2000 Instructions for 1065 - Internal Revenue Service · 2012. 7. 16. · 2 0 00 Department of the Treasury Internal Revenue Service Instructions for Form 1065 U.S. Return of Partnership

2000 Department of the TreasuryInternal Revenue Service

Instructions for Form 1065U.S. Return of Partnership IncomeSection references are to the Internal Revenue Code unless otherwise noted.

Contents Page

Changes To Note● The FSC Repeal and ExtraterritorialIncome Exclusion Act of 2000 allows anew extraterritorial income exclusion fortransactions after September 30, 2000.The exclusion is based on a partnership'squalifying foreign trade income. For moredetails and to figure the amount of theexclusion, see new Form 8873 ,Extraterritorial Income Exclusion.● The partnership may need to mail itsreturn to a different service center thisyear because the IRS has changed thefiling location for several areas. If anenvelope was received with the taxpackage, please use it. Otherwise, seeWhere To File on page 4.● Generally, if a partnership's averageannual gross receipts for the 3 prior taxyears are $1 million or less, it may beeligible to adopt or change to the cashmethod of accounting. If the partnershipmakes this change, it will not be requiredto account for inventories. Instead, thepartnership may treat inventory in thesame manner as costs of material andsupplies that are not incidental. Fordetails, see Cost of Goods Sold on page17.● For tax years ending on or afterDecember 31, 2000, certain partnerships

Contents Page with more than 100 partners are requiredto file Form 1065 electronically. Fordetails see Electronic Filing on page 3.

Photographs of MissingChildrenThe Internal Revenue Service is a proudpartner with the National Center forMissing and Exploited Children.Photographs of missing children selectedby the Center may appear in instructionson pages that would otherwise be blank.You can help bring these children homeby looking at the photographs and calling1-800-THE-LOST (1-800-843-5678) if yourecognize a child.

Unresolved Tax IssuesIf the partnership has attempted to dealwith an IRS problem unsuccessfully, itshould contact the Taxpayer Advocate.The Taxpayer Advocate independentlyrepresents the partnership's interests andconcerns within the IRS by protecting itsrights and resolving problems that havenot been fixed through normal channels.

While the Taxpayer Advocates cannotchange the tax law or make a technicaltax decision, they can clear up problemsthat resulted from previous contacts andensure that the partnership's case is givena complete and impartial review.

The partnership's assigned personaladvocate will listen to its point of view andwill work with the partnership to addressits concerns. The partnership can expectthe advocate to provide:● A “fresh look” at a new or on-goingproblem.● Timely acknowledgement.● The name and phone number of theindividual assigned to its case.● Updates on progress.● Timeframes for action.● Speedy resolution.● Courteous service.

When contacting the TaxpayerAdvocate, the partnership should providethe following information:● The partnership's name, address, andemployer identification number.● The name and telephone number of anauthorized contact person and the hourshe or she can be reached.● The type of tax return and year(s)involved.

Specific Items and Questions . . . 20Changes To Note . . . . . . . . . . 1Specific Instructions (Schedules K

and K-1, Except as Noted) . . . 21Photographs of Missing Children . . 1Unresolved Tax Issues . . . . . . . 1

Special Allocations . . . . . . . . 21How To Get Forms and Publications 2Income (Loss) . . . . . . . . . . . 21

General Instructions . . . . . . . . 2Deductions . . . . . . . . . . . . 23

Purpose of Form . . . . . . . . . 2Credits . . . . . . . . . . . . . . 24

Definitions . . . . . . . . . . . . . 2Investment Interest . . . . . . . . 24

Who Must File . . . . . . . . . . 2Self-Employment . . . . . . . . . 25

Termination of the Partnership . . 3Adjustments and Tax Preference

Items . . . . . . . . . . . . . . 26Electronic Filing . . . . . . . . . . 3When To File . . . . . . . . . . . 3 Foreign Taxes . . . . . . . . . . 27Where To File . . . . . . . . . . . 4 Other . . . . . . . . . . . . . . . 28Who Must Sign . . . . . . . . . . 4 Analysis of Net Income (Loss) . . . 30Penalties . . . . . . . . . . . . . 4

Schedule L—Balance Sheets . . . . 30Accounting Methods . . . . . . . 4

Schedule M-1—Reconciliation ofIncome (Loss) per Books WithIncome (Loss) per Return . . . . 30

Accounting Periods . . . . . . . . 5Rounding Off to Whole Dollars . . 5Recordkeeping . . . . . . . . . . 5 Schedule M-2—Analysis of Partners'

Capital Accounts . . . . . . . . . 30Amended Return . . . . . . . . . 5Other Forms, Returns, and

Statements That May Be Required 6Codes for Principal Business Activity

and Principal Product or Service . 32Assembling the Return . . . . . . 7Separately Stated Items . . . . . 7Elections Made by the Partnership 7Elections Made by Each Partner . 8Partner's Dealings With Partnership 8Contributions to the Partnership . 8Dispositions of Contributed Property 8Recognition of Precontribution Gain

on Certain Partnership Distributions 8Unrealized Receivables and Inventory

Items . . . . . . . . . . . . . . 8Passive Activity Limitations . . . . 8

Specific Instructions . . . . . . . 12General Information . . . . . . . . 13Income . . . . . . . . . . . . . . 13Deductions . . . . . . . . . . . . 14

Schedule A—Cost of Goods Sold . 17Schedule B—Other Information . . . 18Designation of Tax Matters Partner . 19Schedules K and K-1—Partners'

Shares of Income, Credits,Deductions, etc. . . . . . . . . . 20Purpose of Schedules . . . . . . 20Substitute Forms . . . . . . . . . 20How Income is Shared Among

Partners . . . . . . . . . . . . . 20Specific Instructions (Schedule K-1

Only) . . . . . . . . . . . . . . . 20General Information . . . . . . . . 20

Cat. No. 11392V

● A detailed description of the problem.● Previous attempts to solve the problemand the office that had been contacted.● A description of the hardship thepartnership is facing (if applicable).

The partnership may contact aTaxpayer Advocate by calling a toll-freenumber, 1-877-777-4778. Persons whohave access to TTY/TDD equipment maycall 1-800-829-4059 and ask for theTaxpayer Advocate. If the partnershipprefers, it may call, write, or fax theTaxpayer Advocate office in its area. SeePub. 1546, The Taxpayer AdvocateService of the IRS, for a list of addressesand fax numbers.

How To Get Forms andPublications

Personal ComputerYou can access the IRS Web Site 24hours a day, 7 days a week atwww.irs.gov to:● Download forms, instructions, andpublications.● See answers to frequently asked taxquestions.● Search publications on-line by topic orkeyword.● Send us comments or request help bye-mail.● Sign up to receive local and national taxnews by e-mail.

You can also reach us using filetransfer protocol at ftp.irs.gov.

CD-ROMOrder Pub. 1796 , Federal Tax Productson CD-ROM, and get:● Current year forms, instructions, andpublications.● Prior year forms, instructions, andpublications.● Popular tax forms that may be filled inelectronically, printed out for submission,and saved for recordkeeping.● The Internal Revenue Bulletin.

Buy the CD-ROM on the Internet atwww.irs.gov/cdorders from the NationalTechnical Information Service (NTIS) for$21 (no handling fee), or call1-877-CDFORMS (1-877-233-6767) tollfree to buy the CD-ROM for $21 (plus a$5 handling fee).

By Phone and In PersonYou can order forms and publications 24hours a day, 7 days a week, by calling1-800-TAX-FORM (1-800-829-3676). Youcan also get most forms and publicationsat your local IRS office.

General Instructions

Purpose of FormForm 1065 is an information return usedto report the income, deductions, gains,losses, etc., from the operation of apartnership. A partnership does not paytax on its income but “passes through”any profits or losses to its partners.Partners must include partnership itemson their tax returns.

Definitions

PartnershipA partnership is the relationship betweentwo or more persons who join to carry ona trade or business, with each personcontributing money, property, labor, orskill and each expecting to share in theprofits and losses of the business whetheror not a formal partnership agreement ismade.

The term “partnership” includes alimited partnership, syndicate, group,pool, joint venture, or otherunincorporated organization, through orby which any business, financialoperation, or venture is carried on, that isnot, within the meaning of the regulationsunder section 7701, a corporation, trust,estate, or sole proprietorship.

A joint undertaking merely to shareexpenses is not a partnership. Mereco-ownership of property that ismaintained and leased or rented is not apartnership. However, if the co-ownersprovide services to the tenants, apartnership exists.

General PartnerA general partner is a partner who ispersonally liable for partnership debts.

General PartnershipA general partnership is composed onlyof general partners.

Limited PartnerA limited partner is a partner in apartnership formed under a state limitedpartnership law, whose personal liabilityfor partnership debts is limited to theamount of money or other property thatthe partner contributed or is required tocontribute to the partnership. Somemembers of other entities, such asdomestic or foreign business trusts orlimited liability companies that areclassified as partnerships, may be treatedas limited partners for certain purposes.See, for example, Temporary Regulationssection 1.469-5T(e)(3), which treats allmembers with limited liability as limitedpartners for purposes of section469(h)(2).

Limited PartnershipA limited partnership is formed under astate limited partnership law andcomposed of at least one general partnerand one or more limited partners.

Limited Liability PartnershipA limited liability partnership (LLP) isformed under a state limited liabilitypartnership law. Generally, a partner inan LLP is not personally liable for thedebts of the LLP or any other partner, noris a partner liable for the acts or omissionsof any other partner, solely by reason ofbeing a partner.

Limited Liability CompanyA limited liability company (LLC) is anentity formed under state law by filingarticles of organization as an LLC. Unlikea partnership, none of the members of anLLC are personally liable for its debts. AnLLC may be classified for Federal incometax purposes either as a partnership, acorporation, or an entity disregarded asan entity separate from its owner byapplying the rules in Regulations section301.7701-3. See Form 8832 , EntityClassification Election, for more details.Note: A domestic LLC with at least twomembers that does not file Form 8832 isclassified as a partnership for Federalincome tax purposes.

Nonrecourse LoansNonrecourse loans are those liabilities ofthe partnership for which no partner bearsthe economic risk of loss.

Who Must FileExcept as provided below, every domesticpartnership must file Form 1065, unlessit neither receives income nor incurs anyexpenditures treated as deductions orcredits for Federal income tax purposes.

Generally, a foreign partnership thathas gross income effectively connectedwith the conduct of a trade or businesswithin the United States or has grossincome derived from sources in the UnitedStates must file Form 1065, even if itsprincipal place of business is outside theUnited States or all its members areforeign persons. A foreign partnershiprequired to file a return generally mustreport all of its foreign and U.S. sourceincome.

A foreign partnership filing Form 1065solely to make an election (such as anelection to amortize organizationexpenses) need only provide its name,address, and employer identificationnumber (EIN) on page one of the formand attach a statement identifying theelection being made. A foreignpartnership filing Form 1065 solely tomake an election must obtain an EIN if itdoes not already have one.

Page 2 Instructions for Form 1065

A foreign partnership generally is notrequired to file a return if it has $20,000or less of U.S. source income that is noteffectively connected income (ECI), it hasno ECI, and, at no time during the taxyear, is one percent or more of anypartnership item allocable in theaggregate to direct U.S. partners. SeeRegulations section 1.6031(a)-1(b) formore details.

Entities formed as LLCs that areclassified as partnerships for Federalincome tax purposes must file Form 1065.

A religious or apostolic organizationexempt from income tax under section501(d) must file Form 1065 to report itstaxable income, which must be allocatedto its members as a dividend, whetherdistributed or not. Such an organizationmust figure its taxable income on anattachment to Form 1065 in the samemanner as a corporation. Theorganization may use Form 1120, U.S.Corporation Income Tax Return, for thispurpose. Enter the organization's taxableincome, if any, on line 4b of Schedule Kand each member's pro rata share on line4b of Schedule K-1. Net operating lossesare not deductible by the members butmay be carried back or forward by theorganization under the rules of section172. The religious or apostolicorganization also must make its annualinformation return available for publicinspection. For this purpose, “annualinformation return” includes an exact copyof Form 1065 and all accompanyingschedules and attachments, exceptSchedules K-1. For more details, seeRegulations section 301.6104(d)-3.

A qualifying syndicate, pool, jointventure, or similar organization may electunder section 761(a) not to be treated asa partnership for Federal income taxpurposes and will not be required to fileForm 1065 except for the year of election.For details, see section 761(a) andRegulations section 1.761-2.

An electing large partnership (asdefined in section 775) must file Form1065-B, U.S. Return of Income forElecting Large Partnerships.

Real estate mortgage investmentconduits (REMICs) must file Form 1066 ,U.S. Real Estate Mortgage InvestmentConduit (REMIC) Income Tax Return.

Certain publicly traded partnershipstreated as corporations under section7704 must file Form 1120.

Termination of thePartnershipA partnership terminates when:

1. All its operations are discontinuedand no part of any business, financialoperation, or venture is continued by anyof its partners in a partnership, or

2. At least 50% of the total interest inpartnership capital and profits is sold or

exchanged within a 12-month period,including a sale or exchange to anotherpartner. See Regulations section1.708-1(b)(1) for more details.

The partnership's tax year ends on thedate of termination. For purposes of 1above, the date of termination is the datethe partnership winds up its affairs. Forpurposes of 2 above, the date oftermination is the date the partnershipinterest is sold or exchanged that, of itselfor together with other sales or exchangesin the preceding 12 months, transfers aninterest of 50% or more in bothpartnership capital and profits.

Special rules apply in the case of amerger, consolidation, or division of apartnership. See Regulations section1.708-1(b)(2) for details.

Electronic FilingFor tax years ending on or afterDecember 31, 2000, certain partnershipswith more than 100 partners are requiredto file Form 1065, Schedules K-1, andrelated forms and scheduleselectronically. Other partnershipsgenerally have the option to fileelectronically. This requirement or optiondoes not apply to:● Partnerships with a foreign address onForm 1065.● Partnerships filing fiscal year returns.● Partnerships filing short period or finalreturns.

To file electronically, partnershipsmust file:● Form 9041, Application/Registration forElectronic/Magnetic Media Filing ofBusiness Returns.● Form 8453-P, U.S. PartnershipDeclaration and Signature for ElectronicFiling.

For more details on electronicfiling, see:● Pub. 1524, Procedures andSpecifications for the 1065 e-FileProgram, U.S. Return of PartnershipIncome, for Tax Year 2000;● Pub. 1525, Validation Criteria andRecord Layouts for the 1065 e-FileProgram, U.S. Return of PartnershipIncome, for Tax Year 2000;● Pub. 3416, Electronic Filing of Form1065 (Publication 1525 Supplement) forTax Year 2000; and● Pub. 3225, Test Package for ElectronicFilers of U.S. Partnership Return ofIncome, for Tax Year 2000.

To order these forms andpublications, or for moreinformation on filing electronically:● Call the Electronic Filing Section at theMemphis Service Center at 901-546-2690(not a toll-free call) or

● Write to Internal Revenue ServiceCenter, Electronic Filing Section, Stop 26,P.O. Box 30309, Memphis, TN 38130.

Electronic Filing WaiverThe IRS may waive the electronic filingrules if the partnership demonstrates thata hardship would result if it were requiredto file its return electronically. To requesta waiver for the tax year endingDecember 31, 2000, the partnership mustfile a written request during the periodbeginning January 2, 2001, and ending75 days prior to the due date of the return,including extensions. File the requestwith: Internal Revenue Service, P.O. Box30309 AMF Stop 2711, Memphis, TN38130. For more details, call901-546-2690 (not a toll-free call).

When To FileGenerally, a domestic partnership mustfile Form 1065 by the 15th day of the 4thmonth following the date its tax yearended as shown at the top of Form 1065.For partnerships that keep their recordsand books of account outside the UnitedStates and Puerto Rico, an extension oftime to file and pay is granted to the 15thday of the 6th month following the closeof the tax year. If the due date falls on aSaturday, Sunday, or legal holiday, file bythe next business day.

Private Delivery ServicesYou can use certain private deliveryservices designated by the IRS to meetthe “timely mailing as timely filing/paying”rule for Form 1065. The most recent listof designated private delivery serviceswas published by the IRS in August 1999.The list includes only the following:● Airborne Express (Airborne): OvernightAir Express Service, Next AfternoonService, Second Day Service.● DHL Worldwide Express (DHL): DHL“Same Day” Service, DHL USAOvernight.● Federal Express (FedEx): FedExPriority Overnight, FedEx StandardOvernight, FedEx 2Day.● United Parcel Service (UPS): UPS NextDay Air, UPS Next Day Air Saver, UPS2nd Day Air, UPS 2nd Day Air A.M.

The private delivery service can tell youhow to get written proof of the mailingdate.

ExtensionIf you need more time to file a partnershipreturn, file Form 8736, Application forAutomatic Extension of Time To File U.S.Return for a Partnership, REMIC, or forCertain Trusts, for an automatic 3-monthextension. File Form 8736 by the regulardue date of the partnership return. Theautomatic 3-month extension periodincludes any 2-month extension grantedto partnerships that keep their recordsand books of account outside the UnitedStates and Puerto Rico.

Instructions for Form 1065 Page 3

If, after you have filed Form 8736, youstill need more time to file the partnershipreturn, file Form 8800, Application forAdditional Extension of Time To File U.S.Return for a Partnership, REMIC, or forCertain Trusts, for an additional extensionof up to 3 months. The partnership mustprovide a full explanation of the reasonsfor requesting the extension in order toget this additional extension. Form 8800must be filed by the extended due dateof the partnership return.

Period CoveredForm 1065 is an information return forcalendar year 2000 and fiscal yearsbeginning in 2000 and ending in 2001. Ifthe return is for a fiscal year or a short taxyear, fill in the tax year space at the topof the form.

The 2000 Form 1065 may also be usedif:

1. The partnership has a tax year ofless than 12 months that begins and endsin 2001; and

2. The 2001 Form 1065 is notavailable by the time the partnership isrequired to file its return.

However, the partnership must show its2001 tax year on the 2000 Form 1065 andincorporate any tax law changes that areeffective for tax years beginning after2000.

Where To FileFile Form 1065 at the applicable IRSaddress listed below.

A partnership without a principal officeor agency or principal place of businessin the United States must file its returnwith the Internal Revenue Service Center,Philadelphia, PA 19255-0011.

Who Must Sign

General Partner or LLC MemberForm 1065 is not considered to be areturn unless it is signed. One generalpartner or LLC member must sign thereturn. If a receiver, trustee in bankruptcy,or assignee controls the organization'sproperty or business, that person mustsign the return.

Paid Preparer's InformationIf someone prepares the return and doesnot charge the partnership, that personshould not sign the partnership return.

Generally, anyone who is paid toprepare the partnership return must :● Sign the return, by hand, in the spaceprovided for the preparer's signature.Signature stamps or labels are notacceptable.● Fill in the other blanks in the PaidPreparer's Use Only area of the return.● Give the partnership a copy of thereturn in addition to the copy to be filedwith the IRS.

Penalties

Late Filing of ReturnA penalty is assessed against thepartnership if it is required to file apartnership return and it (a) fails to file thereturn by the due date, includingextensions, or (b) files a return that failsto show all the information required,unless such failure is due to reasonablecause. If the failure is due to reasonablecause, attach an explanation to the

partnership return. The penalty is $50 foreach month or part of a month (for amaximum of 5 months) the failurecontinues, multiplied by the total numberof persons who were partners in thepartnership during any part of thepartnership's tax year for which the returnis due. This penalty will not be imposedon partnerships for which the answer toQuestion 4 on Schedule B of Form 1065is No, provided all partners have timelyfiled income tax returns fully reportingtheir shares of the income, deductions,and credits of the partnership. See page19 of the instructions for furtherinformation.

Failure To Furnish InformationTimelyFor each failure to furnish Schedule K-1to a partner when due and each failure toinclude on Schedule K-1 all theinformation required to be shown (or theinclusion of incorrect information), a $50penalty may be imposed with respect toeach Schedule K-1 for which a failureoccurs. The maximum penalty is$100,000 for all such failures during acalendar year. If the requirement to reportcorrect information is intentionallydisregarded, each $50 penalty isincreased to $100 or, if greater, 10% ofthe aggregate amount of items requiredto be reported, and the $100,000maximum does not apply.

Trust Fund Recovery PenaltyThis penalty may apply if certain excise,income, social security, and Medicaretaxes that must be collected or withheldare not collected or withheld, or thesetaxes are not paid. These taxes aregenerally reported on:● Form 720, Quarterly Federal ExciseTax Return;● Form 941, Employer's QuarterlyFederal Tax Return;● Form 943, Employer's Annual TaxReturn for Agricultural Employees; or● Form 945, Annual Return of WithheldFederal Income Tax.

The trust fund recovery penalty maybe imposed on all persons who aredetermined by the IRS to have beenresponsible for collecting, accounting for,and paying over these taxes, and whoacted willfully in not doing so. The penaltyis equal to the unpaid trust fund tax. Seethe Instructions for Form 720, Pub. 15,Circular E, Employer's Tax Guide, or Pub.51, Circular A, Agricultural Employer'sTax Guide, for more details, including thedefinition of a responsible person.

