit and qualified rehabilitation expenditures). These credits may be limited by the passive activity limitations. If the credits are from more than one activity, the partnership will identify the credits from each activity on an attached statement. See Passive Activity Limitations , earlier, and the Instructions for Form 8582-CR for details.

The partnership will identify the type of credit and any other information you need to figure these rental credits. These credits may be limited by the passive activity limitations. If the credits are from more than one activity, the partnership will identify the credits from each activity on an attached statement. See Passive Activity Limitations , earlier, and the Instructions for Form 8582-CR for details.

Code H represents taxes paid on undistributed capital gains by a RIC or REIT. Report these taxes on Schedule 3 (Form 1040), line 13a.

Report this amount on Form 6478, Biofuel Producer Credit, line 3; or Form 3800, Part III, line 4c (see TIP , earlier).

Report this amount on Form 5884, Work Opportunity Credit, line 3; or Form 3800, Part III, line 4b (see TIP , earlier).

Report this amount on Form 8826, Disabled Access Credit, line 7; or Form 3800, Part III, line 1e (see TIP , earlier).

Report this amount on Form 8844, Empowerment Zone Employment Credit, line 3; or Form 3800, Part III, line 3 (see TIP , earlier).

Report this amount on Form 6765, Credit for Increasing Research Activities, line 37; or on Form 3800, Part III (see TIP , earlier) as follows.

The partnership will provide information necessary to determine if it's an eligible small business under section 38(c)(5)(A). If you and the partnership are eligible small businesses, report the credit on line 4i. For more information, see the Instructions for Form 3800.

All others, report the credit on line 1c.

Report this amount on Form 8846, Credit for Employer Social Security and Medicare Taxes Paid on Certain Employee Tips, line 5; or Form 3800, Part III, line 4f (see TIP , earlier).

This is your share of the credit for backup withholding on dividends, interest income, and other types of income. Include this amount in the total you enter on Form 1040 or 1040-SR, line 25c, and attach a copy of the Schedule K-1 to your tax return. Instead of attaching a copy of the Schedule K-1 to the tax return, you can include a statement with the return that provides the partnership's name, address, EIN, and backup withholding amount.

Most credits identified by codes P through ZZ will be reported on Form 3800 (see TIP , earlier).

Report this amount on Form 3468, Part II, line 6.

Report this amount on Form 3468, Part III, line 2.

Report this amount on Form 3468, Part IV, line 2.

Report this amount on Form 3468, Part VI, line 31.

Report this amount on Form 3468, Part VII, line 2.

Report this amount on Form 7207; or Form 3800, Part III, line 1b.

Report this amount on Form 7210; or Form 3800, Part III, line 1g.

Report this amount on Form 8820; or Form 3800, Part III, line 1h.

Report this amount on Form 8830; or Form 3800, Part III, line 1t.

Report this amount on Form 8835, Part II; or Form 3800, Part III, line 1f.

If this credit includes the small agri-biodiesel producer credit, the partnership will provide additional information on an attached statement. If no statement is attached, report this amount on Form 8864, line 10. If a statement is attached, see the instructions for Form 8864, line 10.

Report this amount on Form 8874; or Form 3800, Part III, line 1i.

Report this amount on Form 8881, Part I; or Form 3800, Part III, line 1j.

Report this amount on Form 8881, Part II; or Form 3800, Part III, line 1dd.

Report this amount on Form 8881, Part III; or Form 3800, Part III, line 1ee.

Report this amount on Form 8882; or Form 3800, Part III, line 1k.

Report this amount on Form 8896; or Form 3800, Part III, line 1m.

Report this amount on Form 8900; or Form 3800, Part III, line 4g.

Report this amount on Form 8904; or Form 3800, Part III, line 1bb.

Report this amount on Form 8906; or Form 3800, Part III, line 1n.

Report this amount on Form 8908; or Form 3800, Part III, line 1p.

Report this amount on Form 8910; or Form 3800, Part III, line 1r.

Report this amount on Form 8911, Part II; or Form 3800, Part III, line 1s.

Report this amount on Form 8912.

Report this amount on Form 8932; or Form 3800, Part III, line 1w.

Report this amount on Form 8933, Part III, Section D, line 20; or Form 3800, Part III, line 1x.

Report this amount on Form 8933, Part III, Section D, line 22.

Report this amount on Form 8936, Part II; or Form 3800, Part III, line 1y.

Report this amount on Form 8936, Part V; or Form 3800, Part III, line 1aa.

Report this amount on Form 8941; or Form 3800, Part III, line 4h.

Report this amount on Form 8944; or Form 3800, Part III, line 4j.

Report this amount on Form 3800. See the instructions for Form 3800, Parts III and V, for additional information.

If the partnership checked the box, see the attached Schedule K-3 with respect to items of international tax relevance.

If the partnership didn't check the box, the partnership attached a statement to the Schedule K-1 (or issued a statement prior to furnishing the Schedule K-1) notifying the partner that the partner won't receive Schedule K-3 from the partnership unless the partner requests the schedule.

For additional information, see the Partner’s Instructions for Schedule K-3.

Box 17. Alternative Minimum Tax (AMT) Items

Use the information reported in box 17 (as well as your adjustments and tax preference items from other sources) to prepare your Form 6251; or Schedule I (Form 1041), Alternative Minimum Tax—Estates and Trusts.

This amount is your share of the partnership's post-1986 depreciation adjustment. If you're an individual partner, report this amount on Form 6251, line 2l.

This amount is your share of the partnership's adjusted gain or loss. If you're an individual partner, report this amount on Form 6251, line 2k.

This amount is your share of the partnership's depletion adjustment. If you're an individual partner, report this amount on Form 6251, line 2d.

The amounts reported on these lines include only the gross income (code D) from, and deductions (code E) allocable to, oil, gas, and geothermal properties included in box 1 of Schedule K-1. The partnership should have attached a statement that shows any income from or deductions allocable to such properties that are included in boxes 2 through 13, 18, and 20 of Schedule K-1. Use the amounts reported and the amounts on the attached statement to help you figure the net amount to enter on Form 6251, line 2t.

Enter the information on the statement attached by the partnership on the applicable lines of Form 6251, Form 466, or Schedule I (Form 1041).

Box 18. Tax-Exempt Income and Nondeductible Expenses

Report on your return, as an item of information, your share of the tax-exempt interest received or accrued by the partnership during the year. Individual partners include this amount on Form 1040 or 1040-SR, line 2a. Increase the adjusted basis of your interest in the partnership by this amount.

Increase the adjusted basis of your interest in the partnership by the amount shown, but don't include it in income on your tax return.

The nondeductible expenses paid or incurred by the partnership aren't deductible on your tax return. Decrease the adjusted basis of your interest in the partnership by this amount.

Box 19. Distributions

Code A shows the distributions the partnership made to you of cash and certain marketable securities. The marketable securities are included at their FMVs on the date of distribution (minus your share of the partnership's gain on the securities distributed to you). If the amount shown as code A exceeds the adjusted basis of your partnership interest immediately before the distribution, the excess is treated as gain from the sale or exchange of your partnership interest. Generally, this gain is treated as gain from the sale of a capital asset and should be reported on Form 8949 and the Schedule D for your return. However, if you receive cash or property in exchange for any part of a partnership interest, the amount of the distribution attributable to your share of the partnership's unrealized receivable or inventory items results in ordinary income (see Regulations section 1.751-1(a) and Sale or Exchange of Partnership Interest , earlier). For details, see Form 8308.

The partnership will separately identify both of the following.

The FMVs of the marketable securities when distributed (minus your share of the gain on the securities distributed to you).

The partnership's adjusted basis of those securities immediately before the distribution.

Decrease the adjusted basis of your interest in the partnership (but not below zero) by the amount of cash distributed to you and the partnership's adjusted basis of the distributed securities. Advances or drawings of money or property against your share are treated as current distributions made on the last day of the partnership's tax year.

