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collection through the Federal Register process; for more info, click here.2021 Department of the Treasury
Internal Revenue Service
Partner’s Instructions for
Schedule K-1 (Form 1065)
DRAFT AS OF
Partner's Share of Income, Deductions, Credits, etc.
(For Partner's Use Only)
General Instructions
Contents Page gains of a partner that holds one or more
applicable partnership interests as
General Instructions . . . . . . . . .... 1
short-term capital gains. An applicable
November 24, 2021
Worksheet for Adjusting the Basis
of a Partner's Interest in the
partnership interest is an interest in a Purpose of Schedule K-1
partnership that is transferred to or held by a
Partnership . . . . . . . . . . . .... 3 The partnership uses Schedule K-1 to report
taxpayer, directly or indirectly, in connection your share of the partnership's income,
Specific Instructions . . . . . . . . .... 6 with the performance of substantial services
Part I. Information About the deductions, credits, etc. Keep it for your
by the taxpayer or any other related person, records. Do not file it with your tax return
Partnership . . . . . . . . . . . .... 6 in an applicable trade or business. See
Part II. Information About the unless you are specifically required to do so.
section 1061 FAQs for (See the instructions for Code O. Backup
Partner . . . . . . . . . . . . . . . . . . 6 owner-taxpayer filing and reporting
Part III. Partner's Share of Items . . . . . 7 withholding, later.) The partnership files a
requirements. copy of Schedule K-1 (Form 1065) with the
Income (Loss) . . . . . . . . . . . . . . . . 8 IRS.
Self-employment clarification.
Box 11. Other Income (Loss) . . . . . . . 9 Information has been added to help with
Box 12. Section 179 Deduction . . . . 11 For your protection, Schedule K-1 may
determining which partners qualify as limited show only the last four digits of your
Box 13. Other Deductions . . . . . . . 11 partners for purposes of self-employment identifying number (social security number
Box 14. Self-Employment tax. See Limited Partner, later. (SSN), etc.). However, the partnership has
Earnings (Loss) . . . . . . . . . . . 13 reported your complete identifying number to
Box 15. Credits . . . . . . . . . . . . . . 13 Reminders the IRS.
Box 16. International
Transactions . . . . . . . . . . . . . 14 Changed format of Schedule K-1. Although the partnership generally isn't
Schedule K-1 no longer has a page 2 with subject to income tax, you may be liable for
Box 17. Alternative Minimum Tax tax on your share of the partnership income,
(AMT) Items . . . . . . . . . . . . . 14 the list of codes. The list of codes and
descriptions are provided under List of whether or not distributed. Include your
Box 18. Tax-Exempt Income and share on your tax return if a return is
Nondeductible Expenses . . . . . 15 Codes and References Used in
Schedule K-1 (Form 1065) at the end of required. Use these instructions to help you
Box 19. Distributions . . . . . . . . . . . 15 report the items shown on Schedule K-1 on
these instructions.
Box 20. Other Information . . . . . . . . 15 your tax return.
List of Codes . . . . . . . . . . . . . . . . 19 Decedent’s Schedule K-1. An executor is
Section references are to the Internal Revenue Code responsible to notify the partnership of the The amount of loss and deduction you
unless otherwise noted. name and tax identification number of the may claim on your tax return may be less
decedent’s estate when the partnership than the amount reported on Schedule K-1. It
is the partner's responsibility to consider and
Future Developments interest is part of a decedent’s estate. See
apply any applicable limitations. See
Decedent’s Schedule K-1, later.
Limitations on Losses, Deductions, and
For the latest information about Code N, box 20. Loss class under sec- Credits, later, for more information.
developments related to Schedule K-1 (Form tion 704(d). Regulations section
1065) and the Partner's Instructions for
Schedule K-1 (Form 1065), such as
1.163(j)-6(h) created a new section 704(d)
loss class for business interest expense
Inconsistent Treatment of
legislation enacted after they were effective for tax years beginning after Items
published, go to IRS.gov/Form1065. November 12, 2020, for purposes of loss If you are a partner in a partnership that has
limitation. As a result, all partnerships must not elected out of the centralized partnership
What’s New report to partners, business interest expense audit regime enacted by the Bipartisan
separately for purposes of section 704(d). Budget Act of 2015 (BBA), you must report
Schedule K-3 (Form 1065). New the items shown on your Schedule K-1 (and
Schedule K-3 replaces prior lines 16 and 20 Code AG, box 20. Gross receipts for sec-
tion 448(c). For tax years ending after any attached statements) the same way that
for certain international items on the partnership treated the items on its
Schedule K-1. The new schedule is December 30, 2020, partners in a
partnership must include a share of return.
designed to provide greater clarity for
partners on how to compute their U.S. partnership gross receipts in proportion to If the treatment on your original or
income tax liability with respect to items of their share of gross income under section amended return is inconsistent with the
international tax relevance, including 703 unless the partnership and the partner partnership's treatment, or if the partnership
claiming deductions and credits. are treated as a single employer under was required to but has not filed a return, you
section 448(c). See Regulations section must file Form 8082, Notice of Inconsistent
Section 743(b) adjustment. New code U 1.163(j)-2(d)(iii) and IRS.gov/newsroom/ Treatment or Administrative Adjustment
under line 20 is used to report the total faqs-regarding-the-aggregation-rules-under- Request (AAR), with your original or
remaining section 743(b) adjustment for section-448c2-that-apply-to-the- amended return to identify and explain any
applicable partners. This was reported in section-163j-small-business-exemption. inconsistency (or to note that a partnership
previous years on line 20, code AH. return has not been filed).
Section 1061 reporting. Section 1061 If you are required to file Form 8082 but
recharacterizes certain long-term capital do not do so, you may be subject to the
Oct 28, 2021 Cat. No. 11396Naccuracy-related penalty. This penalty is in Gain or loss from the disposition of See Form 5713 and its instructions for more
addition to any tax that results from making TIP your partnership interest may be net information.
your amount or treatment of the item investment income under section
consistent with that shown on the 1411 and could be subject to the net Definitions
partnership's return. Any deficiency that investment income tax. See Form 8960, Net
results from making the amounts consistent Investment Income Tax—Individuals, General Partner
may be assessed immediately. Estates, and Trusts, and its instructions for A general partner is a partner who is
information about how to report and figure personally liable for partnership debts.