Accounting MethodsFigure ordinary income using the methodof accounting regularly used in keepingthe partnership's books and records.Generally, permissible methods include:● Cash,

Alaska, Arizona, Arkansas,California (counties of Alpine,Amador, Butte, Calaveras,Colusa, Contra Costa, DelNorte, El Dorado, Glenn,Humboldt, Lake, Lassen,Marin, Mendocino, Modoc,Napa, Nevada, Placer,Plumas, Sacramento, SanJoaquin, Shasta, Sierra,Siskiyou, Solano, Sonoma,Sutter, Tehama, Trinity, Yolo,and Yuba), Colorado, Hawaii,Idaho, Iowa, Louisiana,Minnesota, Mississippi,Missouri, Montana,Nebraska, Nevada, NorthDakota, Oregon, SouthDakota, Texas, Utah,Washington, Wyoming

Ogden, UT84201-0011

California (all other counties)Fresno, CA93888-0011

IllinoisKansas City, MO

64999-0011

Alabama, TennesseeMemphis, TN

37501-0011

VirginiaPhiladelphia, PA

19255-0011

If the partnership'sprincipal business,office, or agency is

located in

Use the followingInternal Revenue

Service Center address

New York (New York Cityand counties of Nassau,Rockland, Suffolk, andWestchester)

Holtsville, NY00501-0011

New York (all othercounties), Connecticut,Maine, Massachusetts, NewHampshire, Rhode Island,Vermont

Andover, MA05501-0011

Florida, GeorgiaAtlanta, GA39901-0011

Delaware, District ofColumbia, Indiana, Kentucky,Maryland, Michigan, NewJersey, North Carolina, Ohio,Pennsylvania, SouthCarolina, West Virginia,Wisconsin

Cincinnati, OH45999-0011

Kansas, New Mexico,Oklahoma

Austin, TX73301-0011


● Accrual, or● Any other method authorized by theInternal Revenue Code.

In all cases, the method used mustclearly reflect income. If inventories arerequired, the accrual method must beused for sales and purchases ofmerchandise. See Schedule A—Costof Goods Sold , on page 17.

Generally, a partnership may not usethe cash method of accounting if (a) it hasat least one corporate partner, averageannual gross receipts of more than $5million, and it is not a farming businessor (b) it is a tax shelter (as defined insection 448(d)(3)). See section 448 fordetails.

Under the accrual method, an amountis includible in income when:● All the events have occurred that fix theright to receive the income which is theearliest of the date: (a) the requiredperformance takes place, (b) payment isdue, or (c) payment is received, and● The amount can be determined withreasonable accuracy.

See Regulations section 1.451-1(a) fordetails.

Generally, an accrual basis taxpayercan deduct accrued expenses in the taxyear in which:● All events that determine liability haveoccurred,● The amount of the liability can befigured with reasonable accuracy, and● Economic performance takes place withrespect to the expense.

There are exceptions for certain items,including recurring expenses. Except forcertain home construction contracts andother real property small constructioncontracts, long-term contracts mustgenerally be accounted for using thepercentage of completion methoddescribed in section 460.Change in accounting method.Generally, the partnership must get IRSconsent to change its method ofaccounting used to report income (forincome as a whole or for any materialitem). To do so, it must file Form 3115,Application for Change in AccountingMethod. For more information, see Pub.538, Accounting Periods and Methods.

Mark-to-Market Accounting MethodDealers in securities must use the“mark-to-market” accounting methoddescribed in section 475. Under thismethod, any security that is inventory tothe dealer must be included in inventoryat its fair market value (FMV). Anysecurity that is not inventory and that isheld at the close of the tax year is treatedas sold at its FMV on the last businessday of the tax year, and any gain or lossmust be taken into account in determininggross income. The gain or loss taken intoaccount is generally treated as ordinary

gain or loss. For details, includingexceptions, see section 475 and therelated regulations.

Dealers in commodities and tradersin securities and commodities mayelect to use the mark-to-marketaccounting method. To make the election,the partnership must file a statementdescribing the election, the first tax yearthe election is to be effective, and, in thecase of an election for traders in securitiesor commodities, the trade or business forwhich the election is made. Except fornew taxpayers, the statement must befiled by the due date (not includingextensions) of the income tax return forthe tax year immediately preceding theelection year and attached to that return,or, if applicable, to a request for anextension of time to file that return. Formore details, see Rev. Proc. 99-17,1999-1 C.B. 503, and sections 475(e) and(f).

Accounting PeriodsA partnership is generally required tohave one of the following tax years:

1. The tax year of a majority of itspartners (majority tax year).

2. If there is no majority tax year, thenthe tax year common to all of thepartnership's principal partners (partnerswith an interest of 5% or more in thepartnership profits or capital).

3. If there is neither a majority tax yearnor a tax year common to all principalpartners, then the tax year that results inthe least aggregate deferral of income.

4. Some other tax year, if:● The partnership can establish that thereis a business purpose for the tax year(see Rev. Proc. 87-32, 1987-2 C.B. 396);or● The tax year is a “grandfathered” year(see Rev. Proc. 87-32); or● The partnership elects under section444 to have a tax year other than arequired tax year by filing Form 8716,Election to Have a Tax Year Other Thana Required Tax Year. For a partnershipto have this election in effect, it mustmake the payments required by section7519 and file Form 8752, RequiredPayment or Refund Under Section 7519.

A section 444 election ends if apartnership changes its accounting periodto its required tax year or some otherpermitted year or it is penalized forwillfully failing to comply with therequirements of section 7519. If thetermination results in a short tax year,type or legibly print at the top of the firstpage of Form 1065 for the short tax year,“SECTION 444 ELECTIONTERMINATED.”

To change an accounting period, seePub. 538 and Form 1128, Application ToAdopt, Change, or Retain a Tax Year,

(unless the partnership is making anelection under section 444).Note: The tax year of a common trustfund must be the calendar year.

Rounding Off to WholeDollarsYou may round off cents to whole dollarson your return and accompanyingschedules. To do so, drop amounts under50 cents and increase amounts from 50to 99 cents to the next higher dollar.

RecordkeepingThe partnership must keep its records aslong as they may be needed for theadministration of any provision of theInternal Revenue Code. If theconsolidated audit procedures of sections6221 through 6233 apply, the partnershipusually must keep records that supportan item of income, deduction, or credit onthe partnership return for 3 years from thedate the return is due or is filed,whichever is later. If the consolidatedaudit procedures do not apply, theserecords usually must be kept for 3 yearsfrom the date each partner's return is dueor is filed, whichever is later. Keeprecords that verify the partnership's basisin property for as long as they are neededto figure the basis of the original orreplacement property.

The partnership should also keepcopies of all returns it has filed. They helpin preparing future returns and in makingcomputations when filing an amendedreturn.

Amended ReturnTo correct an error on a Form 1065already filed, file an amended Form 1065and check box G(4) on page 1. If theincome, deductions, credits, or otherinformation provided to any partner onSchedule K-1 are incorrect, file anamended Schedule K-1 (Form 1065) forthat partner with the amended Form 1065.Also give a copy of the amendedSchedule K-1 to that partner. Check boxI(2) on the Schedule K-1 to indicate thatit is an amended Schedule K-1.Exception: If you are filing an amendedpartnership return and you answered Yesto Question 4 in Schedule B, the taxmatters partner must file Form 8082,Notice of Inconsistent Treatment orAdministrative Adjustment Request(AAR).

A change to the partnership's Federalreturn may affect its state return. Thisincludes changes made as a result of anexamination of the partnership return bythe IRS. For more information, contactthe state tax agency for the state in whichthe partnership return is filed.


Other Forms, Returns, andStatements That May BeRequired● Forms W-2 and W-3, Wage and TaxStatement; and Transmittal of Wage andTax Statements. Use these forms toreport wages, tips, other compensation,and withheld income, social security andMedicare taxes for employees.● Form 720, Quarterly Federal ExciseTax Return. Use Form 720 to reportenvironmental excise taxes,communications and air transportationtaxes, fuel taxes, luxury tax on passengervehicles, manufacturers' taxes, shippassenger tax, and certain other excisetaxes.

CAUTION!

See Trust Fund RecoveryPenalty on page 4.

● Form 926, Return by a U.S. Transferorof Property to a Foreign Corporation. Usethis form to report certain informationrequired under section 6038B.● Form 940 or Form 940-EZ, Employer'sAnnual Federal Unemployment (FUTA)Tax Return. The partnership may be liablefor FUTA tax and may have to file Form940 or 940-EZ if it paid wages of $1,500or more in any calendar quarter during thecalendar year (or the preceding calendaryear) or one or more employees workedfor the partnership for some part of a dayin any 20 different weeks during thecalendar year (or the preceding calendaryear).● Form 941, Employer's QuarterlyFederal Tax Return. Employers must filethis form quarterly to report income taxwithheld on wages and employer andemployee social security and Medicaretaxes. Agricultural employers must fileForm 943, Employer's Annual Tax Returnfor Agricultural Employees, instead ofForm 941, to report income tax withheldand employer and employee socialsecurity and Medicare taxes onfarmworkers.

CAUTION!


● Form 945, Annual Return of WithheldFederal Income Tax. Use this form toreport income tax withheld fromnonpayroll payments, including pensions,annuities, individual retirement accounts(IRAs), gambling winnings, and backupwithholding.

CAUTION!


● Forms 1042 and 1042-S, AnnualWithholding Tax Return for U.S. SourceIncome of Foreign Persons; and ForeignPerson's U.S. Source Income Subject toWithholding. Use these forms to reportand send withheld tax on payments ordistributions made to nonresident alienindividuals, foreign partnerships, or

foreign corporations to the extent suchpayments or distributions constitute grossincome from sources within the UnitedStates that is not effectively connectedwith a U.S. trade or business. A domesticpartnership must also withhold tax on aforeign partner's distributive share of suchincome, including amounts that are notactually distributed. Withholding onamounts not previously distributed to aforeign partner must be made and paidover by the earlier of (a) the date on whichSchedule K-1 is sent to that partner or (b)the 15th day of the 3rd month after theend of the partnership's tax year. Formore information, see sections 1441 and1442 and Pub. 515, Withholding of Taxon Nonresident Aliens and ForeignCorporations.● Form 1096, Annual Summary andTransmittal of U.S. Information Returns.● Form 1098, Mortgage InterestStatement. Use this form to report thereceipt from any individual of $600 ormore of mortgage interest (includingpoints) in the course of the partnership'strade or business.● Forms 1099-A, B, INT, LTC, MISC,MSA, OID, R, and S. You may have to filethese information returns to reportacquisitions or abandonments of securedproperty; proceeds from broker and barterexchange transactions; interestpayments; payments of long-term careand accelerated death benefits;miscellaneous income payments;distributions from a medical savingsaccount (MSA); original issue discount;distributions from pensions, annuities,retirement or profit-sharing plans, IRAs,insurance contracts, etc.; and proceedsfrom real estate transactions. Also, usecertain of these returns to report amountsthat were received as a nominee onbehalf of another person.

For more information, see theInstructions for Forms 1099, 1098, 5498,and W-2G.Important: Every partnership must fileForms 1099-MISC if, in the course of itstrade or business, it makes payments ofrents, commissions, or other fixed ordeterminable income (see section 6041)totaling $600 or more to any one personduring the calendar year.● Form 5471, Information Return of U.S.Persons With Respect to Certain ForeignCorporations. A partnership may have tofile Form 5471 if it (a) controls a foreigncorporation; or (b) acquires, disposes of,or owns 5% or more in value of theoutstanding stock of a foreign corporation;or (c) owns stock in a corporation that isa controlled foreign corporation for anuninterrupted period of 30 days or moreduring any tax year of the foreigncorporation, and it owned that stock onthe last day of that year.● Form 5713, International BoycottReport, is used by persons havingoperations in, or related to, a “boycotting”

country, company, or national of acountry, to report those operations andfigure the loss of certain tax benefits. Thepartnership must give each partner a copyof the Form 5713 filed by the partnershipif there has been participation in, orcooperation with, an international boycott.● Form 8264, Application for Registrationof a Tax Shelter. Tax shelter organizersmust file Form 8264 to get a tax shelterregistration number from the IRS.● Form 8271, Investor Reporting of TaxShelter Registration Number.Partnerships that have acquired aninterest in a tax shelter that is required tobe registered use Form 8271 to report thetax shelter's registration number. AttachForm 8271 to any return on which adeduction, credit, loss, or other tax benefitattributable to a tax shelter is taken or anyincome attributable to a tax shelter isreported.● Form 8275, Disclosure Statement. FileForm 8275 to disclose items or positions,except those contrary to a regulation, thatare not otherwise adequately disclosedon a tax return. The disclosure is madeto avoid the parts of the accuracy-relatedpenalty imposed for disregard of rules orsubstantial understatement of tax. Form8275 is also used for disclosures relatingto preparer penalties for understatementsdue to unrealistic positions or disregardof rules.● Form 8275-R, Regulation DisclosureStatement, is used to disclose any itemon a tax return for which a position hasbeen taken that is contrary to Treasuryregulations.● Forms 8288 and 8288-A, U.S.Withholding Tax Return for Dispositionsby Foreign Persons of U.S. Real PropertyInterests; and Statement of Withholdingon Dispositions by Foreign Persons ofU.S. Real Property Interests. Use theseforms to report and send withheld tax onthe sale of U.S. real property by a foreignperson. See section 1445 and the relatedregulations for additional information.● Form 8300, Report of Cash PaymentsOver $10,000 Received in a Trade orBusiness. File this form to report thereceipt of more than $10,000 in cash orforeign currency in one transaction or aseries of related transactions.● Form 8308 , Report of a Sale orExchange of Certain PartnershipInterests, is used by a partnership toreport the sale or exchange by a partnerof all or part of a partnership interestwhere any money or other propertyreceived in exchange for the interest isattributable to unrealized receivables orinventory items.● Form 8594, Asset AcquisitionStatement. Both the seller and buyer of agroup of assets that makes up a trade orbusiness must use this form to reportsuch a sale if goodwill or going concernvalue attaches, or could attach, to suchassets and if the buyer's basis in the


assets is determined only by the amountpaid for the assets.● Form 8697, Interest ComputationUnder the Look-Back Method forCompleted Long-Term Contracts.Partnerships that are not closely held usethis form to figure the interest due or tobe refunded under the look-back methodof section 460(b)(2) on certain long-termcontracts that are accounted for undereither the percentage ofcompletion-capitalized cost method or thepercentage of completion method. Closelyheld partnerships should see theinstructions on page 29 for line 25, item10, of Schedule K-1 for details on theForm 8697 information they must provideto their partners.● Forms 8804, 8805, and 8813, AnnualReturn for Partnership Withholding Tax(Section 1446); Foreign Partner'sInformation Statement of Section 1446Withholding Tax; and PartnershipWithholding Tax Payment (Section 1446).File Forms 8804 and 8805 if thepartnership had effectively connectedgross income and foreign partners for thetax year. Use Form 8813 to sendinstallment payments of withheld taxbased on effectively connected taxableincome allocable to foreign partners.Exception: Publicly traded partnershipsthat do not elect to pay tax based oneffectively connected taxable income donot file these forms. They must insteadwithhold tax on distributions to foreignpartners and report and send paymentsusing Forms 1042 and 1042-S. Seesection 1446 for more information.● Form 8832, Entity ClassificationElection. Except for a business entityautomatically classified as a corporation,a business entity with at least twomembers may choose to be classifiedeither as a partnership or an associationtaxable as a corporation. A domesticeligible entity with at least two membersthat does not file Form 8832 is classifiedunder the default rules as a partnership.However, a foreign eligible entity with atleast two members is classified under thedefault rules as a partnership only if atleast one member does not have limitedliability. File Form 8832 only if the entitydoes not want to be classified under thesedefault rules or if it wants to change itsclassification.● Form 8865, Return of U.S. Person WithRespect To Certain Foreign Partnerships.A domestic partnership may have to fileForm 8865 if it:

1. Controlled a foreign partnership (forexample, it owned more than a 50% director indirect interest in the partnership).

2. Owned at least a 10% direct orindirect interest in a foreign partnershipwhile U.S. persons controlled thatpartnership.

3. Had an acquisition, disposition, orchange in proportional interest of a foreignpartnership that:

a. Increased its direct interest to atleast 10% or reduced its direct interest ofat least 10% to less than 10%.

b. Changed its direct interest by atleast a 10% interest.

4. Contributed property to a foreignpartnership in exchange for a partnershipinterest if:

a. Immediately after the contribution,the partnership owned, directly orindirectly, at least a 10% interest in theforeign partnership; or

b. The fair market value of theproperty the partnership contributed to theforeign partnership in exchange for apartnership interest, when added to othercontributions of property made to theforeign partnership during the preceding12-month period, exceeds $100,000.

Also, the domestic partnership mayhave to file Form 8865 to report certaindispositions by a foreign partnership ofproperty it previously contributed to thatforeign partnership if it was a partner atthe time of the disposition.

For more details, including penalties forfailing to file Form 8865, see Form 8865and its separate instructions.● Form 8866, Interest ComputationUnder the Look-Back Method for PropertyDepreciated Under the Income ForecastMethod. Partnerships that are not closelyheld use this form to figure the interestdue or to be refunded under the look-backmethod of section 167(g)(2) for certainproperty placed in service afterSeptember 13, 1995, depreciated underthe income forecast method. Closely heldpartnerships should see the instructionson page 29 for line 25, item 19, ofSchedule K-1 for details on the Form8866 information they must provide totheir partners.

Assembling the ReturnWhen submitting Form 1065, organize thepages of the return in the following order:● Pages 1–4,● Schedule F (if required),● Form 8825 (if required),● Any other schedules in alphabeticalorder, and● Any other forms in numerical order.

To assist us in processing the return,complete every applicable entry space onForm 1065 and Schedule K-1. If youattach statements, do not write “Seeattached” instead of completing theentry spaces on the forms. Penaltiesmay be assessed if the partnershipfiles an incomplete return.

If you need more space on the formsor schedules, attach separate sheets andplace them at the end of the return. Usethe same size and format as on theprinted forms. But show your totals onthe printed forms. Be sure to put thepartnership's name and EIN on eachsheet.

Separately Stated ItemsPartners must take into accountseparately (under section 702(a)) theirdistributive shares of the following items(whether or not they are actuallydistributed):

1. Ordinary income or loss from tradeor business activities.

2. Net income or loss from rental realestate activities.

3. Net income or loss from other rentalactivities.

4. Gains and losses from sales orexchanges of capital assets.

5. Gains and losses from sales orexchanges of property described insection 1231.

6. Charitable contributions.7. Dividends (passed through to

corporate partners) that qualify for thedividends-received deduction.

8. Taxes described in section 901 paidor accrued to foreign countries and topossessions of the United States.

9. Other items of income, gain, loss,deduction, or credit, to the extent providedby regulations. Examples of such itemsinclude nonbusiness expenses, intangibledrilling and development costs,amortizable basis of reforestationexpenses, and soil and waterconservation expenditures.

Elections Made by thePartnershipGenerally, the partnership decides how tofigure taxable income from its operations.For example, it chooses the accountingmethod and depreciation methods it willuse. The partnership also makeselections under the following sections:

1. Section 179 (election to expensecertain tangible property).

2. Section 614 (definition ofproperty— mines, wells, and other naturaldeposits). This election must be madebefore the partners figure their individualdepletion allowances under section613A(c)(7)(D).

3. Section 1033 (involuntaryconversions).

4. Section 754 (manner of electingoptional adjustment to basis ofpartnership property).

Under section 754, a partnership mayelect to adjust the basis of partnershipproperty when property is distributed orwhen a partnership interest is transferred.If the election is made with respect to atransfer of a partnership interest (section743(b)) and the assets of the partnershipconstitute a trade or business forpurposes of section 1060(c), then thevalue of any goodwill transferred must bedetermined in the manner provided inTemporary Regulations section1.1060-1T. Once an election is madeunder section 754, it applies both to all


distributions and to all transfers madeduring the tax year and in all subsequenttax years unless the election is revoked.See Regulations section 1.754-1(c).

This election must be made in astatement that is filed with thepartnership's timely filed return (includingany extension) for the tax year duringwhich the distribution or transfer occurs.The statement must include:● The name and address of thepartnership.● A declaration that the partnership electsunder section 754 to apply the provisionsof section 734(b) and section 743(b).● The signature of the general partnerauthorized to sign the partnership return.

The partnership can get an automatic12-month extension to make the section754 election provided corrective action istaken within 12 months of the originaldeadline for making the election. Fordetails, see Regulations section301.9100-2.

See section 754 and the relatedregulations for more information.

If there is a distribution of propertyconsisting of an interest in anotherpartnership, see section 734(b).

Elections Made by EachPartnerElections under the following sections aremade by each partner separately on thepartner's tax return:

1. Section 59(e) (election to deductratably certain qualified expenditures suchas intangible drilling costs, miningexploration expenses, or research andexperimental expenditures).

2. Section 108 (income fromdischarge of indebtedness).

3. Section 617 (deduction andrecapture of certain mining explorationexpenditures paid or incurred).

4. Section 901 (foreign tax credit).

Partner's Dealings WithPartnershipIf a partner engages in a transaction withhis or her partnership, other than in hisor her capacity as a partner, the partneris treated as not being a member of thepartnership for that transaction. Specialrules apply to sales or exchanges ofproperty between partnerships andcertain persons, as explained in Pub. 541,Partnerships.

Contributions to thePartnershipGenerally, no gain (loss) is recognized tothe partnership or any of the partnerswhen property is contributed to thepartnership in exchange for an interest inthe partnership. This rule does not applyto any gain realized on a transfer ofproperty to a partnership that would be

treated as an investment company (withinthe meaning of section 351) if thepartnership were incorporated. If, as aresult of a transfer of property to apartnership, there is a direct or indirecttransfer of money or other property to thetransferring partner, the partner may haveto recognize gain on the exchange.

The basis to the partnership of propertycontributed by a partner is the adjustedbasis in the hands of the partner at thetime it was contributed, plus any gainrecognized (under section 721(b)) by thepartner at that time. See section 723 formore information.

Dispositions of ContributedPropertyIf the partnership disposes of propertycontributed to the partnership by apartner, income, gain, loss, anddeductions from that property must beallocated among the partners to take intoaccount the difference between theproperty's basis and its FMV at the timeof the contribution.

For property contributed to thepartnership, the contributing partner mustrecognize gain or loss on a distribution ofthe property to another partner within 5years of being contributed. For propertycontributed after June 8, 1997, the 5-yearperiod is generally extended to 7 years.The gain or loss is equal to the amountthat the contributing partner should haverecognized if the property had been soldfor its FMV when distributed, because ofthe difference between the property'sbasis and its FMV at the time ofcontribution.