Your basis in the distributed marketable securities (other than in liquidation of your interest) is the smaller of:

The partnership's adjusted basis in the securities immediately before the distribution increased by any gain recognized on the distribution of the securities, or

The adjusted basis of your partnership interest reduced by any cash distributed in the same transaction and increased by any gain recognized on the distribution of the securities.

If you received the securities in liquidation of your partnership interest, your basis in the marketable securities is equal to the adjusted basis of your partnership interest reduced by any cash distributed in the same transaction and increased by any gain recognized on the distribution of the securities.

If a partner contributed section 704(c) built-in gain property within the last 7 years and the partnership made a distribution of property to that partner other than the previously contributed built-in gain property, the partner may be required to recognize gain under section 737. This gain is in addition to any gain recognized under section 731 on the distribution.

When this occurs, the partnership will enter code B in box 19 of the contributing partner's Schedule K-1 and attach a statement that provides the information the partner needs to figure the recognized gain under section 737. The partnership is required to provide the following information.

The FMV of the distributed property (other than money).

The amount of money received in the distribution.

The net precontribution gain of the partner.

Using the information from the attached statement, complete the worksheet below to figure your recognized gain under section 737.

The type of gain (section 1231 gain, capital gain) generated is determined by the type of gain you would have recognized if you sold the property rather than contributing it to the partnership. Accordingly, report the amount from line 7, above, on Form 4797 or Form 8949 and the Schedule D of your tax return.

Code C. Other property.

Code C shows the partnership's adjusted basis of property other than money immediately before the property was distributed to you. In addition, the partnership should report the adjusted basis and FMV of each property distributed. Decrease the adjusted basis of your interest in the partnership by the amount of your basis in the distributed property. Your basis in the distributed property (other than in liquidation of your interest) is the smaller of:

The partnership's adjusted basis immediately before the distribution, or

The adjusted basis of your partnership interest reduced by any cash distributed in the same transaction.

If you received the property in liquidation of your interest, your basis in the distributed property is equal to the adjusted basis of your partnership interest reduced by any cash distributed in the same transaction.

If you receive cash or property in exchange for any part of a partnership interest, the amount of the distribution attributable to your share of the partnership's unrealized receivable or inventory items results in ordinary income (see Regulations section 1.751-1(a) and Sale or Exchange of Partnership Interest , earlier).

A partner must attach a statement to their return for the tax year of the distribution if either of the following situations is applicable.

If the basis of distributed property in a non-liquidating distribution is different to the recipient partner from the basis the partnership had in the property immediately before the distribution as a result of section 732(a)(2).

If the basis of distributed property in a liquidating distribution is different to the recipient partner from the basis the partnership had in the property immediately before the distribution as a result of section 732(b).

The statement must include the following information.

The name and EIN of the partnership from which a distribution was received.

The computation of the adjustment to the basis of the distributed property or properties.

The allocation of the basis adjustment to the distributed properties in the hands of the partner.

Box 20. Other Information

Report this amount on Form 4952, line 4a.

Report this amount on Form 4952, line 5.

The partnership will report the number of gallons of each fuel sold or used during the tax year for a nontaxable use qualifying for the credit for taxes paid on fuels, type of use, and the applicable credit per gallon. Use this information to complete Form 4136, Credit for Federal Tax Paid on Fuels.

The partnership will report your share of qualified rehabilitation expenditures and other information you need to complete Form 3468 for property not related to rental real estate activities in box 20 using code D. Your share of qualified rehabilitation expenditures related to rental real estate activities is reported in box 15 using code E. See the Instructions for Form 3468 for details. If the partnership is reporting expenditures from more than one activity, the attached statement will separately identify the expenditures from each activity.

If the partnership provides an attached statement for code E, use the information on the statement to complete the applicable energy credit on Form 3468, Part VI. See Part VI—Energy Credit Under Section 48 in the Instructions for Form 3468.

A section 42(j)(5) partnership will report recapture of a low-income housing credit with code F. All other partnerships will report recapture of a low-income housing credit with code G. Keep a separate record of recapture from each of these sources so that you'll be able to correctly figure any recapture of low-income housing credit that may result from the disposition of all or part of your partnership interest. For details, see Form 8611.

The partnership will provide any information you need to figure your recapture tax on Form 4255, Recapture of Investment Credit. See the Form 3468 on which you took the original credit for other information you need to complete Form 4255.

You may also need Form 4255 if you disposed of more than one-third of your interest in a partnership.

On a statement attached to Schedule K-1, the partnership will report any information you need to figure the recapture of the new markets credit (see Form 8874; and Form 8874-B, Notice of Recapture Event for New Markets Credit); any credit for employer-provided childcare facilities and services (see Form 8882); the alternative motor vehicle credit (see section 30B(h)(8)); the alternative fuel vehicle refueling property credit (see section 30C(e)(5)); or the new qualified plug-in electric drive motor vehicle credit (see section 30D(f)(5)).

The partnership will report any information you need to figure the interest due or to be refunded under the look-back method of section 460(b)(2) on certain long-term contracts. Use Form 8697, Interest Computation Under the Look-Back Method for Completed Long-Term Contracts, to report any such interest.

The partnership will report any information you need to figure the interest due or to be refunded under the look-back method of section 167(g)(2) for certain property placed in service after September 13, 1995, and depreciated under the income forecast method. Use Form 8866, Interest Computation Under the Look-Back Method for Property Depreciated Under the Income Forecast Method, to report any such interest.

The partnership will report your share of gain or loss on the sale, exchange, or other disposition of property for which a section 179 expense deduction was passed through to partners with code L. If the partnership passed through a section 179 expense deduction for the property, you must report the gain or loss and any recapture of the section 179 expense deduction for the property on your income tax return (see the Instructions for Form 4797 for details). The partnership will provide all the following information.

Description of the property.

Date the property was acquired and placed in service.

Date of the sale or other disposition of the property.

Your share of the gross sales price or amount realized.

Your share of the cost or other basis plus the expense of sale.

Your share of the depreciation allowed or allowable.

Your share of the section 179 expense deduction (if any) passed through for the property and the partnership's tax year(s) in which the amount was passed through. To figure the amount of depreciation allowed or allowable for Form 4797, line 22, add to the amount from item 6, above, the amount of your share of the section 179 expense deduction, reduced by any unused carryover of the deduction for this property. This amount may be different from the amount of section 179 expense you deducted for the property if your interest in the partnership has changed.

If the disposition is due to a casualty or theft, a statement providing the information you need to complete Form 4684.

If the sale was an installment sale, any information you need to complete Form 6252, Installment Sale Income. The partnership will separately report your share of all payments received for the property in future tax years. See the Form 6252 instructions for details.

The partnership will report your share of any recapture of the section 179 expense deduction if business use of any property for which the section 179 expense deduction was passed through to partners dropped to 50% or less. If this occurs, the partnership must provide the following information.

Your share of the depreciation allowed or allowable (not including the section 179 expense deduction).

Your share of the section 179 expense deduction (if any) passed through for the property and the partnership's tax year(s) in which the amount was passed through. Reduce this amount by the portion, if any, of your unused (carryover) section 179 expense deduction for this property.

For tax years beginning after November 12, 2020, the partnership will report your share of the partnership's deductible BIE for inclusion in the separate loss class for computing any basis limitation (defined in section 704(d) and Regulations section 1.163(j)-6(h)). This information is necessary if your losses are limited under section 704(d). Deductible BIE is reported elsewhere on Schedule K-1 and the total amount is reported here for information only and was already included as a deduction on another line of your Schedule K-1. Included in the code N information is a statement providing the allocation of the BIE already deducted by the partnership by line number on Schedule K-1.

Any EBIE not deductible under section 163(j) will be included in box 13, code K, for inclusion in the basis limitation and isn't reported here. See Worksheet for Adjusting the Basis of a Partner’s Interest in the Partnership for additional information about computing the loss limitation.