Errors the tax due.
DRAFT AS OF
If you believe the partnership has made an
Limited Partner
Three-year holding period A limited partner is a partner in a partnership
error on your Schedule K-1, notify the
! requirement for applicable formed under a state limited partnership law,
partnership and ask for a corrected CAUTION partnership interests. Section
Schedule K-1. Do not change any items on whose personal liability for partnership debts
1061 increases the required long-term is limited to the amount of money or other
your copy of Schedule K-1. Be sure that the
capital gains holding period for an applicable property that the partner contributed or is
partnership sends a copy of the corrected
partnership interest from more than 1 year to required to contribute to the partnership.
November 24, 2021
Schedule K-1 to the IRS.
more than 3 years. The holding period Some members of other entities, such as
applies only to applicable partnership
Decedent’s Schedule K-1 interests held in connection with the
domestic or foreign business trusts or limited
liability companies (LLCs) that are classified
If you are the executor of an estate and you performance of services as defined in as partnerships, may be treated as limited
have received a decedent's Schedule K-1, section 1061. See section 1061 and Pub. partners for certain purposes.
then you have the responsibility to notify the 541 for details. Also see Section 1061
partnership of the name and taxpayer FAQs. However, whether a partner (including a
identification number (TIN) of the decedent's member of an LLC treated as a partnership
estate if the partnership interest is part of the for federal income tax purposes) qualifies as
decedent's estate. If a decedent died in a Nominee Reporting a limited partner for purposes of
prior year and the partnership continues to Any person who holds, directly or indirectly, self-employment tax depends upon whether
send the decedent a Schedule K-1 after an interest in a partnership as a nominee for the partner meets the definition of a limited
being notified of the decedent's death, then another person must furnish a written partner under section 1402(a)(13); whether a
you should request that the partnership send statement to the partnership by the last day partner is a limited partner under state
a corrected Schedule K-1. If you receive an of the month following the end of the limited partnership law is not determinative.
interest in a partnership by reason of a partnership's tax year. This statement must Relevant to this determination is whether the
former partner's death, you must provide the include the name, address, and identifying partner merely invested in the partnership
partnership with your name and TIN. For number of the nominee and such other and is not actively participating in the
treatment of partnership income upon the person; description of the partnership partnership's business operations; a partner
death of a partner, see Pub. 559. interest held as nominee for that person; and who is performing services for a partnership
other information required by Temporary in their capacity as a partner and who is,
Sale or Exchange of Regulations section 1.6031(c)-1T. A
nominee that fails to furnish this statement
based on the facts and circumstances,
acting in the manner of a self-employed
Partnership Interest must furnish to the person for whom the person is not a limited partner for
Generally, a partner who sells or exchanges nominee holds the partnership interest a self-employment tax purposes. See
a partnership interest in a section 751(a) copy of Schedule K-1 and related Renkemeyer, Campbell & Weaver, LLP v.
exchange must notify the partnership, in information within 30 days of receiving it from Commissioner, 136 T.C. 137, 150 (2011).
writing, within 30 days of the exchange (or, if the partnership.
earlier, by January 15 of the calendar year Nonrecourse Loans
following the calendar year in which the A nominee who fails to furnish all the Nonrecourse loans are those liabilities of the
exchange occurred). A “section 751(a) information required by Temporary partnership for which no partner or related
exchange” is any sale or exchange of a Regulations section 1.6031(c)-1T when due, person bears the economic risk of loss.
partnership interest in which any money or or who furnishes incorrect information, is
other property received by the partner in
exchange for that partner's interest is
subject to a $280 penalty for each failure.
The maximum penalty is $3,392,000 for all
Elections
such failures during a calendar year. If the Generally, the partnership decides how to
attributable to unrealized receivables (as
nominee intentionally disregards the figure taxable income from its operations.
defined in section 751(c)) or inventory items
requirement to report correct information, However, certain elections are made by you
(as defined in section 751(d)).
each $280 penalty increases to $560 or, if separately on your income tax return and not
The written notice to the partnership must greater, 10% of the aggregate amount of by the partnership. These elections are
include the names and addresses of both items required to be reported, and there is no made under the following code sections.
parties to the exchange, the identifying limit to the amount of the penalty. • Section 59(e) (deduction of certain
numbers of the transferor and (if known) of qualified expenditures ratably over the period
of time specified in that section). For details,
the transferee, and the exchange date. International Boycotts see the instructions for code J in box 13.
An exception to this rule is made for sales
Every partnership that had operations in, or • Section 108(b)(5) (election related to
related to, a boycotting country, company, or reduction of tax attributes due to exclusion
or exchanges of publicly traded partnership
a national of a boycotting country must file from gross income of discharge of
interests for which a broker is required to file
Form 5713, International Boycott Report. indebtedness).
Form 1099-B, Proceeds From Broker and
Barter Exchange Transactions. • Section 263A(d) (preproductive
If the partnership cooperated with an expenses). See the instructions for code P in
international boycott, it must give you a copy box 13.
If a partner is required to notify the
of its Form 5713. You must file your own • Section 617 (deduction and recapture of
partnership of a section 751(a) exchange but
Form 5713 to report the partnership's certain mining exploration expenditures).
fails to do so, the partner will be subject to a
activities and any other boycott operations • Section 901 (foreign tax credit).
penalty for each such failure. However, no
that you may have. You may lose certain tax
penalty will be imposed if the partner can
benefits if the partnership participated in, or
show that the failure was due to reasonable
cooperated with, an international boycott.
cause and not willful neglect.
-2- Partner's Inst. for Sch. K-1 (Form 1065) (2021)Additional Information Worksheet for Adjusting the Basis of a
For more information on the treatment of
partnership income, deductions, credits, and Partner's Interest in the Partnership Keep for Your Records
other items, see Pub. 535, Business 1. Your adjusted basis at the end of the prior year. Do not enter less than zero. Enter -0- if
Expenses. this is your first tax year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.
Increases:
To get forms and publications, see the
instructions for your tax return or visit the IRS 2. Money and your adjusted basis in property contributed to the partnership less the
associated liabilities (but not less than zero) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.
website at IRS.gov.