See section 704(c) for details and otherrules on dispositions of contributedproperty. See section 724 for thecharacter of any gain or loss recognizedon the disposition of unrealizedreceivables, inventory items, or capitalloss property contributed to thepartnership by a partner.

Recognition ofPrecontribution Gain onCertain PartnershipDistributionsA partner who contributes appreciatedproperty to the partnership must includein income any precontribution gain to theextent the FMV of other property (otherthan money) distributed to the partner bythe partnership exceeds the adjustedbasis of his or her partnership interest justbefore the distribution. Precontributiongain is the net gain, if any, that wouldhave been recognized under section704(c)(1)(B) if the partnership haddistributed to another partner all theproperty that had been contributed to thepartnership by the distributee partnerwithin 5 years of the distribution and thatwas held by the partnership just before

the distribution. For property contributedafter June 8, 1997, the 5-year period isgenerally extended to 7 years.

Appropriate basis adjustments are tobe made to the adjusted basis of thedistributee partner's interest in thepartnership and the partnership's basis inthe contributed property to reflect the gainrecognized by the partner.

For more details and exceptions, seePub. 541.

Unrealized Receivables andInventory ItemsGenerally, if a partner sells or exchangesa partnership interest where unrealizedreceivables or inventory items areinvolved, the transferor partner mustnotify the partnership, in writing, within 30days of the exchange. The partnershipmust then file Form 8308, Report of aSale or Exchange of Certain PartnershipInterests.

If a partnership distributes unrealizedreceivables or substantially appreciatedinventory items in exchange for all or partof a partner's interest in other partnershipproperty (including money), treat thetransaction as a sale or exchangebetween the partner and the partnership.Treat the partnership gain (loss) asordinary income (loss). The income (loss)is specially allocated only to partnersother than the distributee partner.

If a partnership gives other property(including money) for all or part of thatpartner's interest in the partnership'sunrealized receivables or substantiallyappreciated inventory items, treat thetransaction as a sale or exchange of theproperty.

See Rev. Rul. 84-102, 1984-2 C.B. 119,for information on the tax consequencesthat result when a new partner joins apartnership that has liabilities andunrealized receivables. Also, see Pub.541 for more information on unrealizedreceivables and inventory items.

Passive Activity LimitationsIn general, section 469 limits the amountof losses, deductions, and credits thatpartners may claim from “passiveactivities.” The passive activity limitationsdo not apply to the partnership. Instead,they apply to each partner's share of anyincome or loss and credit attributable toa passive activity. Because the treatmentof each partner's share of partnershipincome or loss and credit depends on thenature of the activity that generated it, thepartnership must report income or lossand credits separately for each activity.

The instructions below (pages 8–12)and the instructions for Schedules K andK-1 (pages 20–30) explain the applicablepassive activity limitation rules andspecify the type of information thepartnership must provide to its partnersfor each activity. If the partnership has


more than one activity, it must reportinformation for each activity on anattachment to Schedules K and K-1.

Generally, passive activities include (a)activities that involve the conduct of atrade or business if the partner does notmaterially participate in the activity; and(b) all rental activities (defined below),regardless of the partner's participation.For exceptions, see Activities That AreNot Passive Activities below. The levelof each partner's participation in anactivity must be determined by thepartner.

The passive activity rules provide thatlosses and credits from passive activitiescan generally be applied only againstincome and tax from passive activities.Thus, passive losses and credits cannotbe applied against income from salaries,wages, professional fees, or a businessin which the taxpayer materiallyparticipates; against “portfolio income”(defined on page 10); or against the taxrelated to any of these types of income.

Special provisions apply to certainactivities. First, the passive activitylimitations must be applied separatelywith respect to a net loss from passiveactivities held through a publicly tradedpartnership. Second, special rules requirethat net income from certain activities thatwould otherwise be treated as passiveincome must be recharacterized asnonpassive income for purposes of thepassive activity limitations.

To allow each partner to correctly applythe passive activity limitations, thepartnership must report income or lossand credits separately for each of thefollowing types of activities and income:trade or business activities, rental realestate activities, rental activities otherthan rental real estate, and portfolioincome.

Activities That Are Not PassiveActivitiesPassive activities do not include:

1. Trade or business activities inwhich the partner materially participatedfor the tax year.

2. Any rental real estate activity inwhich the partner materially participatedif the partner met both of the followingconditions for the tax year:

a. More than half of the personalservices the partner performed in tradesor businesses were performed in realproperty trades or businesses in which heor she materially participated and

b. The partner performed more than750 hours of services in real propertytrades or businesses in which he or shematerially participated.Note: For a partner that is a closely heldC corporation (defined in section465(a)(1)(B)), the above conditions aretreated as met if more than 50% of thecorporation's gross receipts are from real

property trades or businesses in which thecorporation materially participated.

For purposes of this rule, each interestin rental real estate is a separate activity,unless the partner elects to treat allinterests in rental real estate as oneactivity.

If the partner is married filing jointly,either the partner or his or her spousemust separately meet both of the aboveconditions, without taking into accountservices performed by the other spouse.

A real property trade or business is anyreal property development,redevelopment, construction,reconstruction, acquisition, conversion,rental, operation, management, leasing,or brokerage trade or business. Servicesthe partner performed as an employee arenot treated as performed in a real propertytrade or business unless he or she ownedmore than 5% of the stock (or more than5% of the capital or profits interest) in theemployer.

3. An interest in an oil or gas welldrilled or operated under a workinginterest if at any time during the tax yearthe partner held the working interestdirectly or through an entity that did notlimit the partner's liability (for example, aninterest as a general partner). Thisexception applies regardless of whetherthe partner materially participated for thetax year.

4. The rental of a dwelling unit usedby a partner for personal purposes duringthe year for more than the greater of 14days or 10% of the number of days thatthe residence was rented at fair rentalvalue.

5. An activity of trading personalproperty for the account of owners ofinterests in the activity. For purposes ofthis rule, personal property meansproperty that is actively traded, such asstocks, bonds, and other securities. SeeTemporary Regulations section1.469-1T(e)(6).

Trade or Business ActivitiesA trade or business activity is an activity(other than a rental activity or an activitytreated as incidental to an activity ofholding property for investment) that:

1. Involves the conduct of a trade orbusiness (within the meaning of section162),

2. Is conducted in anticipation ofstarting a trade or business, or

3. Involves research or experimentalexpenditures deductible under section174 (or that would be if you chose todeduct rather than capitalize them).

If the partner does not materiallyparticipate in the activity, a trade orbusiness activity held through apartnership is generally a passive activityof the partner.

Each partner must determine if he orshe materially participated in an activity.As a result, while the partnership's overall

trade or business income (loss) isreported on page 1 of Form 1065, thespecific income and deductions from eachseparate trade or business activity mustbe reported on attachments to Form 1065.Similarly, while each partner's allocableshare of the partnership's overall trade orbusiness income (loss) is reported on line1 of Schedule K-1, each partner'sallocable share of the income anddeductions from each trade or businessactivity must be reported on attachmentsto each Schedule K-1. See PassiveActivity Reporting Requirements onpage 12 for more information.

Rental ActivitiesGenerally, except as noted below, if thegross income from an activity consists ofamounts paid principally for the use ofreal or personal tangible property held bythe partnership, the activity is a rentalactivity.

There are several exceptions to thisgeneral rule. Under these exceptions, anactivity involving the use of real orpersonal tangible property is not a rentalactivity if any of the following apply:● The average period of customer use(defined below) for such property is 7days or less.● The average period of customer use forsuch property is 30 days or less andsignificant personal services (definedon page 10) are provided by or on behalfof the partnership.● Extraordinary personal services(defined on page 10) are provided by oron behalf of the partnership.● The rental of such property is treatedas incidental to a nonrental activity of thepartnership under Temporary Regulationssection 1.469-1T(e)(3)(vi) andRegulations section 1.469-1(e)(3)(vi).● The partnership customarily makes theproperty available during definedbusiness hours for nonexclusive use byvarious customers.● The partnership provides property foruse in a nonrental activity of a partnershipor joint venture in its capacity as an ownerof an interest in such partnership or jointventure. Whether the partnership providesproperty used in an activity of anotherpartnership or of a joint venture in thepartnership's capacity as an owner of aninterest in the partnership or joint ventureis determined on the basis of all the factsand circumstances.

In addition, a guaranteed paymentdescribed in section 707(c) is not incomefrom a rental activity under anycircumstances.Average period of customer use.Figure the average period of customeruse for a class of property by dividing thetotal number of days in all rental periodsby the number of rentals during the taxyear. If the activity involves renting morethan one class of property, multiply theaverage period of customer use of each


class by the ratio of the gross rentalincome from that class to the activity'stotal gross rental income. The activity'saverage period of customer use equalsthe sum of these class-by-class averageperiods weighted by gross income. SeeRegulations section 1.469-1(e)(3)(iii).Significant personal services. Personalservices include only services performedby individuals. To determine if personalservices are significant personal services,consider all the relevant facts andcircumstances. Relevant facts andcircumstances include how often theservices are provided, the type andamount of labor required to perform theservices, and the value of the services inrelation to the amount charged for use ofthe property.

The following services are notconsidered in determining whetherpersonal services are significant:● Services necessary to permit the lawfuluse of the rental property.● Services performed in connection withimprovements or repairs to the rentalproperty that extend the useful life of theproperty substantially beyond the averagerental period.● Services provided in connection withthe use of any improved real property thatare similar to those commonly provided inconnection with long-term rentals ofhigh-grade commercial or residentialproperty. Examples include cleaning andmaintenance of common areas, routinerepairs, trash collection, elevator service,and security at entrances.Extraordinary personal services.Services provided in connection withmaking rental property available forcustomer use are extraordinary personalservices only if the services are performedby individuals and the customers' use ofthe rental property is incidental to theirreceipt of the services.

For example, a patient's use of ahospital room generally is incidental to thecare received from the hospital's medicalstaff. Similarly, a student's use of adormitory room in a boarding school isincidental to the personal servicesprovided by the school's teaching staff.Rental activity incidental to a nonrentalactivity. An activity is not a rental activityif the rental of the property is incidental toa nonrental activity, such as the activityof holding property for investment, a tradeor business activity, or the activity ofdealing in property.

Rental of property is incidental to anactivity of holding property forinvestment if both of the following apply:● The main purpose for holding theproperty is to realize a gain from theappreciation of the property.● The gross rental income from suchproperty for the tax year is less than 2%of the smaller of the property'sunadjusted basis or its FMV.

Rental of property is incidental to atrade or business activity if all of thefollowing apply:● The partnership owns an interest in thetrade or business at all times during theyear.● The rental property was mainly used inthe trade or business activity during thetax year or during at least 2 of the 5preceding tax years.● The gross rental income from theproperty for the tax year is less than 2%of the smaller of the property'sunadjusted basis or its FMV.

The sale or exchange of property thatis both rented and sold or exchangedduring the tax year (where the gain or lossis recognized) is treated as incidental tothe activity of dealing in property if, at thetime of the sale or exchange, the propertywas held primarily for sale to customersin the ordinary course of the partnership'strade or business.

See Temporary Regulations section1.469-1T(e)(3) and Regulations section1.469-1(e)(3) for more information on thedefinition of rental activities for purposesof the passive activity limitations.Reporting of rental activities. Inreporting the partnership's income orlosses and credits from rental activities,the partnership must separately reportrental real estate activities and rentalactivities other than rental real estateactivities.

Partners who actively participate in arental real estate activity may be able todeduct part or all of their rental real estatelosses (and the deduction equivalent ofrental real estate credits) against income(or tax) from nonpassive activities. Thecombined amount of rental real estatelosses and the deduction equivalent ofrental real estate credits from all sources(including rental real estate activities notheld through the partnership) that may beclaimed is limited to $25,000. This$25,000 amount is generally reduced forhigh-income partners.

Report rental real estate activity income(loss) on Form 8825, Rental Real EstateIncome and Expenses of a Partnershipor an S Corporation, and line 2 ofSchedules K and K-1 rather than on page1 of Form 1065. Report credits related torental real estate activities on lines 12band 12c and low-income housing creditson line 12a of Schedules K and K-1.

Report income (loss) from rentalactivities other than rental real estate online 3 and credits related to rentalactivities other than rental real estate online 12d of Schedules K and K-1.

Portfolio IncomeGenerally, portfolio income includes allgross income, other than income derivedin the ordinary course of a trade orbusiness, that is attributable to interest;dividends; royalties; income from a realestate investment trust, a regulated

investment company, a real estatemortgage investment conduit, a commontrust fund, a controlled foreigncorporation, a qualified electing fund, ora cooperative; income from thedisposition of property that producesincome of a type defined as portfolioincome; and income from the dispositionof property held for investment.

Solely for purposes of the precedingparagraph, gross income derived in theordinary course of a trade or businessincludes (and portfolio income, therefore,does not include) only the following typesof income:● Interest income on loans andinvestments made in the ordinary courseof a trade or business of lending money.● Interest on accounts receivable arisingfrom the performance of services or thesale of property in the ordinary course ofa trade or business of performing suchservices or selling such property, but onlyif credit is customarily offered tocustomers of the business.● Income from investments made in theordinary course of a trade or business offurnishing insurance or annuity contractsor reinsuring risks underwritten byinsurance companies.● Income or gain derived in the ordinarycourse of an activity of trading or dealingin any property if such activity constitutesa trade or business (unless the dealerheld the property for investment at anytime before such income or gain isrecognized).● Royalties derived by the taxpayer in theordinary course of a trade or business oflicensing intangible property.● Amounts included in the gross incomeof a patron of a cooperative by reason ofany payment or allocation to the patronbased on patronage occurring withrespect to a trade or business of thepatron.● Other income identified by the IRS asincome derived by the taxpayer in theordinary course of a trade or business.

See Temporary Regulations section1.469-2T(c)(3) for more information onportfolio income.

Report portfolio income on line 4 ofSchedules K and K-1, rather than on page1 of Form 1065. Report deductionsrelated to portfolio income on line 10 ofSchedules K and K-1.

Grouping ActivitiesGenerally, one or more trade or businessactivities or rental activities may betreated as a single activity if the activitiesmake up an appropriate economic unit forthe measurement of gain or loss underthe passive activity rules. Whetheractivities make up an appropriateeconomic unit depends on all the relevantfacts and circumstances. The factorsgiven the greatest weight in determiningwhether activities make up an appropriateeconomic unit are:


● Similarities and differences in types oftrades or businesses.● The extent of common control.● The extent of common ownership.● Geographical location.● Reliance between or among theactivities.

Example. The partnership has asignificant ownership interest in a bakeryand a movie theater in Baltimore and abakery and a movie theater inPhiladelphia. Depending on the relevantfacts and circumstances, there may bemore than one reasonable method forgrouping the partnership's activities. Forinstance, the following groupings may ormay not be permissible:● A single activity,● A movie theater activity and a bakeryactivity,● A Baltimore activity and a Philadelphiaactivity, or● Four separate activities.

Once the partnership chooses agrouping under these rules, it mustcontinue using that grouping in later taxyears unless a material change in thefacts and circumstances makes it clearlyinappropriate.

The IRS may regroup the partnership'sactivities if the partnership's grouping failsto reflect one or more appropriateeconomic units and one of the primarypurposes of the grouping is to avoid thepassive activity limitations.Limitation on grouping certainactivities. The following activities maynot be grouped together:

1. A rental activity with a trade orbusiness activity unless the activitiesbeing grouped together make up anappropriate economic unit and

a. The rental activity is insubstantialrelative to the trade or business activityor vice versa or

b. Each owner of the trade orbusiness activity has the sameproportionate ownership interest in therental activity. If so, the portion of therental activity involving the rental ofproperty to be used in the trade orbusiness activity may be grouped with thetrade or business activity.

2. An activity involving the rental ofreal property with an activity involving therental of personal property (exceptpersonal property provided in connectionwith the real property or vice versa).

3. Any activity with another activity ina different type of business and in whichthe partnership holds an interest as alimited partner or as a limitedentrepreneur (as defined in section464(e)(2)) if that other activity engages inholding, producing, or distributing motionpicture films or videotapes; farming;leasing section 1245 property; orexploring for or exploiting oil and gasresources or geothermal deposits.

Activities conducted through otherpartnerships. Once a partnershipdetermines its activities under these rules,the partnership as a partner may usethese rules to group those activities with:● Each other,● Activities conducted directly by thepartnership, or● Activities conducted through otherpartnerships.

A partner may not treat as separateactivities those activities grouped togetherby a partnership.

Recharacterization of PassiveIncomeUnder Temporary Regulations section1.469-2T(f) and Regulations section1.469-2(f), net passive income fromcertain passive activities must be treatedas nonpassive income. Net passiveincome is the excess of an activity'spassive activity gross income over itspassive activity deductions (current yeardeductions and prior year unallowedlosses).

Income from the following six sourcesis subject to recharacterization. Note thatany net passive income recharacterizedas nonpassive income is treated asinvestment income for purposes offiguring investment interest expenselimitations if it is from (a) an activity ofrenting substantially nondepreciableproperty from an equity-financed lendingactivity or (b) an activity related to aninterest in a pass-through entity thatlicenses intangible property.

1. Significant participation passiveactivities. A significant participationpassive activity is any trade or businessactivity in which the partner bothparticipates for more than 100 hoursduring the tax year and does notmaterially participate. Because eachpartner must determine the partner's levelof participation, the partnership will not beable to identify significant participationpassive activities.

2. Certain nondepreciable rentalproperty activities. Net passive incomefrom a rental activity is nonpassiveincome if less than 30% of the unadjustedbasis of the property used or held for useby customers in the activity is subject todepreciation under section 167.

3. Passive equity-financed lendingactivities. If the partnership has netincome from a passive equity-financedlending activity, the smaller of the netpassive income or the equity-financedinterest income from the activity isnonpassive income.Note: The amount of income from theactivities in paragraphs 1 through 3 thatany partner will be required torecharacterize as nonpassive income maybe limited under Temporary Regulationssection 1.469-2T(f)(8). Because thepartnership will not have informationregarding all of a partner's activities, it

must identify all partnership activitiesmeeting the definitions in paragraphs 2and 3 as activities that may be subject torecharacterization.

4. Rental of property incidental toa development activity. Net rentalactivity income is the excess of passiveactivity gross income from renting ordisposing of property over passive activitydeductions (current year deductions andprior year unallowed losses) that arereasonably allocable to the rentedproperty. Net rental activity income isnonpassive income for a partner if all ofthe following apply:● The partnership recognizes gain fromthe sale, exchange, or other dispositionof the rental property during the tax year.● The use of the item of property in therental activity started less than 12 monthsbefore the date of disposition. The use ofan item of rental property begins on thefirst day that (a) the partnership owns aninterest in the property; (b) substantiallyall of the property is either rented or heldout for rent and ready to be rented; and(c) no significant value-enhancingservices remain to be performed.● The partner materially or significantlyparticipated for any tax year in an activitythat involved performing services toenhance the value of the property (or anyother item of property, if the basis of theproperty disposed of is determined inwhole or in part by reference to the basisof that item of property).

Because the partnership cannotdetermine a partner's level ofparticipation, the partnership must identifynet income from property describedabove (without regard to the partner'slevel of participation) as income that maybe subject to recharacterization.

5. Rental of property to anonpassive activity. If a taxpayer rentsproperty to a trade or business activity inwhich the taxpayer materially participates,the taxpayer's net rental activity incomefrom the property is nonpassive income.

6. Acquisition of an interest in apass-through entity that licensesintangible property. Generally, netroyalty income from intangible property isnonpassive income if the taxpayeracquired an interest in the pass-throughentity after the pass-through entitycreated the intangible property orperformed substantial services, orincurred substantial costs in developingor marketing the intangible property. “Netroyalty income” means the excess ofpassive activity gross income fromlicensing or transferring any right inintangible property over passive activitydeductions (current year deductions andprior year unallowed losses) that arereasonably allocable to the intangibleproperty.

See Temporary Regulations section1.469-2T(f)(7)(iii) for exceptions to thisrule.


Passive Activity ReportingRequirementsTo allow partners to correctly apply thepassive activity loss and credit rules, anypartnership that carries on more than oneactivity must:

1. Provide an attachment for eachactivity conducted through the partnershipthat identifies the type of activityconducted (trade or business, rental realestate, rental activity other than rental realestate, or investment).

2. On the attachment for each activity,provide a schedule, using the same linenumbers as shown on Schedule K-1,detailing the net income (loss), credits,and all items required to be separatelystated under section 702(a) from eachtrade or business activity, from eachrental real estate activity, from each rentalactivity other than a rental real estateactivity, and from investments.

3. Identify the net income (loss) andcredits from each oil or gas well drilled oroperated under a working interest that anypartner (other than a partner whose onlyinterest in the partnership during the yearis as a limited partner) holds through thepartnership. Further, if any partner had aninterest as a general partner in thepartnership during less than the entireyear, the partnership must identify boththe disqualified deductions from each wellthat the partner must treat as passiveactivity deductions, and the ratableportion of the gross income from eachwell that the partner must treat as passiveactivity gross income.

4. Identify the net income (loss) andthe partner's share of partnership interestexpense from each activity of renting adwelling unit that any partner uses forpersonal purposes during the year formore than the greater of 14 days or 10%of the number of days that the residenceis rented at fair rental value.

5. Identify the net income (loss) andthe partner's share of partnership interestexpense from each activity of tradingpersonal property conducted through thepartnership.

6. For any gain (loss) from thedisposition of an interest in an activity orof an interest in property used in anactivity (including dispositions before1987 from which gain is being recognizedafter 1986):

a. Identify the activity in which theproperty was used at the time ofdisposition.

b. If the property was used in morethan one activity during the 12 monthspreceding the disposition, identify theactivities in which the property was usedand the adjusted basis allocated to eachactivity.

c. For gains only, if the property wassubstantially appreciated at the time of thedisposition and the applicable holdingperiod specified in Regulations section

1.469-2(c)(2)(iii)(A) was not satisfied,identify the amount of the nonpassive gainand indicate whether the gain isinvestment income under the provisionsof Regulations section1.469-2(c)(2)(iii)(F).