The partnership will report any information you need to figure the interest due under section 453(l)(3) with respect to the disposition of certain timeshares and residential lots on the installment method. If you're an individual, report the interest on Schedule 2 (Form 1040), line 14.

The partnership will report any information you need to figure the interest due under section 453A(c) with respect to certain installment sales. See Pub. 537, Installment Sales, for more information on section 453A(c). The information will include the following from each Form 6252 where line 5 is greater than $150,000.

Description of property.

Date acquired.

Date property sold.

Selling price, including mortgages and other debts (not including interest, whether stated or unstated).

Mortgages, debts, and other liabilities the buyer assumed or took the property subject to.

Gross profit.

Contract price.

Gross profit percentage.

Current year payments and deemed payments received during the year, not including interest, whether stated or unstated.

Origination year payments and deemed payments received during the year, not including interest whether stated or unstated.

Prior year payments, not including interest whether stated or unstated.

Installment sale income.

Character of the income—capital or ordinary.

The partnership will report any information you need to figure the interest due under section 1260(b). If the partnership had gain from certain constructive ownership transactions, your tax liability must be increased by the interest charge on any deferral of gain recognition under section 1260(b). Report the interest on Schedule 2 (Form 1040), line 17z. Enter “1260(b)” and the amount of the interest in the space to the left of line 17z. See section 1260(b) for details, including how to figure the interest.

The partnership will report any information you need relating to interest you're required to capitalize under section 263A for production expenditures. See Regulations sections 1.263A-8 through -15 for details.

The partnership will report your share of nonqualified withdrawals from a CCF. These withdrawals are taxed separately from your other gross income at the highest marginal ordinary income or capital gains tax rate. Attach a statement to your federal income tax return to show your computation of both the tax and interest for a nonqualified withdrawal. Include the tax and interest on Schedule 2 (Form 1040), line 17z. In the space to the left of line 17z, enter the amount of tax and interest and “CCF.” See Pub. 595 for details.

This is your share of gross income from the property, your share of production for the tax year, and other information needed to figure your depletion deduction for oil and gas wells. The partnership should also allocate to you a share of the adjusted basis of each partnership oil or gas property. See the 2022 Pub. 535 for details on how to figure your depletion deduction.

The partnership will provide your section 743(b) adjustment, net of cost recovery, by asset grouping. Go to IRS.gov/forms-pubs/clarifications-for-disregarded-entity-reporting-and-section-743b-reporting for more information.

The partnership will report any information you need to figure unrelated business taxable income under section 512(a)(1) (but excluding any modifications required by paragraphs (8) through (15) of section 512(b)) for a partner that's a tax-exempt organization.

If the partnership distributed any property with precontribution gain or loss to any partner other than the contributing partner, and the date of the distribution was within 7 years of the date the property was contributed to the partnership, the contributing partner must recognize a gain or loss under section 704(c)(1)(B). If the partnership made such a distribution during its tax year, it'll enter code W in box 20 of the contributing partner's Schedule K-1 and attach a statement providing the amount of the partner's precontribution gain (loss) and identifying the character of the gain or loss (for example, capital gain (loss) or section 1231 gain (loss)). Report the precontribution gain or loss on Form 8949 and/or Schedule D (Form 1040) or Form 4797 in accordance with the information provided by the partnership.

If a partnership has checked the box in item K3, this indicates that you or a person related to you has a payment obligation with respect to the partnership's liabilities. The attached statement for box 20, code X, reflects the ending balance of each payment obligation that was included in the aggregate amount reported in box 20 under code X. For purposes of box 20, code X, a payment obligation is defined as an obligation under Regulations section 1.752-2(b)(1) that is recognized under Regulations sections 1.752-2(b)(3)(i)(A) and (B) (such as a recognized guarantee or an obligation to restore a deficit capital account upon liquidation) and a related person is defined as a related person as defined in Regulations section 1.752-4(b).

The partnership may use this code Y to report information you may need to determine your NIIT under section 1411 that isn't reported elsewhere on the Schedule K-1 or K-3. Code Y is used to report information not provided elsewhere on Schedule K-3 (or an attachment) regarding income from CFCs and passive foreign investment companies (PFICs) the stock of which is owned by the partnership. For CFCs and PFICs that you treat as qualified electing funds (QEFs), the information that's relevant to you will depend on whether you, the partnership, or a lower-tier entity has made an election under Regulations section 1.1411-10(g) with respect to the CFC or QEF. For example, if the partnership made an election under Regulations section 1.1411-10(g) for a CFC the stock of which is owned by the partnership, and the relevant income and deduction items derived from that CFC are reported elsewhere on the Schedule K-3, then you won't need the information provided in code Y to complete your Form 8960.

If you're an individual who is a U.S. citizen or resident, or a domestic trust or estate, follow the Instructions for Form 8960 to figure and report your NII and AGI or MAGI. Corporate partners aren't subject to the NIIT. See Regulations sections 1.1411-1 through -10 for details.

Code Z. Section 199A information.

Generally, you may be allowed a deduction of up to 20% of your net qualified business income (QBI) plus 20% of your qualified REIT dividends, also known as section 199A dividends, and qualified PTP income from your partnership. The partnership will provide the information you need to figure your deduction. Use one of these forms to figure your QBI deduction.

Use Form 8995, Qualified Business Income Deduction Simplified Computation, if all of the following apply.

You have QBI, section 199A dividends, or PTP income (defined below).

Your 2023 taxable income before the QBI deduction is equal to or less than $182,100 ($364,200 if married filing jointly).

You aren’t a patron in a specified agricultural or horticultural cooperative.

Use Form 8995-A, Qualified Business Income Deduction, if you don't meet all three of the above requirements.

The amounts reported to you reflect your distributive share of items from the partnership’s trade(s), business(es), or aggregation(s), and may include items that aren't includible in your calculation of the QBI deduction. When determining QBI or qualified PTP income, you must include only those items that are qualified items of income, gain, deduction, and loss included or allowed in determining taxable income for the tax year. To determine your QBI or your qualified PTP income amounts and for information on where to report them, see the instructions for Form 8995 or 8995-A, as appropriate.

The amounts reported reflect your distributive share of the partnership’s W-2 wages allocable to the QBI of each qualified trade, business, or aggregation. See the instructions for Form 8995 or 8995-A, as appropriate.

The amounts reported reflect your distributive share of the partnership’s UBIA of qualified property of each qualified trade, business, or aggregation. See the instructions for Form 8995 or 8995-A, as applicable.

The amount reported reflects your distributive share of the partnership's net section 199A dividends. See the instructions for Form 8995 or 8995-A, as applicable.

If the partnership was a patron of an agricultural or horticultural cooperative (specified cooperative), you must use Form 8995-A to figure your QBI deduction. You must also complete Schedule D (Form 8995-A), Special Rules for Patrons of Agricultural or Horticultural Cooperatives, to determine your patron reduction.

The amounts reported to you reflect your distributive share of items from the partnership’s trade(s), business(es), or aggregation(s), and include items that may not be includible in your calculation of the QBI deduction and patron reduction. When determining QBI items allocable to qualified payments, you must include only qualified items that are included or allowed in determining taxable income for the tax year. To determine your QBI items allocable to qualified payments, see the Instructions for Form 8995-A.

The amounts reported reflect your distributive share of the partnership's W-2 wages allocable to the qualified payments of each qualified trade, business, or aggregation. See the Instructions for Form 8995-A.

The amount reported reflects your distributive share of the partnership’s net section 199A(g) deduction. See the Instructions for Form 8995-A.

The partnership will show the portion of income or deduction items allocated to you under section 704(c). These items are included elsewhere in other income or deduction items on Schedule K-1.

This code is used to report the partner's share of gain or loss on the sale of the partnership interest subject to taxation at ordinary income tax rates.

Information reported for codes AB, AC, and AD may also have been reported to you on Form 8308. In addition, for foreign transferors, the information for code AB must also have been reported to you on Schedule K-3, Part XIII. See the Partner’s Instructions for Schedule K-3 (Form 1065). Even if this information is required to be reported on multiple forms, it must only be reported on the partner’s tax return once.