DRAFT AS OF
3. Your increased share of or assumption of partnership liabilities. (Subtract your share of
liabilities shown in item K of your 2020 Schedule K-1 from your share of liabilities shown
Limitations on Losses, in item K of your 2021 Schedule K-1 and add the amount of any partnership liabilities you
assumed during the tax year (but not less than zero).) . . . . . . . . . . . . . . . . . . . . . . 3.
Deductions, and Credits 4a. Your share of the partnership's income or gain (including tax-exempt
income) reduced by any amount included in interest income with respect
There are potential limitations on partnership to the credit to holders of clean renewable energy bonds . . . . . . . . . . 4a. ____________
losses that you can deduct on your return.
4b. Enter the amount of business interest expense included on 4a . . . . . . . 4b. ____________
These limitations and the order in which you
November 24, 2021
must apply them are as follows: the basis 4c. Add lines 4a and 4b. If the result is less than zero, include this amount on
line 10 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4c.
limitations, the at-risk limitations, and the
5. Any gain recognized this year on contributions of property. Do not include gain from
passive activity limitations. These limitations transfer of liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.
are discussed below.
6. Your share of the excess of the deductions for depletion (other than oil and gas depletion)
over the basis of the property subject to depletion . . . . . . . . . . . . . . . . . . . . . . . . 6.
Other limitations may apply to specific
deductions (for example, the section 179 Decreases:
expense deduction). Generally, specific 7. Withdrawals and distributions of money and the adjusted basis of property distributed to
limitations apply before the at-risk and you from the partnership. Do not include the amount of property distributions included in
the partner's income (taxable income) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.
passive loss limitations.
Caution: A distribution may be taxable if the amount exceeds your adjusted basis of your
Basis Limitations partnership interest immediately before the distribution.
8. Your decreased share of partnership liabilities and any decrease in your individual
Generally, you may not claim your share of a liabilities because they were assumed by the partnership. (Subtract your share of
partnership loss (including a capital loss) to liabilities shown in item K of your 2021 Schedule K-1 from your share of liabilities shown
in item K of your 2020 Schedule K-1 and add the amount of your individual liabilities that
the extent that it is greater than the adjusted the partnership assumed during the tax year (but not less than zero).) . . . . . . . . . . . . 8.
basis of your partnership interest at the end 9. Your share of the partnership's nondeductible expenses that are not capital expenditures
of the partnership's tax year. Any losses and (excluding business interest expense) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.
deductions not allowed this year because of 10. Your share of the partnership's losses and deductions (including capital losses).
the basis limit can be carried forward However, include your share of the partnership's section 179 expense deduction for this
year even if you cannot deduct all of it because of limitations. Include business interest
indefinitely and deducted in a later year expense as a separate loss class. See Note below. . . . . . . . . . . . . . . . . . . . . . . . 10.
subject to the basis limit for that year. 11. The amount of your deduction for depletion of any partnership oil and gas property, not to
exceed your allocable share of the adjusted basis of that property . . . . . . . . . . . . . . 11.
The partnership isn't responsible for
keeping the information needed to figure the 12. Your adjusted basis in the partnership at the end of this tax year. (Add lines 1 through 6
and subtract lines 7 through 11 from the total. If zero or less, enter -0-.) . . . . . . . . . . . 12.
basis of your partnership interest. Although
Caution: The deduction for your share of the partnership's losses and deductions is
the partnership does provide an analysis of limited to your adjusted basis in your partnership interest. If you entered zero on line 12
the changes to your capital account in item L and the amount figured for line 12 was less than zero, a portion of your share of the
partnership losses and deductions may not be deductible. (See Basis Limitations, earlier,
of Schedule K-1, that information is based on for more information.) Also see Part III. Partner's Share of Current Year Income,
the partnership's books and records and Deductions, Credits, and Other Items, later.
Note: Include on line 10 business interest expense that was removed from the amount on
cannot be used to figure your basis. line 4a. Business interest expense is considered a separate loss class under Proposed
Regulations section 1.163(j)-6(h)(1). However, to the extent basis is proportionately
You can figure the adjusted basis of your allocated to this loss class, interest expense is absorbed by applying currently deductible
business interest expense to basis first. Excess business interest expense is applied to
partnership interest by adding items that basis second. Excess business interest expense is only applicable to partnerships
increase your basis and then subtracting subject to section 163(j). In addition, if a partnership has negative section 704(d) expense
(interest expense that is limited by basis), negative section 704(d) expense becomes
items that decrease your basis. excess business interest expense in the year that the basis limitation no longer applies.
This is effective for tax years beginning after November 12, 2020.
Use the Worksheet for Adjusting the
Basis of a Partner’s Interest in the
Partnership to figure the basis of your in the activity for which you are not at risk, Generally, you are not at risk for amounts
interest in the partnership. you will have to complete Form 6198, such as the following.
For partnership tax years beginning after At-Risk Limitations, to figure your allowable • Nonrecourse loans used to finance the
2017, a partner's share of the adjusted basis loss for the activity. activity, to acquire property used in the
in partnership charitable contributions activity, or to acquire your interest in the
(defined in section 170(c)) and taxes, The at-risk rules generally limit the activity that are not secured by your own
described in section 901, paid or accrued to amount of loss and other deductions that you property (other than the property used in the
foreign countries and to possessions of the can claim to the amount you could actually activity). See the instructions for item K, later,
United States are subject to this basis lose in the activity. These losses and for the exception for qualified nonrecourse
limitation (defined in section 704(d)). deductions include a loss on the disposition financing secured by real property.
of assets and the section 179 expense • Cash, property, or borrowed amounts
For more details on the basis limitations, deduction. However, if you acquired your used in the activity (or contributed to the
and special rules for charitable contributions partnership interest before 1987, the at-risk activity, or used to acquire your interest in
and foreign taxes paid and accrued, see rules do not apply to losses from an activity the activity) that are protected against loss
Pub. 541, Partnerships. of holding real property placed in service by a guarantee, stop-loss agreement, or
before 1987 by the partnership. The activity other similar arrangement (excluding
At-Risk Limitations of holding mineral property doesn't qualify for casualty insurance and insurance against
Generally, if you have (a) a loss or other this exception. The partnership should tort liability).
deduction from any activity carried on as a identify on a statement attached to • Amounts borrowed for use in the activity
trade or business or for the production of Schedule K-1 any losses that are not subject from a person who has an interest in the
income by the partnership, and (b) amounts to the at-risk limitations.