7. Specify the amount of grossportfolio income, the interest expenseproperly allocable to portfolio income, andexpenses other than interest expense thatare clearly and directly allocable toportfolio income.

8. Identify separately any of thefollowing types of payments to partners:

a. Payments to a partner for servicesother than in the partner's capacity as apartner under section 707(a).

b. Guaranteed payments to a partnerfor services under section 707(c).

c. Guaranteed payments for use ofcapital.

d. If section 736(a)(2) payments aremade for unrealized receivables or forgoodwill, the amount of the payments andthe activities to which the payments areattributable.

e. If section 736(b) payments aremade, the amount of the payments andthe activities to which the payments areattributable.

9. Identify the ratable portion of anysection 481 adjustment (whether a netpositive or a net negative adjustment)allocable to each partnership activity.

10. Identify the amount of gross incomefrom each oil or gas property of thepartnership.

11. Identify any gross income fromsources that are specifically excludedfrom passive activity gross income,including:

a. Income from intangible property ifthe partner is an individual and thepartner's personal efforts significantlycontributed to the creation of the property.

b. Income from state, local, or foreignincome tax refunds.

c. Income from a covenant not tocompete (in the case of a partner who isan individual and who contributed thecovenant to the partnership).

12. Identify any deductions that are notpassive activity deductions.

13. If the partnership makes a full orpartial disposition of its interest in anotherentity, identify the gain (loss) allocable toeach activity conducted through the entity,and the gain allocable to a passive activitythat would have been recharacterized asnonpassive gain had the partnershipdisposed of its interest in property used inthe activity (because the property wassubstantially appreciated at the time of thedisposition, and the gain representedmore than 10% of the partner's total gainfrom the disposition).

14. Identify the following items fromactivities that may be subject to therecharacterization rules under Temporary

Regulations section 1.469-2T(f) andRegulations section 1.469-2(f):

a. Net income from an activity ofrenting substantially nondepreciableproperty.

b. The smaller of equity-financedinterest income or net passive incomefrom an equity-financed lending activity.

c. Net rental activity income fromproperty that was developed (by thepartner or the partnership), rented, andsold within 12 months after the rental ofthe property commenced.

d. Net rental activity income from therental of property by the partnership to atrade or business activity in which thepartner had an interest (either directly orindirectly).

e. Net royalty income from intangibleproperty if the partner acquired thepartner's interest in the partnership afterthe partnership created the intangibleproperty or performed substantialservices, or incurred substantial costs indeveloping or marketing the intangibleproperty.

15. Identify separately the credits fromeach activity conducted by or through thepartnership.

Specific Instructions

These instructions follow the line numberson the first page of Form 1065. Theaccompanying schedules will bediscussed separately. Specificinstructions for most of the lines areprovided. Lines that are not discussed areself-explanatory.

Fill in all applicable lines andschedules.

Enter any items specially allocated tothe partners on the appropriate line of theapplicable partner's Schedule K-1. Enterthe total amount on the appropriate lineof Schedule K. Do not enter separatelystated amounts on the numbered lines onForm 1065, page 1, or on Schedule A orSchedule D.

File all four pages of Form 1065.However, if the answer to Question 5 ofSchedule B is Yes, Schedules L, M-1, andM-2 on page 4 are optional. Also attacha Schedule K-1 to Form 1065 for eachpartner.

File only one Form 1065 for eachpartnership. Mark “Duplicate Copy” onany copy you give to a partner.

If a syndicate, pool, joint venture, orsimilar group files Form 1065, it mustattach a copy of the agreement and allamendments to the return, unless a copyhas previously been filed.Note: A foreign partnership required tofile a return generally must report all of itsforeign and U.S. source income. Forrules regarding whether a foreign


partnership must file Form 1065, see WhoMust File on page 2.

General Information

Name, Address, and EmployerIdentification NumberUse the label that was mailed to thepartnership. Cross out any errors andprint the correct information on the label.Name. If the partnership did not receivea label, print or type the legal name of thepartnership as it appears in thepartnership agreement.Address. Include the suite, room, orother unit number after the street address.If a preaddressed label is used, includethis information on the label.

If the Post Office does not deliver mailto the street address and the partnershiphas a P.O. box, show the box numberinstead.

If the partnership's address is outsidethe United States or its possessions orterritories, enter the information on theline for “City or town, state, and ZIPcode” in the following order: city, provinceor state, and the foreign country. Followthe foreign country's practice in placingthe postal code in the address. Do notabbreviate the country name.

If the partnership has had a change ofaddress, check box G(3).

If the partnership changes its mailingaddress after filing its return, it can notifythe IRS by filing Form 8822, Change ofAddress.Employer identification number (EIN).Show the correct EIN in item D on page1 of Form 1065. If the partnership doesnot have an EIN, it must apply for one onForm SS-4, Application for EmployerIdentification Number. Form SS-4 hasinformation on how to apply for an EIN bymail or by telephone. If the partnershiphas not received its EIN by the time thereturn is due, write “Applied for” in thespace for the EIN. See Pub. 583, Startinga Business and Keeping Records, formore information.

Do not request a new EIN for apartnership that terminated because of asale or exchange of at least 50% of thetotal interests in partnership capital andprofits.

Items A and CEnter the applicable activity name and thecode number from the list beginning onpage 32.

For example, if, as its principalbusiness activity, the partnership (a)purchases raw materials, (b) subcontractsout for labor to make a finished productfrom the raw materials, and (c) retains titleto the goods, the partnership isconsidered to be a manufacturer andmust enter “Manufacturer” in item A andenter in item C one of the codes (311110

through 339900) listed under“Manufacturing” on page 32.

Item F—Total AssetsYou are not required to complete item Fif the answer to Question 5 of ScheduleB is Yes.

If you are required to complete thisitem, enter the partnership's total assetsat the end of the tax year, as determinedby the accounting method regularly usedin keeping the partnership's books andrecords. If there were no assets at the endof the tax year, enter the total assets asof the beginning of the tax year.

Item GDo not check “Final return” (box G(2)) fora partnership that terminated because ofa sale or exchange of at least 50% of thetotal interests in partnership capital andprofits. However, be sure to file a returnfor the short year ending on the date oftermination.

Income

CAUTION!

Report only trade or businessactivity income on lines 1a through8. Do not report rental activity

income or portfolio income on theselines. See the instructions on PassiveActivity Limitations beginning on page8 for definitions of rental income andportfolio income. Rental activity incomeand portfolio income are reported onSchedules K and K-1. Rental real estateactivities are also reported on Form 8825.

Do not include any tax-exempt incomeon lines 1a through 8. A partnership thatreceives any tax-exempt income otherthan interest, or holds any property orengages in any activity that producestax-exempt income reports the amount ofthis income on line 20 of Schedules K andK-1.

Report tax-exempt interest income,including exempt-interest dividendsreceived as a shareholder in a mutualfund or other regulated investmentcompany, on line 19 of Schedules K andK-1.

See Deductions on page 14 forinformation on how to report expensesrelated to tax-exempt income.

If the partnership has had debtdischarged resulting from a title 11bankruptcy proceeding or while insolvent,see Form 982, Reduction of TaxAttributes Due to Discharge ofIndebtedness, and Pub. 908, BankruptcyTax Guide.

Line 1a—Gross Receipts or SalesEnter the gross receipts or sales from alltrade or business operations except thosethat must be reported on lines 4 through7. For example, do not include grossreceipts from farming on this line. Instead,show the net profit (loss) from farming on

line 5. Also, do not include on line 1arental activity income or portfolio income.

In general, advance payments arereported in the year of receipt. To reportincome from long-term contracts, seesection 460. For special rules forreporting certain advance payments forgoods and long-term contracts, seeRegulations section 1.451-5. Forpermissible methods for reportingadvance payments for services by anaccrual method partnership, see Rev.Proc. 71-21, 1971-2 C.B. 549.Installment sales. Generally, theinstallment method cannot be used for:● Sales of property after December 16,1999, that would otherwise be reportedusing the accrual method of accounting.● Dealer dispositions of property. A“dealer disposition” is any disposition of:

1. Personal property by a person whoregularly sells or otherwise disposes ofpersonal property of the same type on theinstallment plan or

2. Real property held for sale tocustomers in the ordinary course of thetaxpayer's trade or business.

Exception. These restrictions on usingthe installment method do not apply todispositions of property used or producedin a farming business or sales oftimeshares and residential lots for whichthe partnership elects to pay interestunder section 453(l)(3).

Enter on line 1a the gross profit oncollections from installment sales for anyof the following:● Dealer dispositions of property beforeMarch 1, 1986.● Dispositions of property used orproduced in the trade or business offarming.● Certain dispositions of timeshares andresidential lots reported under theinstallment method.

Attach a schedule showing thefollowing information for the current yearand the 3 preceding years:● Gross sales.● Cost of goods sold.● Gross profits.● Percentage of gross profits to grosssales.● Amount collected.● Gross profit on amount collected.

Line 2—Cost of Goods SoldSee the instructions for Schedule A onpage 17.

Line 4—Ordinary Income (Loss)From Other Partnerships, Estates,and TrustsEnter the ordinary income (loss) shownon Schedule K-1 (Form 1065) orSchedule K-1 (Form 1041), or otherordinary income (loss) from a foreignpartnership, estate, or trust. Show thepartnership's, estate's, or trust's name,


address, and EIN on a separatestatement attached to this return. If theamount entered is from more than onesource, identify the amount from eachsource.

Do not include portfolio income orrental activity income (loss) from otherpartnerships, estates, or trusts on thisline. Instead, report these amounts on theapplicable lines of Schedules K and K-1,or on line 20a of Form 8825 if the amountis from a rental real estate activity.

Ordinary income or loss from anotherpartnership that is a publicly tradedpartnership is not reported on this line.Instead, report the amount separately online 7 of Schedules K and K-1.

Treat shares of other items separatelyreported on Schedule K-1 issued by theother entity as if the items were realizedor incurred by this partnership.

If there is a loss from anotherpartnership, the amount of the loss thatmay be claimed is subject to the at-riskand basis limitations as appropriate.

If the tax year of your partnership doesnot coincide with the tax year of the otherpartnership, estate, or trust, include theordinary income (loss) from the otherentity in the tax year in which the otherentity's tax year ends.

Line 5—Net Farm Profit (Loss)Enter the partnership's net farm profit(loss) from Schedule F (Form 1040),Profit or Loss From Farming. AttachSchedule F (Form 1040) to Form 1065.Do not include on this line any farm profit(loss) from other partnerships. Reportthose amounts on line 4. In figuring thepartnership's net farm profit (loss), do notinclude any section 179 expensededuction; this amount must beseparately stated.

Also report the partnership's fishingincome on this line.

For a special rule concerning themethod of accounting for a farmingpartnership with a corporate partner andfor other tax information on farms, seePub. 225, Farmer's Tax Guide.Note: Because the election to deduct theexpenses of raising any plant with apreproductive period of more than 2 yearsis made by the partner and not thepartnership, farm partnerships that are notrequired to use an accrual method shouldnot capitalize such expenses. Instead,state them separately on an attachmentto Schedule K, line 24, and on ScheduleK-1, line 25, Supplemental Information.See Temporary Regulations section1.263A-4T for more information.

Line 6—Net Gain (Loss) From Form4797

CAUTION!

Include only ordinary gains orlosses from the sale, exchange, orinvoluntary conversion of assets

used in a trade or business activity.

Ordinary gains or losses from the sale,exchange, or involuntary conversion ofrental activity assets are reportedseparately on line 19 of Form 8825 or line3 of Schedules K and K-1, generally as apart of the net income (loss) from therental activity.

A partnership that is a partner inanother partnership must include onForm 4797, Sales of Business Property,its share of ordinary gains (losses) fromsales, exchanges, or involuntaryconversions (other than casualties orthefts) of the other partnership's trade orbusiness assets.

Do not include any recapture of section179 expense deduction. See theinstructions for line 25, SupplementalInformation, item 4, and the Instructionsfor Form 4797 for more information.

Line 7—Other Income (Loss)Enter on line 7 trade or business income(loss) that is not included on lines 1athrough 6. Examples of such incomeinclude:

1. Interest income derived in theordinary course of the partnership's tradeor business, such as interest charged onreceivable balances.

2. Recoveries of bad debts deductedin earlier years under the specificcharge-off method.

3. Taxable income from insuranceproceeds.

4. The amount of credit figured onForm 6478, Credit for Alcohol Used asFuel.

5. All section 481 income adjustmentsresulting from changes in accountingmethods. Show the computation of thesection 481 adjustments on an attachedschedule.

6. The amount of any deductionpreviously taken under section 179A thatis subject to recapture. See Pub. 535,Business Expenses, for details, includinghow to figure the recapture.

7. The recapture amount for section280F if the business use of listed propertydrops to 50% or less. To figure therecapture amount, the partnership mustcomplete Part IV of Form 4797.

Do not include items requiring separatecomputations that must be reported onSchedules K and K-1. See the instructionsfor Schedules K and K-1 later in theseinstructions.

Do not report portfolio or rentalactivity income (loss) on this line.

Deductions

CAUTION!

Report only trade or businessactivity deductions on lines 9through 21.

Do not report the following expenseson lines 9 through 21:● Rental activity expenses. Report theseexpenses on Form 8825 or line 3b of

Schedule K.● Deductions allocable to portfolioincome. Report these deductions on line10 of Schedules K and K-1.● Nondeductible expenses (e.g.,expenses connected with the productionof tax-exempt income). Reportnondeductible expenses on line 21 ofSchedules K and K-1.● Qualified expenditures to which anelection under section 59(e) may apply.The instructions for lines 18a and 18b ofSchedules K and K-1 explain how toreport these amounts.● Items the partnership must stateseparately that require separatecomputations by the partners. Examplesinclude expenses incurred for theproduction of income instead of in a tradeor business, charitable contributions,foreign taxes paid, intangible drilling anddevelopment costs, soil and waterconservation expenditures, amortizablebasis of reforestation expenditures, andexploration expenditures. The distributiveshares of these expenses are reportedseparately to each partner on ScheduleK-1.

Limitations on DeductionsSection 263A uniform capitalizationrules. The uniform capitalization rules ofsection 263A require partnerships tocapitalize or include in inventory costs,certain costs incurred in connection with:● The production of real and tangiblepersonal property held in inventory or heldfor sale in the ordinary course ofbusiness.● Real property or personal property(tangible and intangible) acquired forresale.● The production of real property andtangible personal property by apartnership for use in its trade or businessor in an activity engaged in for profit.

The costs required to be capitalizedunder section 263A are not deductibleuntil the property to which the costs relateis sold, used, or otherwise disposed of bythe partnership.

Exceptions: Section 263A does notapply to:● Inventory of a cash method partnershipthat does not account for inventories. SeePub. 553 for details.● Personal property acquired for resale ifthe partnership's average annual grossreceipts for the 3 prior tax years were $10million or less.● Timber.● Most property produced under along-term contract.● Certain property produced in a farmingbusiness. See the note at the end of theinstructions for line 5.

The partnership must report thefollowing costs separately to the partnersfor purposes of determinations undersection 59(e):


● Research and experimental costs undersection 174.● Intangible drilling costs for oil, gas, andgeothermal property.● Mining exploration and developmentcosts.

Tangible personal property producedby a partnership includes a film, soundrecording, video tape, book, or similarproperty.

Partnerships subject to the rules arerequired to capitalize not only direct costsbut an allocable part of most indirect costs(including taxes) that benefit the assetsproduced or acquired for resale, or areincurred by reason of the performance ofproduction or resale activities.

For inventory, some of the indirectcosts that must be capitalized are:● Administration expenses.● Taxes.● Depreciation.● Insurance.● Compensation paid to officersattributable to services.● Rework labor.● Contributions to pension, stock bonus,and certain profit-sharing, annuity, ordeferred compensation plans.

Regulations section 1.263A-1(e)(3)specifies other indirect costs that relate toproduction or resale activities that mustbe capitalized and those that may becurrently deductible.

Interest expense paid or incurredduring the production period ofdesignated property must be capitalizedand is governed by special rules. Formore details, see Regulations sections1.263A-8 through 1.263A-15.

For more details on the uniformcapitalization rules, see Regulationssections 1.263A-1 through 1.263A-3.Transactions between relatedtaxpayers. Generally, an accrual basispartnership may deduct businessexpenses and interest owed to a relatedparty (including any partner) only in thetax year of the partnership that includesthe day on which the payment is includiblein the income of the related party. Seesection 267 for details.Business start-up expenses. Businessstart-up expenses must be capitalized. Anelection may be made to amortize themover a period of not less than 60 months.See Pub. 535 and Regulations section1.195-1.Organization costs. Amounts paid orincurred to organize a partnership arecapital expenditures. They are notdeductible as a current expense.

The partnership may elect to amortizeorganization expenses over a period of60 or more months, beginning with themonth in which the partnership begins

business. Include the amortizationexpense on line 20. On the balance sheet(Schedule L) show the unamortizedbalance of organization costs. See theinstructions for line 10 for the treatmentof organization expenses paid to apartner. See Pub. 535 for moreinformation.Syndication costs. Costs for issuing andmarketing interests in the partnership,such as commissions, professional fees,and printing costs, must be capitalized.They cannot be depreciated or amortized.See the instructions for line 10 for thetreatment of syndication fees paid to apartner.Reducing certain expenses for whichcredits are allowable. For each of thefollowing credits, the partnership mustreduce the otherwise allowabledeductions for expenses used to figurethe credit by the amount of the currentyear credit:

1. The work opportunity credit.2. The welfare-to-work credit.3. The credit for increasing research

activities.4. The enhanced oil recovery credit.5. The disabled access credit.6. The empowerment zone

employment credit.7. The Indian employment credit.8. The credit for employer social

security and Medicare taxes paid oncertain employee tips.

9. The orphan drug credit.If the partnership has any of these

credits, figure each current year creditbefore figuring the deductions forexpenses on which the credit is based.

Line 9—Salaries and WagesEnter on line 9 the salaries and wagespaid or incurred for the tax year, reducedby any applicable employment creditsfrom Form 5884, Work OpportunityCredit; Form 8861, Welfare-to-WorkCredit; Form 8844, Empowerment ZoneEmployment Credit; and Form 8845,Indian Employment Credit. See theinstructions for these forms for moreinformation.

Do not include salaries and wagesreported elsewhere on the return, suchas amounts included in cost of goodssold, elective contributions to a section401(k) cash or deferred arrangement, oramounts contributed under a salaryreduction SEP agreement or a SIMPLEIRA plan.

Line 10—Guaranteed Payments toPartnersDeduct payments or credits to a partnerfor services or for the use of capital if thepayments or credits are determined

without regard to partnership income andare allocable to a trade or businessactivity. Also include on line 10 amountspaid during the tax year for insurance thatconstitutes medical care for a partner, apartner's spouse, or a partner'sdependents.

Do not include any payments andcredits that should be capitalized. Forexample, although payments or credits toa partner for services rendered inorganizing or syndicating a partnershipmay be guaranteed payments, they arenot deductible on line 10. They are capitalexpenditures. However, they should beseparately reported on Schedules K andK-1, line 5.

Do not include distributive shares ofpartnership profits.

Report the guaranteed payments to theappropriate partners on Schedule K-1,line 5.

Line 11—Repairs and MaintenanceEnter the costs of incidental repairs andmaintenance that do not add to the valueof the property or appreciably prolong itslife, but only to the extent that such costsrelate to a trade or business activity andare not claimed elsewhere on the return.

New buildings, machinery, orpermanent improvements that increasethe value of the property are notdeductible. They are chargeable to capitalaccounts and may be depreciated oramortized.

Line 12—Bad DebtsEnter the total debts that becameworthless in whole or in part during theyear, but only to the extent such debtsrelate to a trade or business activity.Report deductible nonbusiness bad debtsas a short-term capital loss on ScheduleD (Form 1065).

CAUTION!

Cash method partnerships cannottake a bad debt deduction unlessthe amount was previously

included in income.

Line 13—RentEnter rent paid on business property usedin a trade or business activity. Do notdeduct rent for a dwelling unit occupiedby any partner for personal use.

If the partnership rented or leased avehicle, enter the total annual rent orlease expense paid or incurred in thetrade or business activities of thepartnership. Also completePart V of Form 4562, Depreciation andAmortization. If the partnership leased avehicle for a term of 30 days or more, thededuction for vehicle lease expense mayhave to be reduced by an amount calledthe inclusion amount. You may have aninclusion amount if:


See Pub. 463 for instructions onfiguring the inclusion amount.

Line 14—Taxes and LicensesEnter taxes and licenses paid or incurredin the trade or business activities of thepartnership if not reflected in cost ofgoods sold. Federal import duties andFederal excise and stamp taxes aredeductible only if paid or incurred incarrying on the trade or business of thepartnership.

Do not deduct the following taxes online 14:● State and local sales taxes paid orincurred in connection with the acquisitionor disposition of business property.These taxes must be added to the costof the property, or, in the case of adisposition, subtracted from the amountrealized.● Taxes assessed against local benefitsto the extent that they increase the valueof the property assessed, such as forpaving, etc.● Federal income taxes or taxes reportedelsewhere on the return.● Section 901 foreign taxes. Report thesetaxes separately on Schedules K and K-1,line 17f.● Taxes allocable to a rental activity.Taxes allocable to a rental real estateactivity are reported on Form 8825.Taxes allocable to a rental activity otherthan a rental real estate activity arereported on line 3b of Schedule K.● Taxes allocable to portfolio income.These taxes are reported on line 10 ofSchedules K and K-1.● Taxes paid or incurred for theproduction or collection of income, or forthe management, conservation, ormaintenance of property held to produceincome. Report these taxes separately online 11 of Schedules K and K-1.

See section 263A(a) for rules oncapitalization of allocable costs (includingtaxes) for any property.

Line 15—InterestInclude only interest incurred in the tradeor business activities of the partnershipthat is not claimed elsewhere on thereturn.