This code is used to report the partner’s share of gain or loss on the sale of the partnership interest subject to taxation at the rate for collectible assets as defined in section 1(h)(5).

This code is used to report the partner’s share of gain or loss on the sale of the partnership interest subject to taxation at the rate for unrecaptured section 1250 gain assets as defined in section 1(h)(6).

If the partnership was required to file Form 8990, it may determine it has excess taxable income. Report the amount of excess taxable income on Form 8990, Schedule A, line 43, column (f), if you're required to file Form 8990. See the Instructions for Form 8990 for additional information.

If the partnership is required to file Form 8990, it may determine it has EBIE. Enter the amount of EBIE on Form 8990, Schedule A, line 43, column (g), if you're required to file Form 8990. See the Instructions for Form 8990 for additional information.

Regulations section 1.163(j)-2(d)(2)(iii) requires that partners in a partnership include a share of partnership gross receipts in proportion to their share of gross income under section 703 (unless the partnership is treated as one person under the aggregation rules of section 448(c)). Partnerships with current year gross receipts (defined in Regulations section 1.448-1T(f)(2)(iv)) greater than $5 million are required to report to their partners their distributive shares of current year gross receipts, as well as their distributive shares of gross receipts for the 3 immediately preceding tax years. If a partnership and a partner are treated as a single employer under the section 448(c) aggregation rules, and the partnership has current year gross receipts greater than $5 million, then the partnership should also report its total current year gross receipts, as well as its total gross receipts for the 3 immediately preceding tax years, to that partner. See IRS.gov/newsroom/faqs-regarding-the-aggregation-rules-under-section-448c2–that-apply-to-the-section-163j-small-business-exemption .

If a partner needs gross receipts information from a partnership in order to figure the gross receipts test under section 448(c), and the partnership didn't report gross receipts on the Schedule K-1, the partner should request this information from the partnership.

If the partnership made a noncash charitable contribution, your share of the partnership’s adjusted basis in the property is limited to basis and is reported here. Additionally, your share of the excess of the FMV over the adjusted basis of noncash and capital gain property contributions is reported here.

Interest and additional tax on compensation deferred under a section 409A nonqualified deferred compensation plan that doesn't meet the requirements of section 409A. See section 409A(a)(1)(B) to figure the interest and additional tax on this income. Report this interest and tax on Schedule 2 (Form 1040), line 17h. This income is included in the amount in either box 4a or box 4b.

If the partnership has deductions attributable to a business activity, it'll provide a statement showing your distributive share of the aggregate gross income or gain, and aggregate deductions, from the business activity of all of the partnership's trades or businesses. You can use this to figure any excess business loss limitation that may apply. See section 461(l) and Form 461 and its instructions for details.

If a partnership is a trader in securities, commodities, or both, and has properly elected under section 475(f) to mark to market the securities, the commodities, or both, the partnership reports ordinary gain or loss from the securities or commodities (or both securities and commodities) trading activities separately from any other ordinary gain or loss.

If the partnership is a section 721(c) partnership, the partnership should include the amounts relating to any remedial items made under the remedial allocation method (described in Regulations sections 1.704-3(d) and 1.704-3(d)(5)(iii)) with respect to section 721(c) property allocable to each partner. The partnership will include a separate code AL for the total remedial income, if any, allocated to the U.S. transferor; total gain recognized due to an acceleration event; or total gain recognized due to a section 367 transfer reflected on Schedule G (Form 8865), Part II, columns (c), (d), and (e), respectively. Only the amount of the total remedial income allocated to the U.S. transferor will be included in box 1 of Schedule K-1, Part III. Any recognized gain due to an acceleration event or section 367 transfer must be separately reported by the U.S. transferor on its own federal income tax return. For all other partners of the section 721(c) partnership, a separate code AL is used to provide the remedial items allocated to that partner relating to section 721(c) property that was taken into account to determine box 1 of Schedule K-1, Part III. See Regulations sections 1.721(c)-3 and 1.721(c)-6.

The partnership will furnish to the partners any information needed to figure their capital gains with respect to an applicable partnership interest. See Section 1061 Reporting Instructions in Pub. 541.

If the partnership is involved in a farming or fishing business, it will report your distributive share of gross income and gains, as well as the losses and deductions attributable to such business activities. See section 1301.

Any information a PTP needs to determine whether it meets the 90% qualifying income test of section 7704(c)(2).

The partnership will provide a statement showing the amounts of each type of income or gain that's included in inversion gain. The partnership has included inversion gain in income elsewhere on Schedule K-1. Inversion gain is also reported under code AP because your taxable income and alternative minimum taxable income can't be less than the inversion gain. Also, your inversion gain (a) isn't taken into account in figuring the net operating loss (NOL) for the tax year or the NOL that can be carried over to each tax year, (b) may limit your credits, and (c) is treated as income from sources within the United States for the foreign tax credit. See section 7874 for details.

Individuals who received social security retirement or disability benefits, and are partners in farm partnerships that receive conservation reserve program payments, don't pay self-employment tax on their portion of the payments. The partnership will report your portion of the conservation reserve program payments in box 20 using code AQ. See Schedule SE (Form 1040) for information on excluding the payment from your calculation of self-employment tax.

If the partnership reported an amount in box 20, code V, the partnership also reported an IRA partner's unique EIN in box 20, code AR. See the Instructions for Form 990-T; and Pub. 598, Tax on Unrelated Business Income of Exempt Organizations.

Use the amounts the partnership provides you to figure the amounts to report on Form 3468, Part II.

Use the amount the partnership provides you to figure the amount to report on Form 3468, Part III.

Use the amount the partnership provides you to figure the amount to report on Form 3468, Part IV.

Any information you need to complete a disclosure statement for reportable transactions in which the partnership participates. If the partnership participates in a transaction that must be disclosed on Form 8886, Reportable Transaction Disclosure Statement, both you and the partnership may be required to file Form 8886 for the transaction. The determination of whether you're required to disclose a transaction of the partnership is based on the category(ies) under which the transaction qualifies for disclosure and is determined by you and the partnership. You may have to pay a penalty if you're required to file Form 8886 and don't do so. See the Instructions for Form 8886 for details.

The information needed to complete Form 8990, Schedule A, for foreign partners which are required to report their allocable share of EBIE, excess taxable income, and excess business interest income, if any, that's attributable to income effectively connected with a U.S. trade or business. When required, the partnership will make this report on an attached statement to partners that are a foreign corporation or a nonresident alien or partners that are a partnership (domestic or foreign) in which the reporting partnership knows, or has a reason to know, that one or more of the partners is a foreign corporation or nonresident alien.

Any other information you may need to file your return not shown elsewhere on Schedule K-1.

Foreign taxes paid or accrued reduce a partner's basis and are limited to basis. Don't use this amount to complete your Form 1116, Foreign Tax Credit; or Form 1118, Foreign Tax Credit—Corporations. See Schedule K-3 to complete your Form 1116 or 1118.

When the partnership has more than one activity for at-risk purposes, it'll check this box and attach a statement. Use the information in the attached statement to correctly figure your at-risk limitation. For more information, see the discussion under At-Risk Limitations , earlier.

When the partnership has more than one activity for passive activity purposes, it'll check this box and attach a statement. Use the information in the attached statement to correctly figure your passive activity limitation. For more information, see the discussion under Passive Activity Limitations , earlier.

List of Codes and References Used in Schedule K-1 (Form 1065)

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Internal Revenue

Sale of Interest in Trust; Negative Capital Accounts; Final Regs on Transfer for Value

First, the IRS has issued private letter rulings deeming an income taxable sale when a trustee commuted a trust. We will review the rules on whether changes to a trust will trigger income tax consequences.