Partner's Inst. for Sch. K-1 (Form 1065) (2021) -3-activity, other than as a creditor, or who is conversion, rental, operation, management, (including individuals who are not owners of
related, under section 465(b)(3), to a person leasing, or brokerage trade or business. interests in the activity).
(other than you) having such an interest. Services you performed as an employee are 3. You participated in the activity for
not treated as performed in a real property more than 100 hours during the tax year, and
You should get a separate statement of trade or business unless you owned more
income, expenses, and other items for each your participation in the activity for the tax
than 5% of the stock (or more than 5% of the year wasn't less than the participation in the
activity from the partnership. capital or profits interest) in the employer. activity of any other individual (including
Note. Box 22 in Part III of Schedule K-1 3. Working interests in oil or gas wells if individuals who were not owners of interests
(Form 1065) will be checked when a you were a general partner. in the activity) for the tax year.
DRAFT AS OF
statement is attached. 4. The rental of a dwelling unit any 4. The activity was a significant
partner used for personal purposes during participation activity for the tax year, and you
Passive Activity Limitations the year for more than the greater of 14 days participated in all significant participation
Section 469 provides rules that limit the or 10% of the number of days that the activities (including activities outside the
deduction of certain losses and credits. residence was rented at fair rental value. partnership) during the year for more than
These rules apply to partners who: 5. Activities of trading personal property 500 hours. A significant participation activity
November 24, 2021
• Are individuals, estates, trusts, closely for the account of owners of interests in the is any trade or business activity in which you
held C corporations, or personal service activities. participated for more than 100 hours during
corporations; and the year and in which you didn't materially
• Have a passive activity loss or credit for If you are an individual, an estate, or a participate under any of the material
the tax year. trust, and you have a passive activity loss or participation tests (other than this test).
credit, use Form 8582, Passive Activity Loss 5. You materially participated in the
Generally, passive activities include the Limitations, to figure your allowable passive
following. activity for any 5 tax years (whether or not
losses and Form 8582-CR, Passive Activity consecutive) during the 10 tax years that
1. Trade or business activities in which Credit Limitations, to figure your allowable immediately precede the tax year.
you didn't materially participate. passive credits. For a corporation, use Form
8810, Corporate Passive Activity Loss and 6. The activity was a personal service
2. Activities that meet the definition of activity and you materially participated in the
rental activities under Temporary Credit Limitations. See the instructions for
these forms for details. activity for any 3 tax years (whether or not
Regulations section 1.469-1T(e)(3) and consecutive) preceding the tax year. A
Regulations section 1.469-1(e)(3). personal service activity involves the
If the partnership had more than one
Passive activities do not include the activity, it will attach a statement to your performance of personal services in the field
following. Schedule K-1 that identifies each activity of health, law, engineering, architecture,
(trade or business activity, rental real estate accounting, actuarial science, performing
1. Trade or business activities in which arts, consulting, or any other trade or
you materially participated. activity, rental activity other than rental real
estate, and other activity) and specifies the business in which capital isn't a material
2. Rental real estate activities in which income (loss), deductions, and credits from income-producing factor.
you materially participated if you were a real each activity. 7. Based on all the facts and
estate professional for the tax year. You circumstances, you participated in the
were a real estate professional only if you Note. Box 23 in Part III of Schedule K-1 activity on a regular, continuous, and
met both of the following conditions. (Form 1065) will be checked when a substantial basis during the tax year.
a. More than half of the personal statement is attached.
services you performed in trades or Limited partners. If you are a limited
Material participation. You must partner, you must meet item item 1, 5, or 6
businesses were performed in real property
determine if you materially participated (a) in above to qualify as having materially
trades or businesses in which you materially
each trade or business activity held through participated.
participated.
the partnership, and (b) if you were a real
b. You performed more than 750 hours estate professional (defined earlier) in each Work counted toward material
of services in real property trades or rental real estate activity held through the participation. Generally, any work that you
businesses in which you materially partnership. All determinations of material or your spouse does in connection with an
participated. participation are based on your participation activity held through a partnership (where
during the partnership's tax year. you own your partnership interest at the time
For a closely held C corporation the work is done) is counted toward material
TIP (defined in section 465(a)(1)(B)), the Material participation standards for
partners who are individuals are listed below. participation. However, work in connection
above conditions are treated as met with the activity isn't counted toward material
if more than 50% of the corporation's gross Special rules apply to certain retired or
disabled farmers and to the surviving participation if either of the following applies.
receipts were from real property trades or
businesses in which the corporation spouses of farmers. See the Instructions for 1. The work isn't the type of work that
materially participated. Form 8582 for details. owners of the activity would usually do and
Corporations should refer to the one of the principal purposes of the work that
For purposes of this rule, each interest in Instructions for Form 8810 for the material you or your spouse does is to avoid the
rental real estate is a separate activity, participation standards that apply to them. passive loss or credit limitations.
unless you elect to treat all interests in rental 2. You do the work in your capacity as
real estate as one activity. For details on Individuals (other than limited an investor and you are not directly involved
making this election, see the Instructions for partners). If you are an individual (either a in the day-to-day operations of the activity.
Schedule E (Form 1040), Supplemental general partner or a limited partner who Examples of work done as an investor that
Income and Loss. owned a general partnership interest at all would not count toward material participation
If you are married filing jointly, either you times during the tax year), you materially include:
or your spouse must separately meet both participated in an activity only if one or more
of the following apply. a. Studying and reviewing financial
(a) and (b) of the above conditions, without statements or reports on operations of the
taking into account services performed by 1. You participated in the activity for activity,
the other spouse. more than 500 hours during the tax year.
b. Preparing or compiling summaries or
A real property trade or business is any 2. Your participation in the activity for analyses of the finances or operations of the
real property development, redevelopment, the tax year constituted substantially all the activity for your own use, and
construction, reconstruction, acquisition, participation in the activity of all individuals
-4- Partner's Inst. for Sch. K-1 (Form 1065) (2021)c. Monitoring the finances or operations 925, Passive Activity and At-Risk Rules, for loss from the PTP by each ratio in column (b)
of the activity in a non-managerial capacity. more details. and enter the result in Part VII, column (c).