Do not deduct interest expense on debtrequired to be allocated to the productionof designated property. Designatedproperty includes real property, personalproperty that has a class life of 20 years

The lease term began:

And the vehicle'sFMV on the first day

of the leaseexceeded:

or more, and other tangible propertyrequiring more than 2 years (1 year in thecase of property with a cost of more than$1 million) to produce or construct.Interest that is allocable to designatedproperty produced by a partnership for itsown use or for sale must be capitalized.

In addition, a partnership must alsocapitalize any interest on debt that isallocable to an asset used to producedesignated property. A partner may berequired to capitalize interest that wasincurred by the partner for thepartnership's production expenditures.Similarly, a partner may have to capitalizeinterest that was incurred by thepartnership for the partner's ownproduction expenditures. The informationrequired by the partner to properlycapitalize interest for this purpose mustbe provided by the partnership on anattachment for line 25 of Schedule K-1.See section 263A(f) and Regulationssections 1.263A-8 through 1.263A-15.

Do not include interest expense on debtused to purchase rental property or debtused in a rental activity. Interest allocableto a rental real estate activity is reportedon Form 8825 and is used in arriving atnet income (loss) from rental real estateactivities on line 2 of Schedules K andK-1. Interest allocable to a rental activityother than a rental real estate activity isincluded on line 3b of Schedule K and isused in arriving at net income (loss) froma rental activity (other than a rental realestate activity). This net amount isreported on line 3c of Schedule K and line3 of Schedule K-1.

Do not include interest expense on debtused to buy property held for investment.Do not include interest expense that isclearly and directly allocable to interest,dividend, royalty, or annuity income notderived in the ordinary course of a tradeor business. Interest paid or incurred ondebt used to purchase or carry investmentproperty is reported on line 14a ofSchedules K and K-1. See the instructionsfor line 14a of Schedules K and K-1 andForm 4952, Investment Interest ExpenseDeduction, for more information oninvestment property.

Do not include interest on debtproceeds allocated to distributions madeto partners during the tax year. Instead,report such interest on line 11 ofSchedules K and K-1. To determine theamount to allocate to distributions topartners, see Notice 89-35, 1989-1 C.B.675.

Temporary Regulations section1.163-8T gives rules for allocating interestexpense among activities so that thelimitations on passive activity losses,investment interest, and personal interestcan be properly figured. Generally,interest expense is allocated in the samemanner that debt is allocated. Debt isallocated by tracing disbursements of thedebt proceeds to specific expenditures,as provided in the regulations.

Interest paid by a partnership to apartner for the use of capital should beentered on line 10 as guaranteedpayments.

Prepaid interest can only be deductedover the period to which the prepaymentapplies.Note: Additional limitations on interestdeductions apply when the partnership isa policyholder or beneficiary with respectto a life insurance, endowment, or annuitycontract issued after June 8, 1997. Fordetails, see section 264. Attach astatement showing the computation of thededuction disallowed under section 264.

Line 16—DepreciationOn line 16a, enter only the depreciationclaimed on assets used in a trade orbusiness activity. Enter on line 16b thedepreciation reported elsewhere on thereturn (for example, on Schedule A) thatis attributable to assets used in trade orbusiness activities. See the Instructionsfor Form 4562 or Pub. 946, How ToDepreciate Property, to figure the amountof depreciation to enter on this line.

For depreciation, you must completeand attach Form 4562 only if thepartnership placed property in serviceduring the tax year or claims depreciationon any car or other listed property.

Do not include any section 179expense deduction on this line. Thisamount is not deducted by thepartnership. Instead, it is passed throughto the partners on line 9 of Schedule K-1.

Line 17—DepletionIf the partnership claims a deduction fortimber depletion, complete and attachForm T, Forest Activities Schedules.

CAUTION!

Do not deduct depletion for oil andgas properties. Each partnerfigures depletion on oil and gas

properties. See the instructions forSchedule K-1, line 25, item 3, for theinformation on oil and gas depletion thatmust be supplied to the partners by thepartnership.

Line 18—Retirement Plans, etc.Do not deduct payments for partners toretirement or deferred compensationplans including IRAs, qualified plans, andsimplified employee pension (SEP) andSIMPLE IRA plans on this line. Theseamounts are reported on Schedule K-1,line 11, and are deducted by the partnerson their own returns.

Enter the deductible contributions notclaimed elsewhere on the return made bythe partnership for its common-lawemployees under a qualified pension,profit-sharing, annuity, or SEP or SIMPLEIRA plan, and under any other deferredcompensation plan.

If the partnership contributes to anindividual retirement arrangement (IRA)for employees, include the contribution in

After 12/31/98 ................................................. $15,500

After 12/31/96 but before 1/1/99 .................... $15,800

After 12/31/94 but before 1/1/97 .................... $15,500

After 12/31/93 but before 1/1/95 .................... $14,600

If the lease term began before January 1, 1994, seePub. 463, Travel, Entertainment, Gift, and CarExpenses, to find out if the partnership has aninclusion amount.


salaries and wages on page 1, line 9, orSchedule A, line 3, and not on line 18.

Employers who maintain a pension,profit-sharing, or other funded deferredcompensation plan (other than a SEP orSIMPLE IRA), whether or not the plan isqualified under the Internal RevenueCode and whether or not a deduction isclaimed for the current year, generallymust file the applicable form listed below:● Form 5500, Annual Return/Report ofEmployee Benefit Plan. File this form fora plan that is not a one-participant plan(see below).● Form 5500-EZ, Annual Return ofOne-Participant (Owners and TheirSpouses) Retirement Plan. File this formfor a plan that only covers one or morepartners (or partners and their spouses).

There are penalties for not filing theseforms on time.

Line 19—Employee BenefitProgramsEnter the partnership's contributions toemployee benefit programs not claimedelsewhere on the return (for example,insurance, health, and welfare programs)that are not part of a pension,profit-sharing, etc., plan included on line18.

Do not include amounts paid during thetax year for insurance that constitutesmedical care for a partner, a partner'sspouse, or a partner's dependents.Instead, include these amounts on line 10as guaranteed payments and onSchedule K, line 5, and Schedule K-1, line5, of each partner on whose behalf theamounts were paid. Also report theseamounts on Schedule K, line 11, andSchedule K-1, line 11, of each partner onwhose behalf the amounts were paid.

Line 20—Other DeductionsAttach your own schedule listing by typeand amount all allowable deductionsrelated to a trade or business activity onlyfor which there is no separate line onpage 1 of Form 1065. Enter the total onthis line. Examples of other deductionsinclude:● Amortization (except as notedbelow)—see the Instructions for Form4562 for more information. Complete andattach Form 4562 if the partnership isclaiming amortization of costs that beganduring the tax year.● Insurance premiums.● Legal and professional fees.● Supplies used and consumed in thebusiness.● Utilities.● Part of the cost of qualified clean-fuelvehicle property and qualified clean-fuelvehicle refueling property. For moredetails, see section 179A.

Also, see Special Rules below forlimits on certain other deductions.

Do not deduct on line 20:● Items that must be reported separatelyon Schedules K and K-1.● Qualified expenditures to which anelection under section 59(e) may apply.See the instructions on page 28 for lines18a and 18b of Schedule K-1 for detailson treatment of these items.● Amortization of reforestationexpenditures under section 194. Thepartnership can elect to amortize up to$10,000 of qualified reforestationexpenditures paid or incurred during thetax year. However, the amortization is notdeducted by the partnership but theamortizable basis is instead separatelyallocated among the partners. See theinstructions on page 30 for Schedule K-1,line 25, item 21 and Pub. 535 for moredetails.● Fines or penalties paid to a governmentfor violating any law. Report theseexpenses on Schedule K, line 21.● Expenses allocable to tax-exemptincome. Report these expenses onSchedule K, line 21.● Net operating losses. Only individualsand corporations may claim a netoperating loss deduction.● Amounts paid or incurred to participateor intervene in any political campaign onbehalf of a candidate for public office, orto influence the general public regardinglegislative matters, elections, orreferendums. Report these expenses onSchedule K, line 21.● Expenses paid or incurred to influenceFederal or state legislation, or to influencethe actions or positions of certain Federalexecutive branch officials. However,certain in-house lobbying expendituresthat do not exceed $2,000 are deductible.See section 162(e) for more details.

Special RulesTravel, meals, and entertainment.Subject to limitations and restrictionsdiscussed below, a partnership candeduct ordinary and necessary travel,meals, and entertainment expenses paidor incurred in its trade or business.Special rules apply to deductions for gifts,skybox rentals, luxury water travel,convention expenses, and entertainmenttickets. See section 274 and Pub. 463 formore details.

Travel. The partnership cannot deducttravel expenses of any individualaccompanying a partner or partnershipemployee, including a spouse ordependent of the partner or employee,unless:● That individual is an employee of thepartnership and● His or her travel is for a bona fidebusiness purpose and would otherwisebe deductible by that individual.

Meals and entertainment. Generally,the partnership can deduct only 50% ofthe amount otherwise allowable for mealsand entertainment expenses. In addition

(subject to exceptions under section274(k)(2)):● Meals must not be lavish orextravagant,● A bona fide business discussion mustoccur during, immediately before, orimmediately after the meal, and● A partner or employee of thepartnership must be present at the meal.

See section 274(n)(3) for a special rulethat applies to expenses for mealsconsumed by individuals subject to thehours of service limits of the Departmentof Transportation.

Membership dues. The partnershipmay deduct amounts paid or incurred formembership dues in civic or public serviceorganizations, professional organizations(such as bar and medical associations),business leagues, trade associations,chambers of commerce, boards of trade,and real estate boards. However, nodeduction is allowed if a principal purposeof the organization is to entertain, orprovide entertainment facilities for,members or their guests. In addition, thepartnership may not deduct membershipdues in any club organized for business,pleasure, recreation, or other socialpurpose. This includes country clubs, golfand athletic clubs, airline and hotel clubs,and clubs operated to provide mealsunder conditions favorable to businessdiscussion.

Entertainment facilities. Thepartnership cannot deduct an expensepaid or incurred for a facility (such as ayacht or hunting lodge) used for anactivity usually considered entertainment,amusement, or recreation.Note: The partnership may be able todeduct otherwise nondeductible meals,travel, and entertainment expenses if theamounts are treated as compensationand reported on Form W-2 for anemployee or on Form 1099-MISC for anindependent contractor.

Schedule A—Cost of GoodsSold

Cost of Goods SoldGenerally, inventories are required at thebeginning and end of each tax year if theproduction, purchase, or sale ofmerchandise is an income-producingfactor. See Regulations section 1.471-1.

However, if a partnership's averageannual gross receipts for the 3 prior taxyears are $1 million or less and thepartnership is an eligible taxpayer thatadopts or changes to the cash method ofaccounting, it will not be required toaccount for inventories. If the partnershipis not required to account for inventoriesand does not want to do so, it must treatinventory in the same manner as costs ofmaterials and supplies that are notincidental. Under this rule, inventory costs


for raw materials purchased for use inproducing finished goods andmerchandise purchased for resale aredeductible in the year the finished goodsor merchandise are sold (or, if later, theyear the partnership paid for the rawmaterials or merchandise). Enter amountspaid for all raw materials andmerchandise during the tax year on line2. The amount the partnership can deductfor the tax year is figured on line 8.

If the partnership wants to change tothe cash method of accounting, it must fileForm 3115. It may also have to make anadjustment to prevent amounts of incomeor expense from being duplicated oromitted. This is called a section 481(a)adjustment, which is taken into accountover a period not to exceed 4 years. Forexample, if the partnership accrued salesin 1999 for which it received payment in2000, it must report those sales in bothyears as a result of changing itsaccounting method and will make asection 481(a) adjustment to preventduplication of income. See Rev. Proc.99-49, 1999-52 I.R.B. 725, to figure theamount of this adjustment for the tax year.Include any positive section 481(a)adjustment on page 1, line 7. If thesection 481(a) adjustment is negative,report it on Form 1065, line 20.

For eligibility requirements and furtherdetails on changing to the cash methodof accounting, see Pub. 553.

All filers not using the cash method ofaccounting should see Section 263Auniform capitalization rules on page 14before completing Schedule A. Theinstructions for lines 2 through 9 belowapply to Schedule A.

Line 1—Inventory at Beginning ofYearIf the partnership is changing its methodof accounting from accrual to cash for thecurrent tax year and it does not want toaccount for inventories, it must refigurelast year's closing inventory using thecash method and enter the result on line1. If there is a difference between theclosing inventory and the refiguredamount, attach an explanation and take itinto account when figuring thepartnership's section 481(a) adjustment(explained above).

Line 2—PurchasesReduce purchases by items withdrawn forpersonal use. The cost of these itemsshould be shown on line 23 of SchedulesK and K-1 as distributions to partners.

Line 4—Additional Section 263ACostsAn entry is required on this line only forpartnerships that have elected a simplifiedmethod.

For partnerships that have elected thesimplified production method,additional section 263A costs are

generally those costs, other than interest,that were not capitalized under thepartnership's method of accountingimmediately prior to the effective date ofsection 263A that are required to becapitalized under section 263A. Interestmust be accounted for separately. Fornew partnerships, additional section 263Acosts are the costs, other than interest,that must be capitalized under section263A, but which the partnership would nothave been required to capitalize if it hadexisted before the effective date of section263A. For more details, see Regulationssection 1.263A-2(b).

For partnerships that have elected thesimplified resale method, additionalsection 263A costs are generally thosecosts incurred with respect to thefollowing categories:● Off-site storage or warehousing.● Purchasing.● Handling, such as processing,assembly, repackaging, and transporting.● General and administrative costs(mixed service costs).For more details, see Regulations section1.263A-3(d).

Enter on line 4 the balance of section263A costs paid or incurred during the taxyear not includable on lines 2, 3, and 5.Attach a schedule listing these costs.

Line 5—Other CostsEnter on line 5 any other inventoriablecosts paid or incurred during the tax yearnot entered on lines 2 through 4. Attacha schedule.

Line 7—Inventory at End of YearSee Regulations sections 1.263A-1through 1.263A-3 for details on figuringthe amount of additional section 263Acosts to be included in ending inventory.

If the partnership is using the cashmethod of accounting and it does notwant to account for inventories, enter online 7 the portion of its raw materials andmerchandise purchased for resale thatare included on line 6 and were not soldduring the year.

Lines 9a through 9c—InventoryValuation MethodsInventories can be valued at:● Cost,● Cost or market value (whichever islower), or● Any other method approved by the IRSthat conforms to the requirements of theapplicable regulations.

However, the partnership is required touse cost if it is using the cash method ofaccounting.

Producers whose average annual grossreceipts are $1 million or less that use thecash method of accounting and choosenot to account for inventories may

currently deduct expenditures for directlabor and all indirect costs that wouldotherwise be included in inventory costs.

The average cost (rolling average)method of valuing inventories generallydoes not conform to the requirements ofthe regulations. See Rev. Rul. 71-234,1971-1 C.B. 148.

Partnerships that use erroneousvaluation methods must change to amethod permitted for Federal taxpurposes. To make this change, use Form3115.

On line 9a, check the methods used forvaluing inventories. Under lower of costor market, the term “market” (for normalgoods) means the current bid priceprevailing on the inventory valuation datefor the particular merchandise in thevolume usually purchased by thetaxpayer. For a manufacturer, marketapplies to the basic elements of cost—rawmaterials, labor, and burden. If section263A applies to the taxpayer, the basicelements of cost must reflect the currentbid price of all direct costs and all indirectcosts properly allocable to goods on handat the inventory date.

Inventory may be valued below costwhen the merchandise is unsalable atnormal prices or unusable in the normalway because the goods are subnormaldue to damage, imperfections, shop wear,etc., within the meaning of Regulationssection 1.471-2(c). These goods may bevalued at the current bona fide sellingprice minus the direct cost of disposition(but not less than scrap value) if such aprice can be established.

If this is the first year the last-in first-out(LIFO) inventory method was eitheradopted or extended to inventory goodsnot previously valued under the LIFOmethod, attach Form 970, Application ToUse LIFO Inventory Method, or astatement with the information requiredby Form 970. Also check the box on line9c.

If the partnership has changed orextended its inventory method to LIFOand has had to write up its openinginventory to cost in the year of election,report the effect of this write-up as income(line 7, page 1, Form 1065)proportionately over a 3-year period thatbegins in the tax year of the LIFOelection.

For more information on inventoryvaluation methods, see Pub. 538,Accounting Periods and Methods.

Schedule B—OtherInformation

Question 1Check box 1(e) for any other type of entityand state the type.


Question 3The partnership must answer Yes toQuestion 3, if during the tax year, itowned:● An interest in another partnership(foreign or domestic) or● A foreign entity that was disregardedas an entity separate from the partnershipunder Regulations sections 301.7701-2and 301.7701-3.

If the partnership answered Yes to thisquestion, report the following informationon an attached schedule:

1. If the partnership owned at least a10% interest, directly or indirectly, in anyother foreign or domestic partnership(other than any partnership for which aForm 8865 is attached to the tax return),show each partnership's name, EIN (ifany), and the country under whose lawsthe partnership was organized.

2. If the partnership owned anyentities that have been disregarded asseparate from the partnership, show eachdisregarded entity's name, EIN (if any),and the country under whose laws theentity was organized.Note: Be sure to clearly indicate whethereach entity in the attached schedule is apartnership or a disregarded entity.

Question 4—Consolidated AuditProceduresGenerally, the tax treatment ofpartnership items is determined at thepartnership level in a consolidated auditproceeding, rather than in separateproceedings with individual partners.

Answer Yes to Question 4 if any of thefollowing apply:● The partnership had more than 10partners at any one time during the taxyear. For purposes of this question, ahusband and wife, and their estates,count as one person.● Any partner was a nonresident alien orwas other than an individual, an estate,or a C corporation.● The partnership is a “smallpartnership” that has elected to be subjectto the rules for consolidated auditproceedings. “Small partnerships” asdefined in section 6231(a)(1)(B)(i) are notsubject to the rules for consolidated auditproceedings unless an election to becovered by them is made underTemporary Regulations section301.6231(a)(1)-1T(b)(2). Once made, theelection may not be revoked without IRSconsent.

CAUTION!

The partnership does not make thiselection when it answers Yes toQuestion 4. The election must be

made separately.If a partnership return is filed by an

entity for a tax year, but it is determinedthat the entity is not a partnership for that

tax year, the consolidated partnershipaudit procedures will generally apply tothat entity and to persons holding aninterest in that entity. See TemporaryRegulations section 301.6233-1T fordetails and exceptions.

Question 6—Foreign PartnersAnswer Yes to Question 6 if thepartnership had any foreign partners (forpurposes of section 1446) at any timeduring the tax year. Otherwise, answerNo.

If the partnership had gross incomeeffectively connected with a trade orbusiness in the United States and foreignpartners, it may be required to withholdtax under section 1446 on incomeallocable to foreign partners (withoutregard to distributions) and file Forms8804, 8805, and 8813.

Question 7Answer Yes to Question 7 if interests inthe partnership are traded on anestablished securities market or arereadily tradable on a secondary market(or its substantial equivalent).

Question 8Organizers of certain tax shelters arerequired to register the tax shelters byfiling Form 8264, Application forRegistration of a Tax Shelter, no laterthan the day on which an interest in theshelter is first offered for sale. Organizersfiling a properly completed Form 8264 willreceive a tax shelter registration numberthat they must furnish to their investors.See the Instructions for Form 8264 for thedefinition of a tax shelter and theinvestments exempted from tax shelterregistration.

Question 9—Foreign AccountsAnswer Yes to Question 9 if either 1 or 2below applies to the partnership.Otherwise, check the No box.

1. At any time during calendar year2000, the partnership had an interest inor signature or other authority over a bankaccount, securities account, or otherfinancial account in a foreign country; and

● The combined value of the accountswas more than $10,000 at any time duringthe calendar year; and ● The accounts were not with a U.S.military banking facility operated by a U.S.financial institution.

2. The partnership owns more than50% of the stock in any corporation thatwould answer the question Yes based onitem 1 above.

Get Form TD F 90-22.1, Report ofForeign Bank and Financial Accounts, tosee if the partnership is considered tohave an interest in or signature or other

authority over a bank account, securitiesaccount, or other financial account in aforeign country.

If you answered Yes to Question 9, fileForm TD F 90-22.1 by June 30, 2001,with the Department of the Treasury at theaddress shown on the form. BecauseForm TD F 90-22.1 is not a tax return, donot file it with Form 1065. You may orderForm TD F 90-22.1 by calling1-800-829-3676.

Question 10The partnership may be required to fileForm 3520, Annual Return To ReportTransactions With Foreign Trusts andReceipt of Certain Foreign Gifts, if:● It directly or indirectly transferredproperty or money to a foreign trust. Forthis purpose, any U.S. person whocreated a foreign trust is considered atransferor.● It is treated as the owner of any part ofthe assets of a foreign trust under thegrantor trust rules.● It received a distribution from a foreigntrust.

For more information, see theInstructions for Form 3520.Note: An owner of a foreign trust mustensure that the trust files an annualinformation return on Form 3520-A,Annual Information Return of ForeignTrust with a U.S. Owner.

Designation of Tax MattersPartner (TMP)

If the partnership is subject to the rules forconsolidated audit proceedings insections 6221 through 6233, thepartnership may designate a partner asthe TMP for the tax year for which thereturn is filed by completing the Designation of Tax Matters Partnersection on page 2 of Form 1065. See theinstructions for Question 4, consolidatedaudit procedures, to determine if thepartnership is subject to these rules. Thedesignated TMP must be a generalpartner and, in most cases, must also bea U.S. person. For details, seeRegulations section 301.6231(a)(7)-1.

For a limited liability company (LLC),only a member-manager of the LLC istreated as a general partner. Amember-manager is any owner of aninterest in the LLC who, alone or togetherwith others, has the continuing exclusiveauthority to make the managementdecisions necessary to conduct thebusiness for which the LLC was formed.If there are no elected or designatedmember-managers, each owner is treatedas a member-manager. For details, seeRegulations section 301.6231(a)(7)-2.