Next, the IRS has started requiring partnerships to report “tax basis” capital accounts, presumably with an eye toward scrutinizing “negative basis.” “Negative basis” is the colloquial description where liabilities allocated to one’s partnership interest exceed basis, so that the disposition would be subject to income tax; and the IRS may be seeing whether those are ripe for current taxation. We will briefly review the reporting and the income tax planning.

Finally, on Halloween final regulations were issued rewriting the rules of when a transfer of a life insurance policy will cause the death benefit to be subject to income tax. We will go through the basics of the new rules.

You will learn:

  • What are the consequences when a modification or other change to a trust trigger income tax.
  • Which modifications or other changes to trusts definitely avoid income tax, which definitely trigger income tax, and what is uncertain.
  • Strategy to minimize any adverse income tax consequences of a modification or other change to a trust.
  • What reporting of “tax basis” capital accounts is required.
  • Basic income tax planning for partnership interests with liabilities in excess of basis.
  • When a transfer of a policy will trigger income taxation of its death benefit, including changes arising from 2017 tax reform and changes to the rules that apply even if 2017 tax reform does not apply.
  • How to cleanse a policy of this taint.

CLE The live presentation of this webinar was approved for 1.5 hours of general CLE credit in California and Illinois and 1.8 hours of general CLE credit in Missouri. CLE credit is no longer available for this recording.

Presenter: Steve Gorin

*Please note that this is a 90-minute webinar

For technical materials supporting the slides, see Steve's newsletter .

Steve's current materials, Structuring Ownership of Privately-Owned Businesses: Tax and Estate Planning Implications, are available by emailing [email protected] .

Originally Presented: January 28, 2020

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transfer of partnership interest with negative capital account

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News, Articles & Resources

New reporting for partner negative capital account balances.

  • Tax Planning & Compliance

New Reporting for Partner Negative Capital Account Balances

Partners and members of an LLC taxed as a partnership will often have negative or deficit capital account balances at the end of a taxable year. A negative capital account balance is permissible if supported by proper allocation of partnership debt (or an obligation to restore a deficit). The new instructions to Item L on form 1065 suggest that the Service is going to be looking at partnership returns where partners have negative capital account balances. Their interest would be, and should be, to see that there is a proper allocation of partnership debt to support the deficit capital account since that amount represents future income or gain of the partnership that the partner will likely recognize.  The actual target of the new instruction is a partnership return where capital account balances are reported on other than a tax basis, since that reporting may show a positive capital account balance for a partner who actually has a deficit balance if reported on tax basis.

There is really no change to the form itself.  Rather, the change appears in the specific instructions for Item L “Partners Capital Account Analysis” on page 30 of the instructions.

The instructions add that if a partnership reports capital accounts on other than the tax basis (for example GAAP or Section 704(b) book basis) and the partners’ tax basis capital accounts at the beginning or end of the year are negative, the partnership must report on line 20 of schedule K-1, using code AH each such partner’s beginning and ending share of tax basis capital.

In other words, the Service wants to know on a tax basis if a partner has a negative capital account balance.  If the partnership is already reporting capital account balances on the tax basis, the return will show that. If the partnership reports capital accounts on any other basis, the capital account may not show as negative on the return even though the tax basis capital accounts are negative. This is what the service wants to know.

Be aware of the new rules because there are penalties for failure to properly file under IRC Section 6698(a)(2).

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Determining the Basis of a Limited Partnership With a Negative Capital Account

  • Small Business
  • Business Models & Organizational Structure
  • Limited Liability Partnerships
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What Is the Decrease in Share of Partnership Liabilities?

Risk of deficit restoration obligations in a partnership agreement, accounting difference for a partnership & corporation.

  • Accounting for Acquisition of Ownership Interest in a Limited Partnership
  • The Differences Between an S Corporation Shareholder Basis and a Partnership

When you form a small business by creating a partnership, you and your partners contribute assets to the new company. This is the basis for each partner’s interest in the company. Each partner forms a capital account that represents the contribution to the partnership. Over the life of the business, if a partner makes withdrawals from the company in excess of the amount in her capital account, that partner has a negative capital account. This does not affect the partner's basis.

Limited Partnership: Starting Basis

According to the IRS , each partner’s basis in a limited partnership is derived from the cash, services and property contributed when the partnership was formed. If any of the property has been depreciated before it is contributed, the book value becomes the basis for that property. Book value is the original price minus the depreciation. A partner may contribute services in exchange for a partnership interest. The partnership must assign a value to those services when the partnership is formed.

Assumption of Mortgage on Property

NOLO reports that a limited partner cannot be held liable fore more than their basis in the partnership. However, this does not mean that their capital account is unaffected by what happens in the business. If the partnership pays the mortgage on a piece of real estate that a single partner contributed, the contributing partner’s basis in the partnership is decreased by the mortgage payment. This principle would apply to outstanding balances owed on equipment or vehicles as well. The contributing partner’s capital account would be reduced by the amount paid by the partnership on the property.

Withdrawals and Payments to Partners

In the event a partner has withdrawn assets over the life of the company, those withdrawals are deducted from the capital account. However, that partner’s original basis in the partnership is not reduced as these deductions are made. That is, the partner still receives income in proportion to her original basis in the company, even though the capital account is negative.

Recapture of Negative Capital Account

Sale of partnership interest with negative capital account balances can get a little sticky. Upon termination of the partnership, the partner with a negative capital account must pay back or restore the amount owed to the partnership. This must be done by the end of the year in which the partnership is terminated or within 90 days of the termination, whichever is later. The partner with the negative account keeps the same basis in the partnership as he originally had when the partnership was formed. This indicates that this partner would receive final distributions in proportion to the original basis. The distributions can be used to pay back the debt to the partnership.

  • IRS: Partner's Outside Basis
  • NOLO: Limited Partnerships and Limited Liability Partnerships

Kevin Johnston writes for Ameriprise Financial, the Rutgers University MBA Program and Evan Carmichael. He has written about business, marketing, finance, sales and investing for publications such as "The New York Daily News," "Business Age" and "Nation's Business." He is an instructional designer with credits for companies such as ADP, Standard and Poor's and Bank of America.

Related Articles

The tax effects of a liquidation of a partnership, how to calculate each partner's tax basis, s-corporations & partnership interest, tax basis for partnership interest, negative equity from a sole proprietor to a partnership, what does it mean to dissolve a general partnership, how to claim 1065 distributions, accounting methods available to partnerships, a guide to preparing general partnership financial statements, most popular.

  • 1 The Tax Effects of a Liquidation of a Partnership
  • 2 How to Calculate Each Partner's Tax Basis
  • 3 S-Corporations & Partnership Interest
  • 4 Tax Basis for Partnership Interest

ProConnect Help

Transferring Capital Due to a Change in Ownership for a Partnership

If you are preparing a Partnership (1065) return where a partner has left the organization and you want to show a zero balance for their ending capital account on the K-1:

In Screen 28, Schedule M-2 (Capital Account) , follow the steps below:

  • Hold down Ctrl+E in,  Other increases (+) (Ctrl+E)
  • Enter a Description. Note:   A Description is required to specially allocate the amount to partners (discussed later).
  • Enter the Amount. Tip:  If you are trying to zero out the ending capital account for a departing partner, this amount should be equal to the ending capital account balance on the Partner's K-1.
  • Hold down Ctrl+E in,  Other decreases (+) (Ctrl+E) .
  • Enter a Description . Note:  A Description is required to specially allocate the amount to partners (discussed later).

Next, follow the steps below in Screen 29, Special Allocations :

  • Select on the + next to the Capital Account folder from the left navigation panel
  • Select on the + next to the Other increases folder from the left navigation panel
  • Select on the Description from the left navigation panel (this should be the Description you entered on Screen 28)
  • Allocate the increases to the Partners receiving the capital under the Allocation Amount column After you've allocated the full amount of "Other increases" to the existing partners, continue to the next step.
  • Select on the + next to the Other decreases folder from the left navigation panel
  • Select on the Description from the left navigation panel (this should be the Description you entered on Screen 28).
  • Allocate the decreases to the Partners selling/departing under the Allocation Amount column Tip:   The full amount of decreases should be entered for a departing partner.