2. If you have an overall gain, the net Then, complete Part VIII if all the loss from
Effect of determination. Income (loss), the same activity is to be reported on one
deductions, and credits from an activity are gain portion (total gain minus total losses) is
nonpassive income. On the form or schedule form or schedule. Use Part IX instead of Part
nonpassive if you determine that: VIII if you have more than one loss to be
• You materially participated in a trade or you normally use, report the net gain portion
as nonpassive income and the remaining reported on different forms or schedules for
business activity of the partnership, or the same activity. Enter the net loss plus any
• You were a real estate professional income and the total losses as passive
income and loss. To the left of the entry prior year unallowed losses in Part VIII,
(defined earlier) in a rental real estate activity
DRAFT AS OF
space, enter “From PTP.” It is important to column (a) (or Part IX, if applicable). The
of the partnership. losses in Part VIII, column (c) (Part IX,
identify the nonpassive income because the
If you determine that you didn't materially nonpassive portion is included in modified column (e)) are the allowed losses to report
participate in a trade or business activity of adjusted gross income for purposes of on the forms or schedules. Report both these
the partnership or if you have income (loss), figuring on Form 8582 the “special losses and any income from the PTP on the
deductions, or credits from a rental activity of allowance” for active participation in a forms and schedules you normally use.
the partnership (other than a rental real non-PTP rental real estate activity. In
November 24, 2021
estate activity in which you materially 4. If you have an overall loss and you
addition, the nonpassive income is included disposed of your entire interest in the PTP to
participated as a real estate professional), in investment income when figuring your
the amounts from that activity are passive. an unrelated person in a fully taxable
investment interest expense deduction on transaction during the year, your losses
Report passive income (losses), deductions, Form 4952, Investment Interest Expense
and credits as follows. (including prior year unallowed losses)
Deduction. allocable to the activity for the year are not
1. If you have an overall gain (the
Example. If you have Schedule E (Form limited by the passive loss rules. A fully
excess of income over deductions and
1040) income of $8,000, and a Form 4797, taxable transaction is one in which you
losses, including any prior year unallowed
Sales of Business Property, prior year recognize all your realized gain or loss.
loss) from a passive activity, report the
unallowed loss of $3,500 from the passive Report the income and losses on the forms
income, deductions, and losses from the
activities of a particular PTP, you have a and schedules you normally use.
activity as indicated in these instructions.
$4,500 overall gain ($8,000 − $3,500). On
2. If you have an overall loss (the For rules on the disposition of an
Schedule E (Form 1040), line 28, report the
excess of deductions and losses, including $4,500 net gain as nonpassive income in TIP entire interest reported using the
any prior year unallowed loss, over income) installment method, see the
column (k). In column (h), report the
or credits from a passive activity, report the Instructions for Form 8582.
remaining Schedule E (Form 1040) gain of
income, deductions, losses, and credits from $3,500 ($8,000 − $4,500). On the
all passive activities using the Instructions for appropriate line of Form 4797, report the Special allowance for a rental real estate
Form 8582 or the Instructions for Form prior year unallowed loss of $3,500. Be sure activity. If you actively participated in a
8582-CR (or Form 8810), to see if your to enter “From PTP” to the left of each entry rental real estate activity, you may be able to
deductions, losses, and credits are limited space. deduct up to $25,000 of the loss from the
under the passive activity rules. activity from nonpassive income. This
3. If you have an overall loss (but didn't
dispose of your entire interest in the PTP to “special allowance” is an exception to the
Publicly traded partnerships (PTPs). general rule disallowing losses in excess of
an unrelated person in a fully taxable
The passive activity limitations are applied income from passive activities. The special
transaction during the year), the losses are
separately for items (other than the allowance isn't available if you were married,
allowed to the extent of the income, and the
low-income housing credit and the file a separate return for the year, and didn't
excess loss is carried forward to use in a
rehabilitation credit) from each PTP. Thus, a live apart from your spouse at all times
future year when you have income to offset
net passive loss from a PTP may not be during the year.
it. Report as a passive loss on the schedule
deducted from other passive income.
or form you normally use the portion of the Only individuals, qualifying estates, and
Instead, a passive loss from a PTP is
loss equal to the income. Report the income qualifying revocable trusts that made a
suspended and carried forward to be applied
as passive income on the form or schedule section 645 election can actively participate
against passive income from the same PTP
you normally use. in a rental real estate activity. Estates (other
in later years. If the partner's entire interest in
than qualifying estates), trusts (other than
the PTP is completely disposed of, any Example. You have a Schedule E (Form
qualifying revocable trusts that made a
unused losses are allowed in full in the year 1040) loss of $12,000 (current year losses
section 645 election), and corporations
of disposition. plus prior year unallowed losses) and a Form
cannot actively participate. Limited partners
If you have an overall gain from a PTP, 4797 gain of $7,200. Report the $7,200 gain
cannot actively participate unless future
the net gain is nonpassive income. In on the appropriate line of Form 4797. On
regulations provide an exception.
addition, the nonpassive income is included Schedule E (Form 1040), line 28, report
$7,200 of the losses as a passive loss in You are not considered to actively
in investment income to figure your
column (g). Carry forward the unallowed loss participate in a rental real estate activity if, at
investment interest expense deduction.
of $4,800 ($12,000 − $7,200). any time during the tax year, your interest
Do not report passive income, gains, or (including your spouse's interest) in the
losses from a PTP on Form 8582. Instead, If you have unallowed losses from more
activity was less than 10% (by value) of all
use the following rules to figure and report on than one activity of the PTP or from the same
interests in the activity.
the proper form or schedule your income, activity of the PTP that must be reported on
different forms, you must allocate the Active participation is a less stringent
gains, and losses from passive activities that
unallowed losses on a pro rata basis to figure requirement than material participation. You
you held through each PTP you owned
the amount allowed from each activity or on may be treated as actively participating if you
during the tax year.
each form. participated, for example, in making
1. Combine any current year income, management decisions or arranging for
gains, and losses, and any prior year To allocate and keep a record of the others to provide services (such as repairs)
unallowed losses to see if you have an TIP unallowed losses, use Parts VII, VIII, in a significant and bona fide sense.
overall gain or loss from the PTP. Include and IX of Form 8582. List each Management decisions that can count as
only the same types of income and losses activity of the PTP in Part VII. Enter the active participation include approving new
you would include in your net income or loss overall loss from each activity in column (a). tenants, deciding rental terms, approving
from a non-PTP passive activity. See Pub. Complete Part VII, column (b), according to capital or repair expenditures, and other
its instructions. Multiply the total unallowed similar decisions.