Schedules K and K-1—Partners' Shares of Income,Credits, Deductions, etc.

Purpose of SchedulesAlthough the partnership is not subject toincome tax, the partners are liable for taxon their shares of the partnership income,whether or not distributed, and mustinclude their shares on their tax returns.Schedule K (page 3 of Form 1065) is asummary schedule of all the partners'shares of the partnership's income,credits, deductions, etc. All partnershipsmust complete Schedule K. Rental activityincome (loss) and portfolio income are notreported on page 1 of Form 1065. Theseamounts are not combined with trade orbusiness activity income (loss). ScheduleK is used to report the totals of these andother amounts.Schedule K-1 (Form 1065) shows eachpartner's separate share. Attach a copyof each Schedule K-1 to the Form 1065filed with the IRS; keep a copy with a copyof the partnership return as a part of thepartnership's records; and furnish a copyto each partner. If a partnership interestis held by a nominee on behalf of anotherperson, the partnership may be requiredto furnish Schedule K-1 to the nominee.See Temporary Regulations sections1.6031(b)-1T and 1.6031(c)-1T for moreinformation.

Give each partner a copy of either thePartner's Instructions for Schedule K-1(Form 1065) or specific instructions foreach item reported on the partner'sSchedule K-1 (Form 1065).

Substitute FormsThe partnership does not need IRSapproval to use a substitute Schedule K-1if it is an exact copy of the IRS schedule,or if it contains only those lines thetaxpayer is required to use. The linesmust use the same numbers and titlesand must be in the same order and formatas on the comparable IRS Schedule K-1.The substitute schedule must include theOMB number. The partnership mustprovide each partner with the Partner'sInstructions for Schedule K-1 (Form 1065)or other prepared specific instructions.

The partnership must request IRSapproval to use other substituteSchedules K-1. To request approval, writeto Internal Revenue Service, Attention:Substitute Forms Program Coordinator,W:CAR:MP:FP:F:CS, 1111 ConstitutionAvenue, NW, Washington, DC 20224.

Each partner's information must be ona separate sheet of paper. Therefore,separate all continuously printedsubstitutes before you file them with theIRS.

The partnership may be subject to apenalty if it files Schedules K-1 that do notconform to the specifications of Rev. Proc.2000-19, 2000-12 I.R.B. 785.

How Income Is Shared AmongPartnersAllocate shares of income, gain, loss,deduction, or credit among the partnersaccording to the partnership agreementfor sharing income or loss generally.Partners may agree to allocate specificitems in a ratio different from the ratio forsharing income or loss. For instance, ifthe net income exclusive of speciallyallocated items is divided evenly amongthree partners but some special items areallocated 50% to one, 30% to another,and 20% to the third partner, report thespecially allocated items on theappropriate line of the applicable partner'sSchedule K-1 and the total on theappropriate line of Schedule K, instead ofon the numbered lines on page 1 of Form1065 or Schedules A or D.

If a partner's interest changed duringthe year, see section 706(d) beforedetermining each partner's distributiveshare of any item of income, gain, loss,deduction, etc. Income (loss) is allocatedto a partner only for the part of the yearin which that person is a member of thepartnership. The partnership will eitherallocate on a daily basis or divide thepartnership year into segments andallocate income, loss, or special items ineach segment among the persons whowere partners during that segment.Partnerships that report their income onthe cash basis must allocate interestexpense, taxes, and any payment forservices or for the use of property on adaily basis if there is any change in anypartner's interest during the year. SeePub. 541 for more details.

Special rules on the allocation ofincome, gain, loss, and deductionsgenerally apply if a partner contributesproperty to the partnership and the FMVof that property at the time of contributiondiffers from the contributing partner'sadjusted tax basis. Under these rules, thepartnership must use a reasonablemethod of making allocations of income,gain, loss, and deductions from theproperty so that the contributing partnerreceives the tax burdens and benefits ofany built-in gain or loss (i.e.,precontribution appreciation or diminutionof value of the contributed property). SeeRegulations section 1.704-3 for details onhow to make these allocations, includinga description of specific allocationmethods that are generally reasonable.

See Dispositions of ContributedProperty on page 8 for special rules onthe allocation of income, gain, loss, anddeductions on the disposition of propertycontributed to the partnership by apartner.

If the partnership agreement does notprovide for the partner's share of income,gain, loss, deduction, or credit, or if theallocation under the agreement does nothave substantial economic effect, thepartner's share is determined accordingto the partner's interest in the partnership.See Regulations section 1.704-1 for moreinformation.

Specific Instructions(Schedule K-1 Only)

General InformationPrepare and give a Schedule K-1 to eachperson who was a partner in thepartnership at any time during the year,including all foreign partners even if nopartnership items were allocated to them.Schedule K-1 must be provided to eachpartner on or before the day on whichthe partnership return is required to befiled.

Generally, any person who holds aninterest in a partnership as a nominee foranother person must furnish to thepartnership the name, address, etc., ofthe other person.

On each Schedule K-1, enter thenames, addresses, and identifyingnumbers of the partner and partnershipand the partner's distributive share ofeach item.

For an individual partner, enter thepartner's social security number (SSN) orindividual taxpayer identification number(ITIN). For all other partners, enter thepartner's EIN. However, if a partner is anindividual retirement arrangement (IRA),enter the identifying number of thecustodian of the IRA. Do not enter theSSN of the person for whom the IRA ismaintained.

Foreign partners without a U.S.taxpayer identifying number should benotified by the partnership of the necessityof obtaining a U.S. identifying number.Certain aliens who are not eligible toobtain SSNs can apply for an ITIN onForm W-7, Application for IRS IndividualTaxpayer Identification Number.

If a husband and wife each had aninterest in the partnership, prepare aseparate Schedule K-1 for each of them.If a husband and wife held an interesttogether, prepare one Schedule K-1 if thetwo of them are considered to be onepartner.

There is space on line 25 of ScheduleK-1 for you to provide information to thepartners. This space may be used insteadof attachments.

Specific Items and Questions

Question A

Answer Question A on all Schedules K-1.If a partner holds interests as both ageneral and limited partner, check the first


two boxes and attach a schedule for eachactivity that shows the amounts allocableto the partner's interest as a limitedpartner.

Question B—What Type of Entity IsThis Partner?

State on this line whether the partner isan individual, a corporation, an estate, atrust, a partnership, an exemptorganization, or a nominee (custodian). Ifthe partner is a nominee, use one of thefollowing codes to indicate the type ofentity the nominee represents:I—Individual; C—Corporation; F—Estateor Trust; P—Partnership; E—ExemptOrganization; or IRA—IndividualRetirement Arrangement.

Question C—Domestic/Foreign Partner

Check the foreign partner box if thepartner is a nonresident alien individual,foreign partnership, foreign corporation,or a foreign estate or trust. Otherwise,check the domestic partner box.

Item D—Partner's Profit, Loss, andCapital Sharing Percentages

Enter in Item D, column (ii), theappropriate percentages as of the end ofthe year. However, if a partner's interestterminated during the year, enter incolumn (i) the percentages that existedimmediately before the termination. Whenthe profit or loss sharing percentage haschanged during the year, show thepercentage before the change in column(i) and the end-of-year percentage incolumn (ii). If there are multiple changesin the profit and loss sharing percentageduring the year, attach a statement givingthe date and percentage before eachchange.

“Ownership of capital” means theportion of the capital that the partnerwould receive if the partnership wasliquidated at the end of the year by thedistribution of undivided interests inpartnership assets and liabilities.

Item F—Partner's Share of Liabilities

Enter each partner's share of nonrecourseliabilities, partnership-level qualifiednonrecourse financing, and otherliabilities.

“Nonrecourse liabilities” are thoseliabilities of the partnership for which nopartner bears the economic risk of loss.The extent to which a partner bears theeconomic risk of loss is determined underthe rules of Regulations section 1.752-2.Do not include partnership-level qualifiednonrecourse financing (defined below) onthe line for nonrecourse liabilities.

If the partner terminated his or herinterest in the partnership during the year,enter the share that existed immediatelybefore the total disposition. In all othercases, enter it as of the end of the year.

If the partnership is engaged in two ormore different types of at-risk activities,or a combination of at-risk activities andany other activity, attach a statementshowing the partner's share ofnonrecourse liabilities, partnership-levelqualified nonrecourse financing, and otherliabilities for each activity. See Pub. 925,Passive Activity and At-Risk Rules, todetermine if the partnership is engaged inmore than one at-risk activity.

The at-risk rules of section 465generally apply to any activity carried onby the partnership as a trade or businessor for the production of income. Theserules generally limit the amount of lossand other deductions a partner can claimfrom any partnership activity to theamount for which that partner isconsidered at risk. However, for partnerswho acquired their partnership interestsbefore 1987, the at-risk rules do not applyto losses from an activity of holding realproperty the partnership placed in servicebefore 1987. The activity of holdingmineral property does not qualify for thisexception. Identify on an attachment toSchedule K-1 the amount of any lossesthat are not subject to the at-risk rules.

If a partnership is engaged in an activitysubject to the limitations of section465(c)(1) (such as, films or videotapes,leasing section 1245 property, farming,or oil and gas property), give each partnerhis or her share of the total pre-1976losses from that activity for which thereexisted a corresponding amount ofnonrecourse liability at the end of eachyear in which the losses occurred. SeeForm 6198, At-Risk Limitations, andrelated instructions for more information.

Qualified nonrecourse financingsecured by real property used in anactivity of holding real property that issubject to the at-risk rules is treated asan amount at risk. “Qualified nonrecoursefinancing” generally includes financing forwhich no one is personally liable forrepayment that is borrowed for use in anactivity of holding real property and thatis loaned or guaranteed by a Federal,state, or local government or that isborrowed from a “qualified” person.Qualified persons include any personactively and regularly engaged in thebusiness of lending money, such as abank or savings and loan association.Qualified persons generally do not includerelated parties (unless the nonrecoursefinancing is commercially reasonable andon substantially the same terms as loansinvolving unrelated persons), the seller ofthe property, or a person who receives afee for the partnership's investment in thereal property. See section 465 for moreinformation on qualified nonrecoursefinancing.

The partner as well as the partnershipmust meet the qualified nonrecourserules. Therefore, the partnership must

enter on an attached statement any otherinformation the partner needs todetermine if the qualified nonrecourserules are also met at the partner level.

Item G—Tax Shelter RegistrationNumber

If the partnership is a registration-requiredtax shelter or has invested in aregistration-required tax shelter, it mustenter the tax shelter registration numberin Item G. Also, a partnership that hasinvested in a registration-required taxshelter must furnish a copy of its Form8271 to its partners. See Form 8271 formore details.

Item J—Analysis of Partner's CapitalAccount

You are not required to complete Item Jif the answer to Question 5 of ScheduleB is Yes. If you are required to completethis item, see the instructions forSchedule M-2 on page 30.

Specific Instructions(Schedules K and K-1,Except as Noted)

Schedules K and K-1 have the same linenumbers for lines 1 through 23.

Special AllocationsAn item is specially allocated if it isallocated to a partner in a ratio differentfrom the ratio for sharing income or lossgenerally.

Report specially allocated ordinary gain(loss) on Schedules K and K-1, line 7.Report other specially allocated items onthe applicable lines of the partner'sSchedule K-1, with the total amount onthe applicable line of Schedule K. Forexample, specially allocated long-termcapital gain is entered on line 4e(2) of thepartner's Schedule K-1, and the total isentered on line 4e(2) of Schedule K, alongwith any net long-term capital gain (orloss) from line 12(f) of Schedule D (Form1065).

Income (Loss)

Line 1—Ordinary Income (Loss) FromTrade or Business Activities

Enter the amount from page 1, line 22.Enter the income (loss) without referenceto (a) the basis of the partners' interestsin the partnership, (b) the partners' at-risklimitations, or (c) the passive activitylimitations. These limitations, if applicable,are determined at the partner level.

If the partnership has more than onetrade or business activity, identify on anattachment to Schedule K-1 the amountfrom each separate activity. See PassiveActivity Reporting Requirements onpage 12.


Line 1 should not include rental activityincome (loss) or portfolio income (loss).

Line 2—Net Income (Loss) From RentalReal Estate Activities

Enter the net income (loss) from rentalreal estate activities of the partnershipfrom Form 8825. Attach this form to Form1065. If the partnership has more thanone rental real estate activity, identify onan attachment to Schedule K-1 theamount attributable to each activity.

Line 3—Net Income (Loss) From OtherRental Activities

On Schedule K, line 3a, enter grossincome from rental activities other thanthose reported on Form 8825. See page9 of these instructions and Pub. 925 forthe definition of rental activities. Includeon line 3a, the gain (loss) from line 18 ofForm 4797 that is attributable to the sale,exchange, or involuntary conversion of anasset used in a rental activity other thana rental real estate activity.

On line 3b of Schedule K, enter thedeductible expenses of the activity. Attacha schedule of these expenses to Form1065.

Enter the net income (loss) on line 3cof Schedule K. Enter each partner's shareon line 3 of Schedule K-1.

If the partnership has more than onerental activity reported on line 3, identifyon an attachment to Schedule K-1 theamount from each activity.

Lines 4a Through 4f—Portfolio Income(Loss)

Enter portfolio income (loss) on lines 4athrough 4f.

See page 10 of these instructions for adefinition of portfolio income. Do notreduce portfolio income by deductionsallocable to it. Report such deductions(other than interest expense) on line 10of Schedules K and K-1. Interest expenseallocable to portfolio income is generallyinvestment interest expense and isreported on line 14a of Schedules K andK-1.Lines 4a and 4b. Enter only taxableinterest and ordinary dividends on theselines. Taxable interest is interest from allsources except interest exempt from taxand interest on tax-free covenant bonds.Lines 4d, 4e(1), and 4e(2). Enter on line4d of Schedule K the gain or loss fromline 5 of Schedule D (Form 1065) plus anyshort-term capital gain (loss) that isspecially allocated to partners. Reporteach partner's share on line 4d ofSchedule K-1.

Enter on line 4e(1) the gain or loss fromline 11 of Schedule D (Form 1065) plusany 28% rate gain (loss) that is speciallyallocated to partners. Enter on line 4e(2)the gain or loss from line 12 of ScheduleD (Form 1065) plus any long-term capital

gain (loss) that is specially allocated topartners. Report each partner's share onlines 4e(1) and 4e(2) of Schedule K-1,respectively.

CAUTION!

If any capital gain or loss is fromthe disposition of nondepreciablepersonal property used in a trade

or business, it may not be treated asportfolio income. Report such gain or losson line 7 of Schedules K and K-1.Line 4f. Report and identify otherportfolio income or loss on an attachmentfor line 4f.

For example, income reported to thepartnership from a real estate mortgageinvestment conduit (REMIC), in which thepartnership is a residual interest holder,would be reported on an attachment forline 4f. If the partnership holds a residualinterest in a REMIC, report on theattachment for line 4f the partner's shareof the following:● Taxable income (net loss) from theREMIC (line 1b of Schedules Q (Form1066)).● “Excess inclusion” (line 2c of SchedulesQ (Form 1066)).● Section 212 expenses (line 3b ofSchedules Q (Form 1066)). Do not reportthese section 212 expenses on line 10 ofSchedules K and K-1.

Because Schedule Q (Form 1066) is aquarterly statement, the partnership mustfollow the Schedule Q instructions tofigure the amounts to report to the partnerfor the partnership's tax year.

Line 5—Guaranteed Payments toPartners

Guaranteed payments to partners include:● Payments for salaries, healthinsurance, and interest deducted by thepartnership and reported on Form 1065,page 1, line 10; Form 8825; or onSchedule K, line 3b; and● Payments the partnership mustcapitalize. See the Instructions for Form1065, line 10.

Generally, amounts reported on line 5are not considered to be related to apassive activity. For example, guaranteedpayments for personal services paid to apartner would not be passive activityincome. Likewise, interest paid to anypartner is not passive activity income.

Line 6—Net Section 1231 Gain (Loss)(Other Than Due to Casualty or Theft)

Enter on line 6 the net section 1231 gain(loss) from Form 4797, line 7, column (g).Do not include specially allocated ordinarygains and losses or net gains or lossesfrom involuntary conversions due tocasualties or thefts on this line. Instead,report them on line 7. If the partnershiphas more than one activity, attach astatement to Schedule K-1 that identifiesthe activity to which the section 1231 gain(loss) relates.

Line 7—Other Income (Loss)

Use line 7 to report other items of income,gain, or loss not included on lines 1through 6. If the partnership has morethan one activity, identify on anattachment the amount and the activity towhich each amount relates.

Include the following items on line 7:● Gains from the disposition of farmrecapture property (see Form 4797) andother items to which section 1252 applies.● Gains from the disposition of an interestin oil, gas, geothermal, or other mineralproperties (section 1254).● Any net gain or loss from section 1256contracts from Form 6781, Gains andLosses From Section 1256 Contracts andStraddles.● Recoveries of tax benefit items (section111).● Gambling gains and losses subject tothe limitations in section 165(d).● Any income, gain, or loss to thepartnership under section 751(b).● Specially allocated ordinary gain (loss).● Net gain (loss) from involuntaryconversions due to casualty or theft. Theamount for this line is shown on Form4684, Casualties and Thefts, line 38a,38b, or 39.

Each partner's share must be enteredon Schedule K-1. Give each partner aschedule that shows the amounts to bereported on the partner's Form 4684, line34, columns (b)(i), (b)(ii), and (c).

If there was a gain (loss) from acasualty or theft to property not used in atrade or business or for income-producingpurposes, notify the partner. Thepartnership should not complete Form4684 for this type of casualty or theft.Instead, each partner will complete his orher own Form 4684.● Gain from the sale or exchange ofqualified small business stock (as definedin the instructions for Schedule D) that iseligible for the 50% section 1202exclusion. The section 1202 exclusionapplies only to qualified small businessstock issued after August 10, 1993, andheld by the partnership for more than 5years. Corporate partners are not eligiblefor the section 1202 exclusion. Additionallimitations apply at the partner level.Report each partner's share of section1202 gain on Schedule K-1. Each partnerwill determine if he or she qualifies for thesection 1202 exclusion. Report on anattachment to Schedule K-1 for each saleor exchange the name of the corporationthat issued the stock, the partner's shareof the partnership's adjusted basis andsales price of the stock, and the dates thestock was bought and sold.● Gain eligible for section 1045 rollover(replacement stock purchased by thepartnership). Include only gain from thesale or exchange of qualified smallbusiness stock (as defined in the


instructions for Schedule D) that wasdeferred by the partnership under section1045 and reported on Schedule D. Seethe instructions for Schedule D for moredetails. Corporate partners are noteligible for the section 1045 rollover.Additional limitations apply at the partnerlevel. Report each partner's share of thegain eligible for section 1045 rollover onSchedule K-1. Each partner will determineif he or she qualifies for the rollover.Report on an attachment to Schedule K-1for each sale or exchange the name of thecorporation that issued the stock, thepartner's share of the partnership'sadjusted basis and sales price of thestock, and the dates the stock was boughtand sold.● Gain eligible for section 1045 rollover(replacement stock not purchased by thepartnership). Include only gain from thesale or exchange of qualified smallbusiness stock (as defined in theinstructions for Schedule D) thepartnership held for more than 6 monthsbut that was not deferred by thepartnership under section 1045. See theinstructions for Schedule D for moredetails. A partner (other than acorporation) may be eligible to defer hisor her distributive share of this gain undersection 1045 if he or she purchases otherqualified small business stock during the60-day period that began on the date thestock was sold by the partnership.Additional limitations apply at the partnerlevel. Report on an attachment toSchedule K-1 for each sale or exchangethe name of the corporation that issuedthe stock, the partner's share of thepartnership's adjusted basis and salesprice of the stock, and the dates the stockwas bought and sold.

Deductions

Line 8—Charitable Contributions

Enter the total amount of charitablecontributions made by the partnershipduring its tax year on Schedule K. Entereach partner's distributive share onSchedule K-1. On an attachment toSchedules K and K-1, show separatelythe dollar amount of contributions subjectto each of the 50%, 30%, and 20% ofadjusted gross income limits. Foradditional information, see Pub. 526,Charitable Contributions.

Generally, no deduction is allowed forany contribution of $250 or more unlessthe partnership obtains a writtenacknowledgment from the charitableorganization that shows the amount ofcash contributed, describes any propertycontributed, and gives an estimate of thevalue of any goods or services providedin return for the contribution. Theacknowledgment must be obtained by thedue date (including extensions) of thepartnership return or, if earlier, the datethe partnership files its return. Do notattach the acknowledgment to the tax

return, but keep it with the partnership'srecords. These rules apply in addition tothe filing requirements for Form 8283described below.

Certain contributions made to anorganization conducting lobbying activitiesare not deductible. See section 170(f)(9)for more details.

Form 8283, Noncash CharitableContributions, must be completed andattached to Form 1065 if the deductionclaimed for noncash contributionsexceeds $500. The partnership must givea copy of its Form 8283 to every partnerif the deduction for an item or group ofsimilar items of contributed propertyexceeds $5,000. Each partner must befurnished a copy even if the amountallocated to any partner is $5,000 or less.

If the deduction for an item or group ofsimilar items of contributed property is$5,000 or less, the partnership shouldpass through each partner's share of theamount of noncash contributions so thepartners will be able to complete their ownForms 8283. See the Instructions forForm 8283 for additional information.

If the partnership made a qualifiedconservation contribution, include theFMV of the underlying property beforeand after the donation and describe theconservation purpose furthered by thedonation. Give a copy of this informationto each partner.

Line 9—Section 179 ExpenseDeduction

A partnership may elect to expense partof the cost of certain tangible property thepartnership purchased this year for use inits trade or business or certain rentalactivities. See Pub. 946 for a definitionof what kind of property qualifies for thesection 179 expense deduction and theInstructions for Form 4562 for limitationson the amount of the section 179 expensededuction.