The departing partner's capital account on Form K-1 should reflect "0.00" and the remaining partner's capital account should increase by the amount entered on Screen 29, Special Allocation .

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Accounting for the Death of a Partner

  • Partnership & LLC Taxation
  • Individual Income Taxation

The death of a partner can have many federal income tax implications for the partnership, the partner's heirs, the partner's estate, and the partner's final income tax return. This column reviews the income tax rules that come into play upon a partner's death. Using these rules as background, both premortem and postmortem planning will be reviewed.

Determining the Effect on the Partnership Tax Year

The tax year of the partnership closes for a partner whose entire interest in the partnership is terminated for any reason, including death, sale, exchange, or liquidation (Sec. 706(c)(2)).

Example 1: G was a minority partner in Q Partnership, a cash - method , calendar - year partnership. She died on Sept. 1. The distributive share of partnership income allocable to G' s interest through the date of death was $80,000; for the entire year, it was $120,000.

G' s death causes the partnership year to close with respect to her interest. Accordingly, $80,000 of income is included in G' s final income tax return, and the remaining $40,000 of income for the year is reported by the successor(s) in interest to G' s partnership interest. The $80,000 allocable to G also would constitute self - employment income reportable on G' s final return.

Allocating Distributive Shares of Partnership Income/Loss in the Year of Death

A decedent partner's distributive share of partnership income or loss will be reported on the decedent's final tax return, and the distributive share for the portion of the year during which the interest was owned by the decedent's successor(s) in interest would be reported by the successor(s) in the same manner as in the case of other transfers of partnership interests.

Computing Self-Employment Income in Year of Death

A decedent's self - employment income attributable to his or her share of partnership income for the year of death will be determined on the same basis as for years prior to death, i.e., based on the decedent's status as a partner (general or limited, etc.) and the character of the income.

Determining Income in Respect of a Decedent

The determination of income in respect of a decedent (IRD) can have significant estate tax and income tax implications for the decedent's estate and successor in interest. In general, IRD is income that was earned by the decedent but was not subject to income tax prior to the decedent's death (Sec. 691). More specifically, IRD includes the following types of partnership income:

  • Income earned by the partnership but not recognized for tax purposes as of the date of the partner's death because of the partnership's accounting methods (such as installment sale income and cash-method receivables), regardless of whether it was earned in the year of the partner's death ( Woodhall , 454 F.2d 226 (9th Cir. 1972); George Edward Quick Trust ,444 F.2d 90(8th Cir. 1971)).
  • Sec. 736(a) payments included in the income of a successor in interest to a deceased partner (Sec. 753).

Items constituting IRD are included in the estate of the decedent as assets and are subject to income tax when received by the estate or other successor in interest.

Example 2:  G was minority general partner in Q Partnership, a cash - method , calendar - year partnership. She died on Sept. 1, when her distributive share of partnership income was $80,000. The distributive share of income for the entire year that was allocable to her interest was $120,000. G' s spouse was designated as her successor in interest, and there was no provision for liquidation of her interest.

The partnership year closes for G on her date of death, so the $80,000 would be includible in G' s final return and would not be IRD. The remaining $40,000 distributive share of income from the year of G' s death would be reported to her husband. Her share of any accounts receivable held by the partnership at the date of her death would be IRD and would be reported as income by G' s spouse when collected by the partnership.

Using Buy/Sell Agreements

Service partnerships, such as law firms and accounting firms, often prohibit the interests of deceased partners from being transferred to anyone but an existing partner. To ensure this result, the remaining partners (as opposed to the partnership itself) may be required to acquire the interest from the decedent's estate immediately after his or her death. Similar buy/sell agreements may be entered into by partners in partnerships engaged in other types of businesses to provide a market for a deceased partner's interest or ensure the remaining partners can purchase a deceased partner's interest for a price agreed upon by the partners at some earlier point in time.

In such cases, the partnership's tax year ends with respect to the deceased partner on his or her date of death, and he or she is allocated his or her ratable share of the partnership's income for the portion of the tax year occurring prior to that date. The annual proration or interim closing of the books method can be used to determine the amount of such income required to be reported on the decedent's final tax return.

Note: Because the partnership interest must be included in the decedent's gross estate at fair market value (FMV), a buy/sell agreement that results in the sale of the partnership interest for less than FMV may cause the deceased partner's successor in interest (e.g., his or her estate) to receive an amount of cash that is less than the estate tax assessed on the transferred interest.

A purchase under the terms of a buy/sell agreement can also cause a technical termination of the partnership and a closing of the partnership's tax year with respect to all partners. A technical termination occurs if the deceased partner owned at least a 50% interest in the capital and profits of the partnership (Sec. 708(b)(1)(B)). A technical termination of the partnership also occurs on the decedent partner's date of death if the purchase of the deceased partner's interest along with transfers of other interests during the 12 - month period immediately before the partner's death aggregate to 50% or more of total interests in partnership capital and profits. When a technical termination occurs, the partnership's tax year closes for all partners on the date the terminating event takes place (Regs. Sec. 1. 708 - 1 (b)(3)(ii)). Accordingly, the partnership's tax year closes for all partners on the date of death.

Death of a Partner in a Two-Person Partnership

The death of a partner in a two - person partnership will terminate the partnership for federal tax purposes if it results in the partnership's immediately winding up its business (Sec. 708(b)(1)(A)). If this occurs, the partnership's tax year closes on the partner's date of death. Similarly, the death of a partner in a two - person partnership generally will cause the technical termination of the partnership under Rev. Rul. 99 - 6 . The regulations, however, provide two exceptions that prevent an immediate termination of the partnership of a two - person partnership upon a partner's death.

A two - person partnership does not terminate upon a partner's death if the deceased partner's successor in interest (usually the estate) continues to share in the partnership's profits or losses (Regs. Sec. 1. 708 - 1 (b)(1)(I)). The partnership's tax year does not close, and the partner's distributive share of partnership income from the date of death through the end of the partnership tax year is reported on the tax return of the successor in interest (Regs. Sec. 1. 706 - 1 (a)). Likewise, if a partnership begins or continues to make liquidating payments to a deceased partner's successor in interest under the provisions of Sec. 736, the successor in interest is treated as a partner until the deceased partner's interest in the partnership has been completely liquidated (Regs. Sec. 1. 736 - 1 (a)(1)(ii)). In a two - person partnership, the partnership does not terminate, nor does the partnership year end (other than the partnership's normal tax year), until the final liquidating payment is made to the successor in interest (Regs. Sec. 1. 736 - 1 (a)(6)).

If the clients wish to continue a two - partner partnership after a partner's death, the practitioner should consider making the following recommendations to ensure continuation:

  • The operating agreement or the liquidation agreement should indicate the interest of the deceased partner is to be retired by a series of liquidating payments made by the partnership. Ideally, the agreement should state the payments are made under Sec. 736.
  • When the interest is retired, the partnership books should reflect the elimination of the deceased partner's interest in capital and the establishment of a payable to the partner's successor in interest. All subsequent payments made to retire the interest should reduce the payable.
  • Partnership tax returns should be filed as long as payments are being made to the deceased partner's successor in interest.
  • All payments for the deceased partner's interest in the partnership should be made from the partnership's business account and not from the remaining partner's personal account.

Partnership Ceases to Do Business on Date of Death

A partnership is terminated for tax purposes if all of its business activities are discontinued (Sec. 708(b)(1)(A)). It is possible that a partner's death could cause business activities of a partnership to cease, thereby causing the partnership's immediate termination. For example, assume a partnership is in the business of providing a service. The partnership has one partner who provides the service and a number of partners who do not participate in providing services but are investors. If the service provider dies, the partnership's business activities would probably cease on the date of death. Accordingly, the partnership's tax year would close, and the distributive share of partnership income earned by the decedent through the date of death would be reported on his or her final income tax return.

