Guaranteed payments to general partners and limited partners for services provided to the partnership are net earnings from self-employment and are reported on this line. Investment income and investment expenses other than interest are reported on lines 20a and 20b, respectively. This information is needed by partners to determine the investment interest expense limitation (see Form 4952 for details). Include on this line the interest properly allocable to debt on property held for investment purposes. Property held for investment includes property that produces income from interest, dividends, annuities, or royalties not derived in the ordinary course of a trade or business.

• 515, Withholding of Tax on Nonresident Aliens and Foreign Entities, for more information.
• The traditional method is used to allocate section 704(c) items pertaining to X.
• Also enter the business activity in item A and a brief description of the principal product or service of the business in item B.
• However, the partnership must show its 2025 tax year on the 2024 Form 1065 and incorporate any tax law changes that are effective for tax years beginning after 2024.

How to Avoid Capital Gains on Investment Property Sales

A partnership that is just starting to use tax basis capital accounts can use either of the two methods or may use the §704(b) method to determine the beginning-of-year (BOY) capital account. For 2020, if a partnership is using tax basis capital accounts for the first time, it must attach a statement showing which method was used to compute the BOY capital account. Note that the Modified outside basis method, which requires information about the partners’ outside basis, would require partnerships to maintain records that they never previously had to maintain. Under the Modified Outside Basis method, the partnership determines, or the partner provides, the partner’s adjusted basis in the partnership interest, and subtracts the partner’s share of partnership liabilities. The partner must notify the partnership of any change in basis (other than contributions or distributions, etc., of which the partnership would have records). The partner must notify the partnership within 30 days or by end of partnership’s taxable year, whichever is later.

• It must indicate the status in the appropriate checkboxes for each trade or business (or aggregated trade or business) reported.
• See Dispositions of Contributed Property , earlier, for more information.
• In figuring the amount of the distribution, use the adjusted basis of the property to the partnership immediately before the distribution, taking into account any adjustments under sections 732(d), 734(b), or 743(b), as applicable.

If a partnership distributes unrealized receivables or substantially appreciated inventory items in exchange for all or part of a partner’s interest in other partnership property (including money), treat the transaction as a sale or exchange between the partner and the partnership. Treat the partnership gain (loss) as ordinary business income (loss). The income (loss) is specially allocated only to partners other than the distributee partner. Generally, if the partnership disposes of property contributed to the partnership by a partner, income, gain, loss, and deductions from that property must be allocated among the partners to take into account the difference between the property’s basis and its FMV at the time of the contribution. However, if the adjusted basis of the contributed property exceeds its FMV at the time of the contribution, the built-in loss can only be taken into account by the contributing partner. For all other partners, the basis of the property in the hands of the partnership is treated as equal to its FMV at the time of the contribution (see section 704(c)(1)(C)).

Item K3. Payment Obligations Including Guarantees and Deficit Restoration Obligations (DROs)

Gain from sale or exchange of QSB stock with section 1202 exclusion (code O). Gain eligible for section 1045 rollover (replacement stock not purchased by the partnership) (code N). Gain eligible for section 1045 rollover (replacement stock purchased by partnership) (code M).

Legal Services

Show the partnership’s, estate’s, or trust’s name, address, and EIN on a separate statement attached to this return. If the amount entered is from more than one source, identify the amount from each source. If you’re required to complete this item, enter the partnership’s total assets at the end of the tax year, as determined by the accounting method regularly used in keeping the partnership’s books and records.

The complex simplicity of partnership interests exchanged for services

Enter interest paid or accrued on debt properly allocable to each general partner’s share of a working interest in any oil or gas property (if the partner’s liability isn’t limited). General partners that didn’t materially participate in the oil or gas activity treat this interest as investment interest; for other general partners, it’s trade or business interest. In box 13, report the partner’s distributive share of deductions related to portfolio income that are reported on Schedule K, line 13e, using code I (for deductions related to royalty income) or L (for other deductions related to portfolio income). Generally, section 59(e) allows each partner to make an election to deduct their distributive share of reporting partnership tax basis the partnership’s otherwise deductible qualified expenditures ratably over 10 years (3 years for circulation expenditures).

Don’t include amounts paid during the tax year for insurance that constitutes medical care for a partner, a partner’s spouse, a partner’s dependents, or a partner’s children under age 27 who aren’t dependents. Instead, include these amounts on line 10 as guaranteed payments on the applicable line of Schedule K, line 4, and the applicable line of box 4 of Schedule K-1, of each partner on whose behalf the amounts were paid. Also report these amounts on Schedule K, line 13e, and in box 13 of Schedule K-1, using code M, of each partner on whose behalf the amounts were paid.

Enter deductions not included on lines 12, 13a, 13b, 13c, 13d(2), and 21. On the line to the left of the entry space for this line, identify the type of deduction. If there’s more than one type of deduction, attach a statement to Form 1065 that separately identifies the type and amount of each deduction for the following categories. The codes needed for Schedule K-1 reporting are provided for each category.

Attach a statement to line 20, code U, showing each section 743(b) basis adjustment making up the total and identify the assets to which it relates. On the line for other increase (decrease), enter the sum of all other increases or decreases that affected the partner’s capital account for tax purposes during the year and attach a statement explaining each adjustment. The at-risk rules of section 465 generally apply to any activity carried on by the partnership as a trade or business or for the production of income. These rules generally limit the amount of loss and other deductions a partner can claim from any partnership activity to the amount for which that partner is considered at risk.

Any income, gain, or loss to the partnership from a distribution under section 751(b) (code L). Don’t include net gain or loss from involuntary conversions due to casualty or theft. Report net gain or loss from involuntary conversions due to casualty or theft on Schedule K, line 11 (box 11, code B, of Schedule K-1).

Forms & Instructions

If a transferor partner disposed of its interest in the partnership by sale, exchange, or gift, or as the result of death, enter the transferor partner’s ending capital account with respect to the interest transferred immediately before the transfer figured using the tax-basis method. On the line for capital contributed during the year, enter the amount of cash plus the adjusted tax basis of all property contributed by the partner to the partnership during the year. The amount you enter on this line should be reduced by any liabilities assumed by the partnership in connection with, or liabilities to which the property is subject immediately before, the contribution.