Complete Part I of Form 4562 to figurethe partnership's section 179 expensededuction. The partnership does not claimthe deduction itself but instead passes itthrough to the partners. Attach Form 4562to Form 1065 and show the total section179 expense deduction on Schedule K,line 9. Report each partner's allocableshare on Schedule K-1, line 9. Do notcomplete line 9 of Schedule K-1 for anypartner that is an estate or trust.

If the partnership is an enterprise zonebusiness, also report on an attachment toSchedules K and K-1 the cost of section179 property placed in service during theyear that is qualified zone property.

See the instructions for line 25 ofSchedule K-1, item 4, for any recaptureof a section 179 amount.

Line 10—Deductions Related toPortfolio Income

Enter on line 10 and attach an itemizedlist of the deductions clearly and directly

allocable to portfolio income (other thaninterest expense and section 212expenses from a REMIC). Interestexpense related to portfolio income isinvestment interest expense and isreported on line 14a of Schedules K andK-1. Section 212 expenses from thepartnership's interest in a REMIC arereported on an attachment for line 4f ofSchedules K and K-1.

No deduction is allowable under section212 for expenses allocable to aconvention, seminar, or similar meeting.

Line 11—Other Deductions

Use line 11 to report deductions notincluded on lines 8, 9, 10, 17e, and 18b.On an attachment, identify the deductionand amount and, if the partnership hasmore than one activity, the activity towhich the deduction relates.

Examples of items to be reported onan attachment to line 11 include:● Amounts paid by the partnership thatwould be allowed as itemized deductionson any of the partners' income tax returnsif they were paid directly by a partner forthe same purpose. However, do not enterexpenses related to portfolio income orinvestment interest expense on this line.

If there was a loss from an involuntaryconversion due to casualty or theft ofincome-producing property, include in thetotal amount for this line the relevantamount from Form 4684, line 32.● Any penalty on early withdrawal ofsavings.● Soil and water conservationexpenditures (section 175).● Expenditures for the removal ofarchitectural and transportation barriers tothe elderly and handicapped and whichthe partnership has elected to treat as acurrent expense (section 190).● Contributions to a capital constructionfund.● Any amounts paid during the tax yearfor health insurance coverage for apartner (including that partner's spouseand dependents). For 2000, a partnermay be allowed to deduct up to 60% ofsuch amounts on Form 1040, line 28.● Payments for a partner to an IRA,qualified plan, or simplified employeepension (SEP) or SIMPLE IRA plan. If aqualified plan is a defined benefit plan, apartner's distributive share of payments isdetermined in the same manner as his orher distributive share of partnershiptaxable income. For a defined benefitplan, attach to the Schedule K-1 for eachpartner a statement showing the amountof benefit accrued for the tax year.● Interest expense allocated todebt-financed distributions. See Notice89-35 for more information.● Interest paid or accrued on debtproperly allocable to each generalpartner's share of a working interest inany oil or gas property (if the partner'sliability is not limited). General partners


that did not materially participate in theoil or gas activity treat this interest asinvestment interest; for other generalpartners, it is trade or business interest.

Credits

Line 12a—Low-Income Housing Credit

Section 42 provides a credit that may beclaimed by owners of low-incomeresidential rental buildings. If the partnersare eligible to take the low-incomehousing credit, complete and attach Form8586, Low-Income Housing Credit; Form8609, Low-Income Housing CreditAllocation Certification; and Schedule A(Form 8609), Annual Statement, to Form1065.

Report on line 12a(1) the totallow-income housing credit for propertyplaced in service before 1990 with respectto which a partnership is to be treatedunder section 42(j)(5) as the taxpayer towhich the low-income housing credit wasallowed. Report any other low-incomehousing credit for property placed inservice before 1990 on line 12a(2). Onlines 12a(3) and (4), report thelow-income housing credit for propertyplaced in service after 1989.

Line 12b—Qualified RehabilitationExpenditures Related to Rental RealEstate Activities

Enter total qualified rehabilitationexpenditures related to rental real estateactivities of the partnership. Alsocomplete the applicable lines of Form3468, Investment Credit, that apply toqualified rehabilitation expenditures forproperty related to rental real estateactivities of the partnership for whichincome or loss is reported on line 2 ofSchedule K. See Form 3468 for detailson qualified rehabilitation expenditures.Attach Form 3468 to Form 1065.

For line 12b of Schedule K-1, entereach partner's distributive share of theexpenditures. On the dotted line to the leftof the entry space for line 12b, enter theline number of Form 3468 on which thepartner should report the expenditures.If there is more than one type ofexpenditure, or the expenditures are frommore than one rental real estate activity,report this information separately for eachexpenditure or activity on an attachmentto Schedules K and K-1.

CAUTION!

Qualified rehabilitationexpenditures for property notrelated to rental real estate

activities must be listed separately on line25 of Schedule K-1.

Line 12c—Credits (Other Than CreditsShown on Lines 12a and 12b) Relatedto Rental Real Estate Activities

Report any information that the partnersneed to figure credits related to a rentalreal estate activity, other than thelow-income housing credit and qualifiedrehabilitation expenditures. On the dotted

line to the left of the entry space for line12c (or in the margin), identify the type ofcredit. If there is more than one type ofcredit or the credit is from more than oneactivity, report this information separatelyfor each credit or activity on anattachment to Schedules K and K-1.

Line 12d—Credits Related to OtherRental Activities

Use this line to report information that thepartners need to figure credits related toa rental activity other than a rental realestate activity. On the dotted line to theleft of the entry space for line 12d, identifythe type of credit. If there is more thanone type of credit or the credit is frommore than one activity, report thisinformation separately for each credit oractivity on an attachment to Schedules Kand K-1.

Line 13—Other Credits

Enter on line 13 any other credit, exceptcredits or expenditures shown or listed forlines 12a through 12d of Schedules K andK-1. On the dotted line to the left of theentry space for line 13, identify the typeof credit. If there is more than one typeof credit or the credit is from more thanone activity, report this informationseparately for each credit or activity onan attachment to Schedules K and K-1.The credits to be reported on line 13 andother required attachments are as follows:● Credit for backup withholding ondividends, interest, or patronagedividends.● Nonconventional source fuel credit. Thecredit is figured at the partnership leveland then is apportioned to the partnersbased on their distributive shares ofpartnership income attributable to salesof qualified fuels. Attach a separateschedule to the return to show thecomputation of the credit. See section 29for more information.● Qualified electric vehicle credit (Form8834).● Unused credits from cooperatives. Theunused credits are apportioned topersons who were partners in thepartnership on the last day of thepartnership's tax year.● Work opportunity credit (Form 5884).This credit is apportioned among thepartners according to their interest in thepartnership at the time the wages onwhich the credit is figured were paid oraccrued.● Welfare-to-work credit (Form 8861).This credit is apportioned in the samemanner as the work opportunity credit.● Credit for alcohol used as fuel (Form6478). This credit is apportioned topersons who were partners on the lastday of the partnership's tax year. Thecredit must be included in income on page1, line 7, of Form 1065. See section 40(f)for an election the partnership can maketo not have the credit apply.

If this credit includes the small ethanolproducer credit, identify on a statementattached to each Schedule K-1 (a) theamount of the small producer creditincluded in the total credit allocated to thepartner, (b) the number of gallons ofqualified ethanol fuel production allocatedto the partner, and (c) the partner's sharein gallons of the partnership's productivecapacity for alcohol.● Credit for increasing research activities(Form 6765).● Enhanced oil recovery credit (Form8830).● Disabled access credit (Form 8826).● Renewable electricity production credit(Form 8835).● Empowerment zone employment credit(Form 8844).● Indian employment credit (Form 8845).● Credit for employer social security andMedicare taxes paid on certain employeetips (Form 8846).● Orphan drug credit (Form 8820).● Credit for contributions to selectedcommunity development corporations(Form 8847).● General credits from an electing largepartnership.

See the instructions for line 25, item 13of Schedule K-1 to report expendituresqualifying for the (a) rehabilitation creditnot related to rental real estate activities,(b) energy credit, or (c) reforestationcredit.

Investment InterestLines 14a through 14b(2) must becompleted for all partners.

Line 14a—Interest Expense onInvestment Debts

Include on this line interest paid oraccrued on debt properly allocable toproperty held for investment. Propertyheld for investment includes property thatproduces income (unless derived in theordinary course of a trade or business)from interest, dividends, annuities, orroyalties; and gains from the dispositionof property that produces those types ofincome or is held for investment.

Property held for investment alsoincludes each general partner's share ofa working interest in any oil or gasproperty for which the partner's liability isnot limited and in which the partner didnot materially participate. However, thelevel of each partner's participation in anactivity is determined by the partner andnot by the partnership. As a result,interest allocable to a general partner'sshare of a working interest in any oil orgas property (if the partner's liability is notlimited) should not be reported on line14a. Instead, report this interest on line11.

Investment interest does not includeinterest expense allocable to a passiveactivity.


The amount on line 14a will bededucted (after applying the investmentinterest expense limitations of section163(d)) by individual partners onSchedule A (Form 1040), line 13.

For more information, see Form 4952.

Lines 14b(1) and 14b(2)—InvestmentIncome and Expenses

Enter on line 14b(1) only the investmentincome included on lines 4a, 4b, 4c, and4f of Schedules K and K-1. Do not includeother portfolio gains or losses on this line.

Enter on line 14b(2) only the investmentexpense included on line 10 of SchedulesK and K-1.

If there are other items of investmentincome or expense included in theamounts that must be passed throughseparately to the partner on Schedule K-1(such as net short-term capital gain orloss, net long-term capital gain or loss,and other portfolio gains or losses) giveeach partner a schedule identifying theseamounts.

Investment income includes grossincome from property held for investment,the excess of net gain from the dispositionof property held for investment over netcapital gain from the disposition ofproperty held for investment, and any netcapital gain from the disposition ofproperty held for investment that eachpartner elects to include in investmentincome under section 163(d)(4)(B)(iii).Generally, investment income andinvestment expenses do not include anyincome or expenses from a passiveactivity.

Property subject to a net lease is nottreated as investment property because itis subject to the passive loss rules. Donot reduce investment income by lossesfrom passive activities.

Investment expenses are deductibleexpenses (other than interest) directlyconnected with the production ofinvestment income. See the Form 4952instructions for more information oninvestment income and expenses.

Self-EmploymentNote: If the partnership is an optionsdealer or a commodities dealer, seesection 1402(i) before completing lines15a, 15b, and 15c, to determine theamount of any adjustment that may haveto be made to the amounts shown on theWorksheet for Figuring Net Earnings(Loss) From Self-Employment below. Ifthe partnership is engaged solely in theoperation of a group investment program,earnings from the operation are notself-employment earnings for eithergeneral or limited partners.General partners. General partners' netearnings (loss) from self-employment donot include:● Dividends on any shares of stock andinterest on any bonds, debentures, notes,etc., unless the dividends or interest arereceived in the course of a trade orbusiness, such as a dealer in stocks orsecurities or interest on notes or accountsreceivable.● Rentals from real estate, except rentalsof real estate held for sale to customersin the course of a trade or business as areal estate dealer or payments for roomsor space when significant services areprovided.● Royalty income, except royalty incomereceived in the course of a trade orbusiness.

See the instructions for Schedule SE(Form 1040), Self-Employment Tax, formore information.

Limited partners. Generally, a limitedpartner's share of partnership income(loss) is not included in net earnings (loss)from self-employment. Limited partnerstreat as self-employment earnings onlyguaranteed payments for services theyactually rendered to, or on behalf of, thepartnership to the extent that thosepayments are payment for those services.

Worksheet InstructionsLine 1b. Include on line 1b any part ofthe net income (loss) from rental realestate activities from Schedule K, line 2,that is from:

1. Rentals of real estate held for saleto customers in the course of a trade orbusiness as a real estate dealer, or

2. Rentals for which services wererendered to the occupants (other thanservices usually or customarily renderedfor the rental of space for occupancyonly). The supplying of maid service issuch a service; but the furnishing of heatand light, the cleaning of public entrances,exits, stairways and lobbies, trashcollection, etc., are not consideredservices rendered to the occupants.Lines 3b and 4b. Allocate the amountson these lines in the same way Form1065, page 1, line 22, is allocated to theseparticular partners.Line 4a. Include in the amount on line4a any guaranteed payments to partnersreported on Schedules K and K-1, line 5,and derived from a trade or business asdefined in section 1402(c). Also includeother ordinary income and expense items(other than expense items subject toseparate limitations at the partner level,such as the section 179 expensededuction) reported on Schedules K andK-1 that are used to figure

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

1a

bcd

e2

3a

b

c

4a

b

c

5

Ordinary income (loss) (Schedule K, line 1)

Net income (loss) from certain rental real estate activities (see instructions)Net income (loss) from other rental activities (Schedule K, line 3c)

Net loss from Form 4797, Part II, line 18, included on line 1a above. Enter as a positiveamount Combine lines 1a through 1dNet gain from Form 4797, Part II, line 18, included on line 1a above

Subtract line 2 from line 1e. If line 1e is a loss, increase the loss on line 1e by theamount on line 2

Part of line 3a allocated to limited partners, estates, trusts, corporations, exemptorganizations, and IRAs

Subtract line 3b from line 3a. If line 3a is a loss, reduce the loss on line 3a by the amount on line 3b. Includeeach individual general partner’s share on line 15a of Schedule K-1

Guaranteed payments to partners (Schedule K, line 5) derived from a trade or businessas defined in section 1402(c) (see instructions)

Part of line 4a allocated to individual limited partners for other than services and toestates, trusts, corporations, exempt organizations, and IRAs

Subtract line 4b from line 4a. Include each individual general partner’s share and each individual limitedpartner’s share on line 15a of Schedule K-1Net earnings (loss) from self-employment. Combine lines 3c and 4c. Enter here and on Schedule K, line 15a

1a1b1c

1d1e2

3a

3b

3c

4a

4b

4c5


self-employment earnings under section1402.

Line 15a—Net Earnings (Loss) FromSelf-EmploymentSchedule K. Enter on line 15a theamount from line 5 of the worksheet.Schedule K-1. Do not complete this linefor any partner that is an estate, trust,corporation, exempt organization, orindividual retirement arrangement (IRA).

Enter on line 15a of Schedule K-1 eachindividual general partner's share of theamount shown on line 5 of the worksheetand each individual limited partner's shareof the amount shown on line 4c of theworksheet.

Line 15b—Gross Farming or FishingIncome

Enter the partnership's gross farming orfishing income from self-employment.Individual partners need this amount tofigure net earnings from self-employmentunder the farm optional method in SectionB, Part II of Schedule SE (Form 1040).

Line 15c—Gross Nonfarm Income

Enter the partnership's gross nonfarmincome from self-employment. Individualpartners need this amount to figure netearnings from self-employment under thenonfarm optional method in Section B,Part II of Schedule SE (Form 1040).

Adjustments and Tax PreferenceItemsLines 16a through 16e must be completedfor all partners except certain smallcorporations exempt from the alternativeminimum tax (AMT) under section 55(e).

Enter items of income and deductionsthat are adjustments or tax preferenceitems for the AMT. See Form 6251,Alternative Minimum Tax— Individuals; Form 4626, Alternative MinimumTax—Corporations; or Schedule I ofForm 1041, U.S. Income Tax Return forEstates and Trusts, to determine theamounts to enter and for otherinformation.

Do not include as a tax preference itemany qualified expenditures to which anelection under section 59(e) may apply.Instead, report these expenditures onlines 18a and 18b. Because theseexpenditures are subject to an election byeach partner, the partnership cannotfigure the amount of any tax preferencerelated to them.

Line 16a—Depreciation Adjustment onProperty Placed in Service After 1986

Figure the adjustment for line 16a basedonly on tangible property placed in serviceafter 1986 (and tangible property placedin service after July 31, 1986, and before1987 for which the partnership elected touse the general depreciation system). Donot make an adjustment for motionpicture films, videotapes, soundrecordings, certain public utility property

(as defined in section 168(f)(2)), propertydepreciated under the unit-of-productionmethod (or any other method notexpressed in a term of years), or qualifiedIndian reservation property.

For property placed in service before1999, refigure depreciation for the AMTas follows (using the same conventionused for the regular tax):● For section 1250 property (generally,residential rental and nonresidential realproperty), use the straight line methodover 40 years.● For tangible property (other thansection 1250 property) depreciated usingthe straight line method for the regulartax, use the straight line method over theproperty's class life. Use 12 years if theproperty has no class life.● For any other tangible property, use the150% declining balance method,switching to the straight line method thefirst year it gives a larger deduction, overthe property's AMT class life. Use 12years if the property has no class life.Note: See Pub. 946 for a table of classlives.

For property placed in service after1998, refigure depreciation for the AMTonly for property depreciated for theregular tax using the 200% decliningbalance method. For the AMT, use the150% declining balance method,switching to the straight line method thefirst tax year it gives a larger deduction,and the same convention and recoveryperiod used for the regular tax.

Figure the adjustment by subtractingthe AMT deduction for depreciation fromthe regular tax deduction and enter theresult on line 14a. If the AMT deductionis more than the regular tax deduction,enter the difference as a negative amount.Depreciation capitalized to inventory mustalso be refigured using the AMT rules.Include on this line the current yearadjustment to income, if any, resultingfrom the difference.

Line 16b—Adjusted Gain or Loss

If the partnership disposed of any tangibleproperty placed in service after 1986 (orafter July 31, 1986, if an election wasmade to use the general depreciationsystem), or if it disposed of a certifiedpollution control facility placed in serviceafter 1986, refigure the gain or loss fromthe disposition using the adjusted basisfor the AMT. The property's adjustedbasis for the AMT is its cost or other basisminus all depreciation or amortizationdeductions allowed or allowable for theAMT during the current tax year andprevious tax years. Enter on this line thedifference between the regular tax gain(or loss) and the AMT gain (or loss). If theAMT gain is less than the regular tax gain,or the AMT loss is more than the regulartax loss, or there is an AMT loss and aregular tax gain, enter the difference as anegative amount.

If any part of the adjustment is allocableto net short-term capital gain (loss), netlong-term capital gain (loss), or netsection 1231 gain (loss), attach aschedule that identifies the amount of theadjustment allocable to each type of gainor loss. For a net long-term capital gain(loss), also identify the amount of theadjustment that is 28% rate gain (loss).For a net section 1231 gain (loss), alsoidentify the amount of adjustment that isunrecaptured section 1250 gain.

No schedule is required if theadjustment is allocable solely to ordinarygain (loss).

Line 16c—Depletion (Other Than Oiland Gas)

Do not include any depletion on oil andgas wells. The partners must figure theirdepletion deductions and preferenceitems separately.

Refigure the depletion deduction undersection 611 for mines, wells (other thanoil and gas wells), and other naturaldeposits for the AMT. Percentagedepletion is limited to 50% of the taxableincome from the property as figured undersection 613(a), using only income anddeductions allowed for the AMT. Also, thededuction is limited to the property'sadjusted basis at the end of the year, asrefigured for the AMT. Figure this limitseparately for each property. Whenrefiguring the property's adjusted basis,take into account any AMT adjustmentsmade this year or in previous years thataffect basis (other than the current year'sdepletion).

Enter the difference between theregular tax and AMT deduction. If theAMT deduction is greater, enter thedifference as a negative amount.

Lines 16d(1) and 16d(2)

Enter only the income and deductions foroil, gas, and geothermal properties thatare used to figure the partnership'sordinary income or loss (line 22 of Form1065). If there are items of income ordeduction for oil, gas, and geothermalproperties included in the amountsrequired to be passed through separatelyto the partners on Schedule K-1 (itemsnot reported on line 1 of Schedule K-1),give each partner a schedule identifyingthese amounts.

Figure the amount for lines 16d(1) and(2) separately for oil and gas propertiesthat are not geothermal deposits and forall properties that are geothermaldeposits.

Give each partner a schedule thatshows the separate amounts that areincluded in the computation of theamounts on lines 16d(1) and (2).Line 16d(1)—Gross income from oil,gas, and geothermal properties. Enterthe aggregate amount of gross income(within the meaning of section 613(a))from all oil, gas, and geothermalproperties that was received or accrued


during the tax year and included on page1, Form 1065.Line 16d(2)—Deductions allocable tooil, gas, and geothermal properties.Enter the amount of any deductionsallowed for the AMT that are allocable tooil, gas, and geothermal properties.

Line 16e—Other Adjustments and TaxPreference Items

Attach a schedule that shows eachpartner's share of other items not shownon lines 16a through 16d(2) that areadjustments or tax preference items orthat the partner needs to complete Form6251, Form 4626, or Schedule I of Form1041. See these forms and theirinstructions to determine the amount toenter.

Other adjustments and tax preferenceitems or information the partner needsinclude the following:● Accelerated depreciation of realproperty under pre-1987 rules.● Accelerated depreciation of leasedpersonal property under pre-1987 rules.● Long-term contracts entered into afterFebruary 28, 1986. Except for certainhome construction contracts, the taxableincome from these contracts must befigured using the percentage ofcompletion method of accounting for theAMT.● Losses from tax shelter farm activities.No loss from any tax shelter farm activityis allowed for the AMT.● Any information needed by certaincorporate partners to compute theadjusted current earnings (ACE)adjustment.

Foreign TaxesLines 17a through 17g must be completedif the partnership has foreign income,deductions, or losses or has paid oraccrued foreign taxes. See Pub. 514,Foreign Tax Credit for Individuals, formore information.

Line 17a—Name of Foreign Country orU.S. Possession

Enter the name of the foreign country orU.S. possession from which thepartnership had income or to which thepartnership paid or accrued taxes. If thepartnership had income from, or paid oraccrued taxes to, more than one foreigncountry or U.S. possession, enter “Seeattached” and attach a schedule for eachcountry for lines 17a through 17g.

Line 17b—Gross Income Sourced atPartner Level

Enter the total gross income of thepartnership that is required to be sourcedat the partner level. This includes incomefrom the sale of most personal propertyother than inventory, depreciableproperty, and certain intangible property.