Partner's Inst. for Sch. K-1 (Form 1065) (2021) -5-An estate is a qualifying estate if the If you have net income subject to partnership has reported your complete
decedent would have satisfied the active recharacterization under Temporary identification number to the IRS.
participation requirement for the activity for Regulations section 1.469-2T(f) and
the tax year the decedent died. A qualifying Regulations sections 1.469-2(f)(5) and (6), Item H2
estate is treated as actively participating for report such amounts according to the If the partner is a DE, such as a
tax years ending less than 2 years after the Instructions for Form 8582 (or Form 8810). single-member LLC that did not elect to be
date of the decedent's death. If you have net income (loss), deductions, treated as a corporation, the partnership will
or credits from any of the following activities, check the DE box and enter the name and
Modified adjusted gross income TIN of the DE.
(MAGI) limitation. The maximum special treat such amounts as nonpassive and report
DRAFT AS OF
allowance that single individuals and married them as indicated in these instructions. Item J
individuals filing a joint return can qualify for 1. Working interests in oil and gas wells Generally, the amounts reported in item J are
is $25,000. The maximum is $12,500 for if you are a general partner. based on the partnership agreement. If your
married individuals who file separate returns 2. The rental of a dwelling unit any interest commenced after the beginning of
and who lived apart at all times during the partner used for personal purposes during the partnership's tax year, the partnership
year. The maximum special allowance for the year for more than the greater of 14 days will have entered, in the Beginning column,
November 24, 2021
which an estate can qualify is $25,000 or 10% of the number of days that the the percentages that existed for you
reduced by the special allowance for which residence was rented at fair rental value. immediately after admission. If your interest
the surviving spouse qualifies. terminated before the end of the
3. Trading personal property for the
If your MAGI (defined below) is $100,000 account of owners of interests in the activity. partnership's tax year, the partnership will
or less ($50,000 or less if married filing have entered, in the Ending column, the
separately), your loss is deductible up to the Self-charged interest. The partnership will percentages that existed immediately before
maximum special allowance referred to in report any self-charged interest income or termination.
the preceding paragraph. If your MAGI is expense that resulted from loans between
more than $100,000 (more than $50,000 if The ending percentage share shown on
you and the partnership (or between the the Capital line is the portion of the capital
married filing separately), the special partnership and another partnership or S
allowance is limited to 50% of the difference you would receive if the partnership was
corporation if both entities have the same liquidated at the end of its tax year by the
between $150,000 ($75,000 if married filing owners with the same proportional
separately) and your MAGI. When MAGI is distribution of undivided interests in the
ownership interest in each entity). If there partnership's assets and liabilities. If your
$150,000 or more ($75,000 or more if was more than one activity, the partnership
married filing separately), there is no special capital account is negative or zero, the
will provide a statement allocating the partnership will have entered zero on this
allowance. interest income or expense with respect to line.
Modified adjusted gross income each activity. The self-charged interest rules
do not apply to your partnership interest if the The "Check if decrease is due to sale or
(MAGI). This is your adjusted gross income
partnership made an election under exchange of partnership interest" box will be
from Form 1040, 1040-SR, or 1040-NR,
Regulations section 1.469-7(g) to avoid the checked if you sold or exchanged all or part
line 11, figured without taking into account:
application of these rules. See the of your partnership interest to a new or
1. The taxable amount of social security Instructions for Form 8582 for details. pre-existing partner during this tax year,
or equivalent tier 1 railroad retirement regardless of whether you recognized gain or
benefits,
Specific Instructions
loss on the transaction(s). You may have
2. The deductible contributions to realized a gain or loss on the transfer or
traditional individual retirement accounts disposition of your interest. See codes AB,
(IRAs) and section 501(c)(18) pension plans, Part I. Information About AC, and AD on line 20 for items that have
special gain or loss treatment. For more
3. The exclusion from income of interest the Partnership information, see Disposition of a Partner's
from series EE or I U.S. savings bonds used
Interest and Partnership Distributions in Pub.
to pay higher education expenses, Item D 541.
4. The exclusion of amounts received If the box in item D is checked, you are a
under an employer's adoption assistance partner in a PTP and must follow the rules Item K
program, discussed earlier under Publicly traded Item K should show your share of the
5. Any passive activity income or loss partnerships. partnership's nonrecourse liabilities,
included on Form 8582, partnership-level qualified nonrecourse
financing, and other recourse liabilities at the
6. Any rental real estate loss allowed to
real estate professionals,
Part II. Information About beginning and the end of the partnership's
7. Any overall loss from a PTP (see the Partner tax year. If you terminated your interest in the
partnership during the tax year, item K
Publicly Traded Partnerships (PTPs) in the Item E should show the share that existed
Instructions for Form 8582), immediately before the total disposition. A
If the partner is an individual, the partnership
8. The deduction allowed for one-half of will enter the partner's SSN or individual partner's “recourse liability” is any
self-employment tax, taxpayer identification number (ITIN). For all partnership liability for which a partner is
9. The deduction allowed for interest other partners, the partnership will enter the personally liable.
paid on student loans, and partner's employer identification number If this partnership invested in other
10. The deduction allowed for (EIN). However, if the partner is an IRA, the partnerships, item K will include your share
foreign-derived intangible income and global partnership will enter the identifying number of partnership liabilities from those other
intangible low-taxed income. of the custodian of the IRA. In the case of a partnerships, except to the extent the
disregarded entity (DE), the partnership will liabilities from those other partnerships are
Special rules for certain other activities. enter the TIN of the beneficial owner of the owed to this partnership.