As a general rule, however, the cessation of a partnership's business activities and the resulting termination of the partnership for tax purposes are not considered to occur until all the partnership's assets have been distributed to the partners. In Sargent , T.C. Memo. 1970 - 214 , the courts held that the process of winding up is considered part of an entity's business. Consequently, if the partnership continues to pay its creditors or make distributions to the remaining partners after the date of the service provider's death, the partnership would not terminate until the winding - up activities were complete.

Distribution of Partnership Interest to Estate's Beneficiary

Under trust and estate tax law, the transfer of property to satisfy a pecuniary bequest (i.e., one in which a specific monetary amount rather than specific property is left to a particular heir) is treated as a distribution of the property from the estate to the heir. Under Sec. 761(e), the distribution of a partnership interest is treated as a deemed sale or exchange of the interest for purposes of Sec. 708(b)(1)(B) (the technical termination rules). Therefore, the distribution of a partnership interest representing 50% or more of partnership capital and profits (or resulting in the transfer of 50% or more of the interests in partnership capital and profits when combined with other sales or exchanges that occur within a 12 - month period) to satisfy a pecuniary bequest terminates the partnership under the Sec. 708 rules (Regs. Secs. 1.661(a)- 2 (f) and 1. 1014 - 4 (a)(3)).

Preparation pointer: A specific bequest of a partnership interest to a particular heir does not cause a termination of the partnership because the transfer from the estate to the beneficiary is not treated as a distribution of the interest for estate tax purposes (Sec. 663(a)(1) and Regs. Secs. 1.663(a)- 1 (b)(2)).

When an estate distributes a partnership interest to a beneficiary, the beneficiary generally reports all income or loss for the entire partnership tax year of distribution—provided the distribution satisfies a specific bequest. However, if the distribution satisfies a pecuniary (i.e., a monetary) bequest, the partnership's tax year closes with respect to the estate (or with respect to all partners if the distribution triggers a technical termination) on the date of the distribution, because the distribution to satisfy the pecuniary bequest is deemed to be a sale or exchange of the distributed interest. As a result, the partnership must allocate the year's income or loss between the estate and the beneficiary.

Practitioners who have clients holding substantial interests in partnerships should consider whether it is more desirable for the estate or the beneficiary to report the successor's share of income in the year of death when performing estate planning services for the client. The clients can then address whether the transfer of the passthrough interest should be by specific or pecuniary bequest.

Treatment of Suspended Losses Upon Partner's Death

A taxpayer holding a partnership interest on his or her date of death may have been allocated partnership losses in prior years that were not deductible because of a limitation imposed by the tax laws. Losses may have been disallowed under the at - risk rules, the passive loss rules, or because the partner had insufficient basis in the partnership interest to deduct the loss. Such losses are generally carried over by the partner to subsequent tax years until some event triggers their deductibility. Upon the death of the partner, however, the treatment of those losses is not always as clear.

Losses Suspended Due to Basis Limitation

If a partner has suspended partnership losses at his or her date of death due to the basis limitation rule of Sec. 704(d), those losses should be deductible on the decedent's final return to the extent the partner's tax basis in the partnership interest increased before his or her death (e.g., if the partner made capital contributions). It appears, however, that any remaining losses suspended under these rules disappear. Although not specifically addressed in the Code or regulations, the treatment of those suspended losses upon a partner's death should be similar to their treatment upon a taxable disposition of the partnership interest. A taxable disposition does not enable the transferring member to deduct losses suspended due to lack of basis. Also, there is no carryover of the suspended loss to the transferee partner.

Because the partner's basis has not been reduced by the suspended losses, the loss is essentially recognized in the form of a decrease in the amount of gain (or increase in the amount of loss) recognized on the transaction. Upon the partner's death, the basis of the partner's interest is stepped up to FMV on the date of death (or alternate valuation date, if elected). Based on the rationale that applies to suspended losses upon a taxable disposition, it appears there is no carryover of the suspended loss to the estate or other successor in interest.

Losses Suspended Due to At-Risk Limitations

When a partner dies owning an at - risk activity with suspended losses through a partnership, the treatment of the suspended losses is not clearly spelled out in the regulations. As with losses suspended under the basis limitation rules, at - risk suspended losses should be deductible on the decedent's final return to the extent the partner's amount at risk increased during the portion of the tax year preceding his or her death. However, since at - risk losses are treated as personal to the transferor under Prop. Regs. Sec. 1. 465 - 67 (b), it appears that any remaining suspended at - risk losses "disappear" upon the partner's death.

The regulations do, however, address the calculation of the successor partner's amount at risk (Prop. Regs. Sec. 1. 465 - 69 ). A partner who inherits an interest in an at - risk activity receives an increase in at - risk basis for the positive at - risk basis of the decedent. In addition, the successor in interest receives a step - up in at - risk basis equal to the amount of the step - up to FMV (if any) at the date of death (or alternate valuation date) under Sec. 1014.

Losses Suspended Due to Passive Loss Rules

If partnership losses have not been deducted solely by reason of the passive activity limitations, a casual glance at the rules might suggest that the complete disposition of the partner's interest at death would cause the suspended losses to be deductible on the partner's final Form 1040, U.S. Individual Income Tax Return . If the decedent has passive income on his or her final Form 1040, suspended losses can be used to offset that income. However, any remaining suspended passive activity losses are deductible only to the extent they exceed the difference between the stepped - up basis of the partnership interest in the hands of the successor in interest and the basis of the partnership interest in the hands of the deceased partner (Sec. 469(g)(2)). To the extent the suspended losses do not exceed this difference, they are never allowed as a deduction. In essence, they simply disappear.

Sec. 754 Election to Step Up Basis of Partnership Assets

Sec. 754 provides an election to adjust the inside bases of partnership assets pursuant to Sec. 743(b) upon the transfer of a partnership interest caused by a partner's death. A Sec. 754 election can also be made when a member's interest is sold or upon certain distributions of partnership assets. A basis adjustment is made to eliminate the discrepancy between the outside basis of the partnership interest after its step - up (or step - down ) to FMV and the successor in interest's share of the partnership's inside basis in its assets. (A partner's interest in a partnership's inside basis is based on a calculation of "previously taxed capital.") The adjustment benefits only the deceased partner's successor in interest.

To adjust the bases of the underlying assets under Sec. 743(b), the partnership must have a Sec. 754 election in effect or must make the election for the year that includes the deceased partner's date of death. A basis adjustment is required for a transferred partnership interest (including transfers upon the death of a partner) if the partnership has a substantial built - in loss immediately after the transfer (unless the partnership is an electing investment partnership or a securitization partnership). A partnership has a substantial built - in loss if the partnership's adjusted basis in partnership property exceeds the FMV of that property by more than $250,000 (Secs. 743(a) and (d)).

This case study has been adapted from PPC's Guide to Tax Planning for Partnerships , 29th edition, by William D. Klein, Sara S. McMurrian, Linda A. Markwood, Cynthia Zatopek, Sheila A. Owen, and M. Andrew Vance. Published by Thomson Reuters/Tax & Accounting, Carrollton, Texas, 2015 (800-431-9025; tax.thomsonreuters.com ).

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transfer of partnership interest with negative capital account

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transfer of partnership interest with negative capital account

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  4. Partnership Liquidation Partner Pays Partnership for Negative Capital Account 50

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  5. What are the methods of maintaining Partners Capital Account Class 12

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    transfer of partnership interest with negative capital account

VIDEO

  1. Fundamentals of Partnership

  2. The Zone Of Interest (spoiler free review): Switching Perspectives

  3. Interest on Capital

  4. Problem-2 : Conversion of Partnership firm into a Limited Company

  5. Interest On Capital. class -12th. (Question Number

  6. PARTNERSHIP |INTEREST ON CAPITAL|CALCULATION OF SALARY| BONUS| COMMISSION|part 2

COMMENTS

  1. PDF IRS provides Form 1065 FAQs, negative capital account reporting

    A and B are each allocated $50 of the taxable income and $25 of the tax-exempt income by the partnership. At the end of Year 1, A's tax basis capital account is increased by $75, to $175, and B's tax basis capital account is increased by $75, to $105. Example 4: The facts are the same as in Example 3. Additionally, in Year 2, the ...