If you have net income (loss), deductions, or DE in item E and the beneficial owner's
credits from any activity to which special address in item F. Use the total of the three amounts for
rules apply, the partnership will identify the figuring the adjusted basis of your
For your protection, this form may show
activity and all amounts relating to it on partnership interest.
only the last four digits of the TIN in items E
Schedule K-1 or on an attached statement. and H2, as noted under Purpose of Generally, you may use only the amounts
Schedule K-1, earlier. However, the shown next to “Qualified nonrecourse
-6- Partner's Inst. for Sch. K-1 (Form 1065) (2021)financing” and “Recourse” to figure your interest. Generally, this is because a allocated unrecognized section 704(c) gain
amount at risk. Do not include any amounts partner's adjusted tax basis in its partnership or loss if:
that are not at risk if such amounts are interest includes the partner's share of • You contributed property with FMV in
included in either of these categories. partnership liabilities (and capital accounts excess of adjusted tax basis (built-in gain
determined by using the tax basis method do property);
If your partnership is engaged in two or not). In addition, your partnership may not • You contributed property with FMV less
more different types of activities subject to have all the necessary information from you than adjusted tax basis (built-in loss
the at-risk provisions, or a combination of to accurately figure the adjusted tax basis in property); or
at-risk activities and any other activity, the your partnership interest due to partner-level • The partnership elected, under certain
DRAFT AS OF
partnership should give you a statement adjustments. You are responsible for circumstances, to revalue property (book-up
showing your share of nonrecourse liabilities, maintaining an annual record of the adjusted or book-down) on its books to reflect
partnership-level qualified nonrecourse tax basis in your partnership interest as changes in the FMV of such property. These
financing, and other recourse liabilities for determined under the principles and revaluations are sometimes referred to as
each activity. provisions of subchapter K, including, for reverse section 704(c) allocations.
Qualified nonrecourse financing secured example, those under sections 705, 722,
The partnership is providing this for your
733, and 742. Regulations section
November 24, 2021
by real property used in an activity of holding information. If the partnership disposes of the
real property that is subject to the at-risk 1.705-1(a)(1) provides that a partner is
property or there are special allocations due
rules is treated as an amount at risk. required to determine the adjusted basis of
to depreciation, depletion, or amortization,
Qualified nonrecourse financing generally its interest in a partnership when necessary
the partnership will report these items on
includes financing for which no one is to determine its tax liability or that of any
other parts of Schedule K-1.
personally liable for repayment that is other person. For example, a determination
borrowed for use in an activity of holding real is required in ascertaining the extent to which Note. Although the partnership is reporting
property and that is loaned or guaranteed by a partner's share of loss is allowed, when the beginning and ending balances on an
a federal, state, or local government or there is a sale or exchange of all or part of a aggregate net basis, it is generally required
borrowed from a “qualified” person. partnership interest, and when a partner's to keep records of this information on a
entire partnership interest is liquidated. The property-by-property basis.
Qualified persons include any persons adjusted basis of a partner's interest in a
actively and regularly engaged in the partnership is determined without regard to These rules do not apply to PTPs, and
business of lending money, such as a bank any amount shown in the partnership books their partners, for 2019 partnership tax years
or savings and loan association. Qualified as the partner's “capital,” “equity,” or similar and thereafter, until further notice.
persons generally do not include related account.
parties (unless the nonrecourse financing is
commercially reasonable and on Item M Part III. Partner's Share of
substantially the same terms as loans If you have contributed property with a Current Year Income,
involving unrelated persons), the seller of the built-in gain or loss during the tax year, the
property, or a person who receives a fee for partnership will check the “Yes” box. Also, Deductions, Credits, and
the partnership's investment in the real the partnership will attach a statement Other Items
property. showing the property contributed, the date of The amounts shown in boxes 1 through 20
the contribution, and the amount of any reflect your share of income, loss,
See Pub. 925 for more information on built-in gain or loss. A built-in gain or loss is
qualified nonrecourse financing. deductions, credits, and other items from
the difference between the FMV of the partnership business or rental activities
Both the partnership and you must meet property and your adjusted basis in the without reference to limitations on losses or
the qualified nonrecourse rules on this debt property at the time it was contributed to the adjustments that may be required of you
before you can include the amount shown partnership. If you contributed more than 10 because of:
next to “Qualified nonrecourse financing” in properties on a single date during the tax
year, the statement may instead show the 1. The adjusted basis of your
your at-risk computation. partnership interest,
number of properties contributed on that
See Limitations on Losses, Deductions, date, the total amount of built-in gain, and the 2. The amount for which you are at risk,
and Credits, earlier, for more information on total amount of built-in loss. and
the at-risk limitations. 3. The passive activity limitations.
The partnership is providing this for your
Item L information. Contributions of property with a For information on these provisions, see
The partnership must report your beginning built-in gain or loss could affect a partner's Limitations on Losses, Deductions, and
capital account and ending capital account tax liability (in matters concerning Credits, earlier.
for the year using the Tax Basis Method, precontribution gain or loss, and distributions
subject to section 737), and may also affect Other limitations may apply to specific
including the amount of capital you deductions (for example, the section 179
contributed to the partnership during the how the partnership allocated certain items
on your Schedule K-1. For information on expense deduction). Generally, specific
year, your share of the partnership's current limitations apply before the at-risk and
year net income or loss as computed for tax precontribution gain or loss, see the
instructions for box 20, code W. For passive loss limitations.
purposes, any withdrawals and distributions
made to you by the partnership, and any information on distributions subject to If you are an individual and the passive
other increases or decreases to your capital section 737, see the instructions for box 19, activity rules do not apply to the amounts
account determined in a manner generally code B. shown on your Schedule K-1, take the
amounts shown and enter them on the
consistent with figuring the partner's Item N appropriate lines of your tax return. If the
adjusted tax basis in its partnership interest
If you are allocated a share of section 704(c) passive activity rules do apply, report the
(without regard to partnership liabilities),
gain or loss, the partnership will report your amounts shown as indicated in these
taking into account the rules and principles of
net unrecognized section 704(c) gain or loss instructions.
sections 705, 722, 733, and 742. See the
both at the beginning and at the end of the
Instructions for Form 1065 for more details. If you are not an individual, report the
partnership's tax year in item N. The
partnership can use any reasonable method amounts in each box as instructed on your
For many reasons, your ending capital
in reporting net unrecognized section 704(c) tax return.
account as reported to you by the
partnership in item L may not equal the built-in gain or loss to you. You will be If you file your tax return on a calendar
adjusted tax basis in your partnership year basis, but your partnership files a return
Partner's Inst. for Sch. K-1 (Form 1065) (2021) -7-for a fiscal year, report the amounts on your Generally, where you report this amount on e. If you are a married person filing
tax return for the year in which the Form 1040 or 1040-SR depends on whether separately, you lived apart from your spouse
partnership's fiscal year ends. For example, the amount is from an activity that is a all year.
if the partnership's tax year ends in February passive activity to you. If you are an f. You have no current or prior year
2022, report the amounts on your 2022 tax individual partner filing a 2021 Form 1040 or unallowed credits from a passive activity.
return. 1040-SR, find your situation below and
report your box 1 income (loss) as instructed, g. Your MAGI wasn’t more than
If you have losses, deductions, or credits after applying the basis and at-risk limitations $100,000 (not more than $50,000 if married
from a prior year that were not deductible or on losses. If the partnership had more than filing separately and you lived apart from
your spouse all year).