  2. Partnership Tax Complications: Navigating Negative Capital Accounts and

    A negative capital account can be problematic for a couple of reasons: If any members of a partnership have a negative capital account, that partner is legally obligated to restore their deficit, also known as a DRO (deficit restoration obligation). The reasoning behind a DRO is that if an event happens to impact the state of the partnership ...

  3. Tax Issues to Consider When a Partnership Interest is Transferred

    Example - Partner A, an individual, transfers his 55% partnership interest to Corporation D, a C corporation with a year-end of June 30. Prior to the transfer, the partnership had a calendar year-end. As a result of the transfer, the partnership will be required to change its tax year to June 30 because Corporation D now owns the majority ...

  4. Publication 541 (03/2022), Partnerships

    The FMV of an interest in partnership capital transferred to a partner as payment for services to the partnership is a guaranteed payment, ... While each partner has increased his capital account by $1,000, which will be reflected in the partnership's books, the adjusted basis of Enzo's interest is only $400 and the adjusted basis of his ...

  5. IRS Changes Deficit Restoration Obligation Rules for Partnerships

    The IRS and Treasury issued final regulations on October 4, 2019, that changed the rules on deficit restoration obligations. In short, the regulations address when a partner can, or cannot, disregard the obligation to restore their deficit balance in a capital account. In particular, the regulations discuss how bottom dollar payment obligations ...

  6. Gifts of Partnership Interests

    Gain recognition usually occurs when the partner has a negative tax basis capital account. Some of this gain may be ordinary, depending on whether the hot asset rules of Sec. 751 apply. ... Any transfer of an interest in a partnership to a family member is subject to the family partnership rules of Sec. 704(e).

  7. Tax Treatment of Liquidations of Partnership Interests

    Redemption of a Partnership Interest. Redemptions of a partner's entire partnership interests are governed by IRC section 736. That section does not affect the amount of income, gain, or loss that will be reported by the retiring partner; instead, it determines whether the income will be a capital gain (or loss) or ordinary income, and whether the remaining partners will be able to deduct a ...

  8. The Negative Capital Account Maze

    A's and B's negative capital accounts increase from a negative $50,000 to a negative $60,000. But under the Restatement, the creditor could be seen as a third-party beneficiary only of the first $50,000. The additional $10,000 deficit creates contractual rights and obligations among the partners and the.

  9. A Practical Guide to the Tax Consequences of Disposing of a Partnership

    C. Character of Income. Because a sale of a partnership interest would permit the unwarranted conversion of ordinary income into capital gains, attention must be paid to the recharacterization rules under Section 751, which treat as ordinary income a portion of the income from the sale of a partnership interest. D. Basis.

  10. Reporting on the transfer of partnership interests: PwC

    Section 1446 (f), added to the Code by the 2017 tax reform legislation, provides rules for withholding on the transfer or disposition of a partnership interest. Proposed Regulations were issued in May 2019, which laid the framework for guidance on withholding and reporting obligations under Section 1446 (f) (the Proposed Regulations).

  11. Partner's Instructions for Schedule K-1 (Form 1065) (2023)

    Don't include gain from the transfer of liabilities. Line 6. ... If your capital account is negative or zero, the partnership will have entered zero on this line. ... If the partner disposes of a partnership interest in which the basis has been reduced before all of the allocated excess business interest was used, the partner increases its ...

  12. PDF IRS Requires Reporting of Tax Basis Capital Accounts

    First, a partner's gain from the sale of his partnership interest is generally equal to the cash he receives minus his tax basis capital account balance. If a partner has a negative tax basis capital account, then the gain from the sale of his partnership interest will generally exceed the cash he receives, and it is possible that the income ...

  13. Demystifying capital accounts in tax equity transactions webinar: Q&A

    Instead, the buyer of the partnership interest steps into the seller's negative capital account and the associated DRO. Some business people describe the loss of the suspended losses in a sale as offsetting the seller's negative capital account; such a shortcut approach is functionally accurate in many but not all instances, and the ...

  14. PDF partner

    KPMG observation: Where a partner has a negative tax basis capital account at the beginning or end of the tax year, the partnership may want to compare the partner's negative tax basis capital account to the partner's share of liabilities. This may be an area of potential concern and an area of interest to the IRS.

  15. Termination of a Partnership Interest

    The sale of 50% or more of the partnership's capital and profits interests within a 12- month period terminates the partnership under Sec. 708(b)(1)(B). Liquidation of Partner's Interest The second method this item will discuss is where the partnership liquidates the terminating partner's interest.

  16. Special Issues Related to Distributions of Partnership Interests by

    Further, if the property distributed is a partnership interest and the estate or trust has a negative tax capital account (this occurs when the liabilities of the partnership allocable to the interest ex ceed the estate or trust's share of the partnership basis of its assets), then a gain will be recognized equal to the negative capital as a ...

  17. Sale of Interest in Trust; Negative Capital Accounts; Final Regs on

    Originally Presented: January 28, 2020. Sale of Interest in Trust; Negative Capital Accounts; Final Regs on Transfer for Value. First, the IRS has issued private letter rulings deeming an income taxable sale when a trustee commuted a trust. We will review the rules on whether changes to a trust will trigger income tax consequences.

  18. New Reporting for Partner Negative Capital Account Balances

    Share: Partners and members of an LLC taxed as a partnership will often have negative or deficit capital account balances at the end of a taxable year. A negative capital account balance is permissible if supported by proper allocation of partnership debt (or an obligation to restore a deficit). The new instructions to Item L on form 1065 ...

  19. Determining the Basis of a Limited Partnership With a Negative Capital

    Sale of partnership interest with negative capital account balances can get a little sticky. Upon termination of the partnership, the partner with a negative capital account must pay back or ...

  20. Transferring Capital Due to a Change in Ownership for a Partnership

    Enter the Amount. Tip: If you are trying to zero out the ending capital account for a departing partner, this amount should be equal to the ending capital account balance on the Partner's K-1. Next, follow the steps below in Screen 29, Special Allocations: Select on the + next to the Capital Account folder from the left navigation panel.

  21. Partnership Capital Account Revaluations: An In-Depth Look at Sec. 704

    The regulations generally require partnerships to maintain a Sec. 704(b) book capital account for each partner to reflect the partner's economic interest in the partnership. 3 To pass the substantial economic effect safe harbor, the partnership agreement must require these capital accounts to be maintained in accordance with the subchapter K ...

  22. Transferring Real Estate with Negative Capital

    It can be a mistake for lawyers to make transfers of such interests without reviewing whether the member has a negative capital in the entity. Negative capitals are common where real estate in the ...

  23. PDF Testimony of Jocelyn B. Ulrich, Vice President, Policy and Research

    of Technology Transfer, "technology transfer moves medical innovation from the benchtop through additional research and development, testing, regulatory approval, manufacturing, and finally to distribution as a medical product which will improve the health of everyone." 43 Partnership between the government and

  24. PDF 1. Applicant Identification 100 Festival Park Avenue 2. Funding

    Johns River. As such, these communities need redevelopment that takes into account resiliency strategies. The negative effects of climate change in the form of more frequent or extreme weather events are often magnified by the realities of poverty, an underserved population, and an impoverished local economy.

  25. Accounting for the Death of a Partner

    Therefore, the distribution of a partnership interest representing 50% or more of partnership capital and profits (or resulting in the transfer of 50% or more of the interests in partnership capital and profits when combined with other sales or exchanges that occur within a 12-month period) to satisfy a pecuniary bequest terminates the ...