DRAFT AS OF
usable because of certain limitations, such one trade or business activity, it will attach a
as the basis limitations or the at-risk statement identifying the income or loss from h. Your interest in the rental real estate
limitations, take them into account in each activity. activity wasn't held as a limited partner.
determining your net income, loss, or credits
for this year. However, except for passive 1. Report box 1 income (loss) from 2. If you have a loss from a passive
activity losses and credits, do not combine partnership trade or business activities in activity in box 2 and you do not meet all the
the prior year amounts with any amounts which you materially participated on conditions in (1) above, follow the
Schedule E (Form 1040), line 28, column (i) Instructions for Form 8582 to figure how
November 24, 2021
shown on this Schedule K-1 to get a net
figure to report on any supporting schedules, or (k). much of the loss you can report on
statements, or forms attached to your return. 2. Report box 1 income (loss) from Schedule E (Form 1040), line 28, column (g).
Instead, report the amounts on the attached partnership trade or business activities in However, if the box in item D is checked,
schedule, statement, or form on a which you didn't materially participate, as report the loss following the rules for Publicly
year-by-year basis. follows. traded partnerships, earlier.
a. If income is reported in box 1, report 3. If you were a real estate professional
If the partnership reports a section 743(b) and you materially participated in the activity,
adjustment to partnership items, report these the income on Schedule E (Form 1040),
line 28, column (h). However, if the box in report box 2 income (loss) on Schedule E
adjustments as separate items on Form (Form 1040), line 28, column (i) or (k).
1040 or 1040-SR in accordance with the item D is checked, report the income
following the rules for Publicly traded 4. If you have income from a passive
reporting instructions for the partnership item
partnerships, earlier. activity in box 2, report the income on
being adjusted. A section 743(b) adjustment
b. If a loss is reported in box 1, follow Schedule E (Form 1040), line 28, column (h).
increases or decreases your share of
the Instructions for Form 8582 to figure how However, if the box in item D is checked,
income, deduction, gain, or loss for a
much of the loss can be reported on report the income following the rules for
partnership item. For example, if the
Schedule E (Form 1040), line 28, column (g). Publicly traded partnerships, earlier.
partnership reports a section 743(b)
adjustment to depreciation for property used However, if the box in item D is checked,
report the loss following the rules for Publicly
Box 3. Other Net Rental Income
in its trade or business, report the adjustment
on Schedule E (Form 1040), line 28, in traded partnerships, earlier. (Loss)
accordance with the instructions for box 1 of The amount in box 3 is a passive activity
Schedule K-1. Box 2. Net Rental Real Estate amount for all partners. If the partnership had
If you have amounts other than Income (Loss) more than one rental activity, it will attach a
Generally, the income (loss) reported in statement identifying the income or loss from
TIP those shown on Schedule K-1 to each activity. Report the income or loss as
report on Schedule E (Form 1040), box 2 is a passive activity amount for all
partners. However, the income (loss) in follows.
enter each item separately on Schedule E
(Form 1040), line 28. box 2 isn't from a passive activity if you were 1. If box 3 is a loss, follow the
a real estate professional (defined earlier) Instructions for Form 8582 to figure how
Codes. In box 11, boxes 13 through 15, and you materially participated in the activity. much of the loss can be reported on
and boxes 17 through 20, the partnership will If the partnership had more than one rental Schedule E (Form 1040), line 28, column (g).
identify each item by entering a code in the real estate activity, it will attach a statement However, if the box in item D is checked,
column to the left of the dollar amount entry identifying the income or loss from each report the loss following the rules for Publicly
space. These codes are identified under List activity. traded partnerships, earlier.
of Codes and References Used in 2. If income is reported in box 3, report
Schedule K-1 (Form 1065) at the end of If you are filing a 2021 Form 1040 or
1040-SR, use the following instructions to the income on Schedule E (Form 1040),
these instructions. line 28, column (h). However, if the box in
determine where to report a box 2 amount.
Attached statements. The partnership will item D is checked, report the income
1. If you have a loss from a passive following the rules for Publicly traded
enter an asterisk (*) after the code, if any, in activity in box 2 and you meet all the
the column to the left of the dollar amount partnerships, earlier.
following conditions, report the loss on
entry space for each item for which it has
attached a statement providing additional
Schedule E (Form 1040), line 28, column (g). Box 4a. Guaranteed Payments
information. For those informational items a. You actively participated in the for Services
that cannot be reported as a single dollar partnership rental real estate activities. See
Guaranteed payments are payments made
amount, the partnership will enter an asterisk Special allowance for a rental real estate
by a partnership to a partner that are
(*) in the left column and enter “STMT” in the activity, earlier.
determined without regard to the
dollar amount entry space to indicate the b. Rental real estate activities with partnership's income. Generally, amounts on
information is provided on an attached active participation were your only passive this line are not passive income, and you
statement. activities. should report them on Schedule E (Form
c. You have no prior year unallowed 1040), line 28, column (k) (for example,
losses from these activities. guaranteed payments for personal services).
Income (Loss) d. Your total loss from the rental real Box 4b. Guaranteed Payments
Box 1. Ordinary Business estate activities wasn't more than $25,000
for Capital
(not more than $12,500 if married filing
Income (Loss) separately and you lived apart from your These are guaranteed payments other than
The amount reported in box 1 is your share spouse all year). for services, such as for the use of capital or
of the ordinary income (loss) from trade or attributable to section 736(a)(2) payments for
business activities of the partnership.
-8- Partner's Inst. for Sch. K-1 (Form 1065) (2021)You can also read