See Pub. 514 and section 865 for details.Attach a schedule showing the followinginformation:● The amount of this gross income(without regard to its source) in eachcategory identified in the instructions forline 17c, including each of the listedcategories.● Specifically identify gains on the saleof personal property other than inventory,depreciable property, and certainintangible property on which a foreign taxof 10% or more was paid or accrued. Alsolist losses on the sale of such property ifthe foreign country would have imposeda 10% or higher tax had the sale resultedin a gain. See Sales or Exchanges ofCertain Personal Property in Pub. 514and section 865.

Line 17c—Foreign Gross IncomeSourced at Partnership Level

Separately report gross income fromsources outside the United States bycategory of income as follows. Forpartnership and corporate partners only,attach a schedule identifying the totalamount of foreign gross income in eachcategory of income attributable to foreignbranches. See Pub. 514 for informationon the categories of income.Line 17c(1). Passive foreign sourceincome.Line 17c(2). Attach a schedule showingthe amount of foreign source incomeincluded in each of the following listedcategories of income:● Financial services income;● High withholding tax interest;● Shipping income;● Dividends from each noncontrolledsection 902 corporation;● Dividends from a domestic internationalsales corporation (DISC) or a formerDISC;● Distributions from a foreign salescorporation (FSC) or a former FSC;● Section 901(j) income; and● Certain income re-sourced by treaty.Line 17c(3). General limitation foreignsource income (all other foreign sourceincome).

Line 17d—Deductions Allocated andApportioned at Partner Level

Enter on line 17d(1) the partnership's totalinterest expense (including interestequivalents under Temporary Regulationssection 1.861-9T(b)). Do not includeinterest directly allocable underTemporary Regulations section 1.861-10Tto income from a specific property. Thistype of interest is allocated andapportioned at the partnership level andis included on lines 17e(1) through (3).On line 17d(2), enter the total of all otherdeductions or losses that are required tobe allocated at the partner level. For

example, include on line 17(d)(2)research and experimental expenditures(see Regulations section 1.861-17(f)).

Line 17e—Deductions Allocated andApportioned at Partnership Level toForeign Source Income

Separately report partnership deductionsthat are apportioned at the partnershiplevel to (1) passive foreign source income,(2) each of the listed foreign categoriesof income, and (3) general limitationforeign source income (see theinstructions for line 17c). See Pub. 514for more information.

For partnership and corporate partnersonly, attach a schedule identifying thetotal amount of deductions apportioned toeach category of income shown in theinstructions for line 17c that areattributable to foreign branches.

Line 17f—Total Foreign Taxes

Enter in U.S. dollars the total foreign taxes(described in section 901 or section 903)that were paid or accrued by thepartnership (according to its method ofaccounting for such taxes). Translatethese amounts into U.S. dollars by usingthe applicable exchange rate (see Pub.514).

Attach a schedule reporting thefollowing information:

1. The total amount of foreign taxes(including foreign taxes on incomesourced at the partner level) relating toeach category of income (see instructionsfor line 17c).

2. The dates on which the taxes werepaid or accrued, the exchange rates used,and the amounts in both foreign currencyand U.S. dollars, for:● Taxes withheld at source on interest.● Taxes withheld at source on dividends.● Taxes withheld at source on rents androyalties.● Other foreign taxes paid or accrued.

Line 17g—Reduction in TaxesAvailable for Credit and Gross IncomeFrom all Sources

Attach a schedule showing:● The partnership's gross income fromall sources, including all U.S. and foreignsource income.● The total reductions in taxes availablefor credit.

Separately show the reductions for:● Taxes on foreign mineral income(section 901(e)).● Taxes on foreign oil and gas extractionincome (section 907(a)).● Taxes attributable to boycott operations(section 908).● Failure to timely file (or furnish all of theinformation required on) Forms 5471 and8865.● Any other items (specify).


Other

Lines 18a and 18b

Generally, section 59(e) allows eachpartner to make an election to deduct thepartner's distributive share of thepartnership's otherwise deductiblequalified expenditures ratably over 10years (3 years for circulationexpenditures), beginning with the tax yearin which the expenditures were made (orfor intangible drilling and developmentcosts, over the 60-month period beginningwith the month in which such costs werepaid or incurred). The term “qualifiedexpenditures” includes only the followingtypes of expenditures paid or incurredduring the tax year:● Circulation expenditures.● Research and experimentalexpenditures.● Intangible drilling and developmentcosts.● Mining exploration and developmentcosts.If a partner makes this election, theseitems are not treated as tax preferenceitems.

Because the partners are generallyallowed to make this election, thepartnership cannot deduct these amountsor include them as adjustments or taxpreference items on Schedule K-1.Instead, on lines 18a and 18b of ScheduleK-1, the partnership passes through theinformation the partners need to figuretheir separate deductions.

On line 18a, enter the type ofexpenditures claimed on line 18b. Enteron line 18b the qualified expenditures paidor incurred during the tax year to whichan election under section 59(e) mayapply. Enter this amount for all partnerswhether or not any partner makes anelection under section 59(e). If theexpenditures are for intangible drilling anddevelopment costs, enter the month inwhich the expenditures were paid orincurred (after the type of expenditure online 18a). If there is more than one typeof expenditure included in the total shownon line 18b (or intangible drilling anddevelopment costs were paid or incurredfor more than 1 month), report thisinformation separately for each type ofexpenditure (or month) on an attachmentto Schedules K and K-1.

Line 19—Tax-Exempt Interest Income

Enter on line 19 tax-exempt interestincome, including any exempt-interestdividends received from a mutual fund orother regulated investment company.Individual partners must report thisinformation on line 8b of Form 1040. Theadjusted basis of the partner's interest isincreased by the amount shown on thisline under section 705(a)(1)(B).

Line 20—Other Tax-Exempt Income

Enter on line 20 all income of thepartnership exempt from tax other thantax-exempt interest (for example, lifeinsurance proceeds). The adjusted basisof the partner's interest is increased bythe amount shown on this line undersection 705(a)(1)(B).

Line 21—Nondeductible Expenses

Enter on line 21 nondeductible expensespaid or incurred by the partnership. Do notinclude separately stated deductionsshown elsewhere on Schedules K andK-1, capital expenditures, or items thededuction for which is deferred to a latertax year. The adjusted basis of thepartner's interest is decreased by theamount shown on this line under section705(a)(2)(B).

Line 22—Distributions of Money (Cashand Marketable Securities)

Enter on line 22 the total distributions toeach partner of cash and marketablesecurities that are treated as money undersection 731(c)(1). Generally, marketablesecurities are valued at FMV on the dateof distribution. However, the value ofmarketable securities does not include thedistributee partner's share of the gain onthe securities distributed to that partner.See section 731(c)(3)(B) for details.

If the amount on line 22 includesmarketable securities treated as money,state separately on an attachment toSchedules K and K-1 (a) the partnership'sadjusted basis of those securitiesimmediately before the distribution and(b) the FMV of those securities on thedate of distribution (excluding thedistributee partner's share of the gain onthe securities distributed to that partner).

Line 23—Distributions of PropertyOther Than Money

Enter on line 23 the total distributions toeach partner of property not included online 22. In computing the amount of thedistribution, use the adjusted basis of theproperty to the partnership immediatelybefore the distribution. In addition, attacha statement showing the adjusted basisand FMV of each property distributed.

Line 24 (Schedule K Only)

Attach a statement to report thepartnership's total income, expenditures,or other information for the items listedunder Line 25 (Schedule K-1Only)—Supplemental Informationbelow.

Lines 24a and 24b (Schedule K-1Only)—Recapture of Low-IncomeHousing Credit

If recapture of part or all of the low-incomehousing credit is required because (a)prior year qualified basis of a buildingdecreased or (b) the partnership disposed

of a building or part of its interest in abuilding, see Form 8611, Recapture ofLow-Income Housing Credit. Theinstructions for Form 8611 indicate whenthe form is completed by the partnershipand what information is provided topartners when recapture is required.

If a partner's ownership interest in abuilding decreased because of atransaction at the partner level, thepartnership must provide the necessaryinformation to the partner to enable thepartner to figure the recapture.

Report on line 24a the total low-incomehousing credit recapture with respect to apartnership treated under section 42(j)(5)as the taxpayer to which the low-incomehousing credit was allowed. Report anyother low-income housing credit recaptureon line 24b.

If the partnership filed Form 8693,Low-Income Housing Credit DispositionBond, to avoid recapture of thelow-income housing credit, no entryshould be made on line 24 of ScheduleK-1.

See Form 8586, Form 8611, andsection 42 for more information.

Line 25 (Schedule K-1Only)—Supplemental Information

Enter in the line 25 SupplementalInformation space of Schedule K-1, or onan attached schedule if more space isneeded, each partner's share of anyinformation requested on lines 1 through24b that must be reported in detail, anditems 1 through 23 below. Identify theapplicable line number next to theinformation entered in the SupplementalInformation space. Show income or gainsas a positive number. Show losses inparentheses.

1. Taxes paid on undistributed capitalgains by a regulated investment companyor a real estate investment trust (REIT).As a shareholder of a regulatedinvestment company or a REIT, thepartnership will receive notice on Form2439, Notice to Shareholder ofUndistributed Long-Term Capital Gains,of the amount of tax paid on undistributedcapital gains.

2. The number of gallons of each fuelsold or used during the tax year for anontaxable use qualifying for the credit fortaxes paid on fuels, type of use, and theapplicable credit per gallon. See Form4136, Credit for Federal Tax Paid onFuels, for details.

3. The partner's share of grossincome from each property, share ofproduction for the tax year, etc., neededto figure the partner's depletion deductionfor oil and gas wells. The partnershipshould also allocate to each partner aproportionate share of the adjusted basisof each partnership oil or gas property.The allocation of the basis of eachproperty is made as specified in section613A(c)(7)(D).


The partnership cannot deductdepletion on oil and gas wells. Thepartner must determine the allowableamount to report on his or her return. SeePub. 535 for more information.

4. Recapture of section 179 expensededuction. For property placed in serviceafter 1986, the section 179 expensededuction is recaptured at any time thebusiness use of the property drops to 50%or less. Enter the amount that wasoriginally passed through to the partnersand the partnership's tax year in which theamount was passed through. Inform thepartner if the recapture amount wascaused by the disposition of the section179 property. Do not include this amountin the partnership's income.

5. Recapture of certain miningexploration expenditures (section 617).

6. Any information or statements apartner needs to comply with section 6111(registration of tax shelters) or section6662(d)(2)(B)(ii) (regarding adequatedisclosure of items that may cause anunderstatement of income tax).

7. The partner's share ofpreproductive period farm expenses, if thepartnership is not required to use theaccrual method of accounting. SeeRegulations section 1.263A-4.

8. Any information a partner needs tofigure the interest due under section453(l)(3). If the partnership elected toreport the disposition of certaintimeshares and residential lots on theinstallment method, each partner's taxliability must be increased by the partner'sallocable share of the interest on taxattributable to the installment paymentsreceived during the tax year.

9. Any information a partner needs tofigure interest due under section 453A(c).If an obligation arising from the dispositionof property to which section 453A appliesis outstanding at the close of the year,report each partner's allocable share ofthe outstanding installment obligation towhich section 453A(b) applies.

10. For closely held partnerships (asdefined in section 460(b)(4)), provide theinformation a partner needs to figure thepartner's allocable share of any interestdue or to be refunded under the look-backmethod of section 460(b)(2) on certainlong-term contracts that are accounted forunder either the percentage ofcompletion-capitalized cost method or thepercentage of completion method. Alsoattach to Form 1065 the informationspecified in the Instructions for Form8697, Part II, lines 1 and 3, for each taxyear in which such a long-term contract iscompleted.

11. Any information a partner needsrelating to interest expense that thepartner is required to capitalize. A partnermay be required to capitalize interest thatwas incurred by the partner for thepartnership's production expenditures.Similarly, a partner may have to capitalize

interest that was incurred by thepartnership for the partner's ownproduction expenditures. See Regulationssections 1.263A-8 through 1.263A-15 formore information.

12. Any information a partner that is atax-exempt organization may need tofigure its share of unrelated businesstaxable income under section 512(a)(1)(but excluding any modifications requiredby paragraphs (8) through (15) of section512(b)). Partners are required to notifythe partnership of their tax-exempt status.See Form 990-T, Exempt OrganizationBusiness Income Tax Return, for moreinformation.

13. Expenditures qualifying for the (a)rehabilitation credit not related to rentalreal estate activities, (b) energy credit, or (c) reforestation credit. Complete andattach Form 3468. See Form 3468 andthe related instructions for information oneligible property and the lines on Form3468 to complete. Do not include thatpart of the cost of the property thepartnership has elected to expense undersection 179. Attach to each Schedule K-1a separate schedule in a format similar tothat shown on Form 3468 detailing eachpartner's share of qualified expenditures.Also indicate the lines of Form 3468 onwhich the partners should report theseamounts.

14. Recapture of investment credit. Complete and attach Form 4255,Recapture of Investment Credit, wheninvestment credit property is disposed of,or it no longer qualifies for the credit,before the end of the recapture period orthe useful life applicable to the property.State the type of property at the top ofForm 4255 and complete lines 2, 4, and5, whether or not any partner is subject torecapture of the credit. Attach to eachSchedule K-1 a separate scheduleproviding the information the partnershipis required to show on Form 4255, but listonly the partner's distributive share of thecost of the property subject to recapture.Also indicate the lines of Form 4255 onwhich the partners should report theseamounts.

15. Any information a partner may needto figure the recapture of the qualifiedelectric vehicle credit. See Pub. 535 formore information.

16. Any information a partner may needto figure recapture of the Indianemployment credit. Generally, if apartnership terminates a qualifiedemployee less than 1 year after the dateof initial employment, any Indianemployment credit allowed for a prior taxyear by reason of wages paid or incurredto that employee must be recaptured. Fordetails, see section 45A(d).

17. Nonqualified withdrawals by thepartnership from a capital constructionfund.

18. Unrecaptured section 1250 gain.Figure this amount for each section 1250

property in Part III of Form 4797 (exceptproperty for which gain is reported usingthe installment method on Form 6252) forwhich you had an entry in Part I of Form4797 by subtracting line 26g of Form 4797from the smaller of line 22 or line 24 ofForm 4797. Figure the total of theseamounts for all section 1250 properties.Generally, the result is the partnership'sunrecaptured section 1250 gain.However, if the partnership is reportinggain on the installment method for asection 1250 property held more than 1year, see the next paragraph to figure theunrecaptured section 1250 gain on thatproperty. Report each partner'sdistributive share of the total amount as“Unrecaptured section 1250 gain.”

The total unrecaptured section 1250gain for an installment sale of section1250 property held more than 1 year isfigured for the year of the sale in amanner similar to that used in thepreceding paragraph. However, the totalunrecaptured section 1250 gain must beallocated to the installment paymentsreceived from the sale. To do so, thepartnership generally must treat the gainallocable to each installment payment asunrecaptured section 1250 gain until allsuch gain has been used in full. Figurethe unrecaptured section 1250 gain forinstallment payments received during thetax year as the smaller of (a) the amountfrom line 26 or line 37 of Form 6252(whichever applies) or (b) the totalunrecaptured section 1250 gain for thesale reduced by all gain reported in prioryears (excluding section 1250 ordinaryincome recapture). However, if thepartnership chose not to treat all of thegain from payments received after May6, 1997, and before August 24, 1999, asunrecaptured section 1250 gain, use onlythe amount the partnership chose to treatas unrecaptured section 1250 gain forthose payments to reduce the totalunrecaptured section 1250 gain remainingto be reported for the sale.

If the partnership received a ScheduleK-1 or Form 1099-DIV from an estate, atrust, a REIT, or a mutual fund (or otherregulated investment company) reporting“unrecaptured section 1250 gain,” do notadd it to the partnership's ownunrecaptured section 1250 gain. Instead,report it as a separate amount. Forexample, if the partnership received aForm 1099-DIV from a REIT withunrecaptured section 1250 gain, report itas “Unrecaptured section 1250 gain froma REIT.”

Also report as a separate amount anygain from the sale or exchange of aninterest in another partnership attributableto unrecaptured section 1250 gain. SeeRegulations section 1.1(h)-1 and attachthe statement required under Regulationssection 1.1(h)-1(e).

19. If the partnership is a closely heldpartnership (as defined in section460(b)(4)) and it depreciated certain


property placed in service afterSeptember 13, 1995, under the incomeforecast method, it must attach to Form1065 the information specified in theinstructions for Form 8866, line 2, for the3rd and 10th tax years beginning after thetax year the property was placed inservice. It must also report the line 2amounts to its partners. See theinstructions for Form 8866 for moredetails.

20. Any information a partner that is apublicly traded partnership may need todetermine if it meets the 90% qualifyingincome test of section 7704(c)(2).Partners are required to notify thepartnership of their status as a publiclytraded partnership.

21. Amortization of reforestationexpenditures. Report the amortizablebasis and year in which the amortizationbegan for the current year and the 7preceding years. For limits that mayapply, see section 194 and Pub. 535.

22. Any information needed by apartner to figure the interest due undersection 1260(b). If any portion of aconstructive ownership transaction wasopen in any prior year, each partner's taxliability must be increased by the partner'spro rata share of interest due on anydeferral of gain recognition. See section1260(b) for details, including how to figurethe interest.

23. Any other information a partner mayneed to file his or her return that is notshown anywhere else on Schedule K-1.For example, if one of the partners is apension plan, that partner may needspecial information to properly file its taxreturn.

Analysis of Net Income(Loss)

For each type of partner shown, enter theportion of the amount shown on line 1 thatwas allocated to that type of partner.Report all amounts for LLC members onthe line for limited partners. The sum ofthe amounts shown on line 2 must equalthe amount shown on line 1. In addition,the amount on line 1 must equal theamount on line 9, Schedule M-1 (if thepartnership is required to completeSchedule M-1).

In classifying partners who areindividuals as “active” or “passive,” thepartnership should apply the rules below.In applying these rules, a partnershipshould classify each partner to the bestof its knowledge and belief. It is assumedthat in most cases the level of a particularpartner's participation in an activity will beapparent.

1. If the partnership's principal activityis a trade or business, classify a generalpartner as “active” if the partner materiallyparticipated in all partnership trade or

business activities; otherwise, classify ageneral partner as “passive.”

2. If the partnership's principal activityconsists of a working interest in an oil orgas well, classify a general partner as“active.”

3. If the partnership's principal activityis a rental real estate activity, classify ageneral partner as “active” if the partneractively participated in all of thepartnership's rental real estate activities;otherwise, classify a general partner as“passive.”

4. Classify as “passive” all partners ina partnership whose principal activity is arental activity other than a rental realestate activity.

5. If the partnership's principal activityis a portfolio activity, classify all partnersas “active.”

6. Classify as “passive” all limitedpartners and LLC members in apartnership whose principal activity is atrade or business or rental activity.

7. If the partnership cannot make areasonable determination whether apartner's participation in a trade orbusiness activity is material or whether apartner's participation in a rental realestate activity is active, classify thepartner as “passive.”

Schedule L—Balance Sheetsper Books

Note: Schedules L, M-1, and M-2 are notrequired to be completed if thepartnership answered Yes to Question 5of Schedule B.

The balance sheets should agree withthe partnership's books and records.Attach a statement explaining anydifferences.

Partnerships reporting to the InterstateCommerce Commission (ICC) or to anynational, state, municipal, or other publicofficer may send copies of their balancesheets prescribed by the ICC or national,state, or municipal authorities, as of thebeginning and end of the tax year, insteadof completing Schedule L. However,statements filed under this proceduremust contain sufficient information toenable the IRS to reconstruct a balancesheet similar to that contained on Form1065 without contacting the partnershipduring processing.

All amounts on the balance sheetshould be reported in U.S. dollars. If thepartnership's books and records are keptin a foreign currency, the balance sheetshould be translated in accordance withU.S. generally accepted accountingprinciples (GAAP).Exception. If the partnership or anyqualified business unit of the partnershipuses the U.S. dollar approximate separatetransactions method, Schedule L shouldreflect the tax balance sheet prepared and

translated into U.S. dollars according toRegulations section 1.985-3(d), and not aU.S. GAAP balance sheet.

Line 5—Tax-Exempt SecuritiesInclude on this line:

1. State and local governmentobligations, the interest on which isexcludable from gross income undersection 103(a) and

2. Stock in a mutual fund or otherregulated investment company thatdistributed exempt-interest dividendsduring the tax year of the partnership.

Line 18—All Nonrecourse LoansNonrecourse loans are those liabilities ofthe partnership for which no partner bearsthe economic risk of loss.

Schedule M-1—Reconciliation of Income(Loss) per Books WithIncome (Loss) per Return

Line 3—Guaranteed PaymentsInclude on this line guaranteed paymentsshown on Schedule K, line 5 (other thanamounts paid for insurance thatconstitutes medical care for a partner, apartner's spouse, and a partner'sdependents).

Line 4b—Travel and EntertainmentInclude on this line:● The part of the cost of meals andentertainment not allowed under section274(n).● Expenses for the use of anentertainment facility.● The part of business gifts over $25.● Expenses of an individual allocable toconventions on cruise ships over $2,000.● Employee achievement awards over$400.● The part of the cost of entertainmenttickets that exceeds face value (alsosubject to 50% disallowance).● The part of the cost of skyboxes thatexceeds the face value of nonluxury boxseat tickets.● The part of the cost of luxury watertravel not allowed under section 274(m).● Expenses for travel as a form ofeducation.● Nondeductible club dues.● Other travel and entertainmentexpenses not allowed as a deduction.

Schedule M-2—Analysis ofPartners' Capital Accounts

Show what caused the changes duringthe tax year in the partners' capitalaccounts as reflected on the partnership's


books and records. The amounts onSchedule M-2 should equal the total of theamounts reported in Item J of all thepartners' Schedules K-1.

The partnership may, but is notrequired to, use the rules in Regulationssection 1.704-1(b)(2)(iv) to determine thepartners' capital accounts in ScheduleM-2 and Item J of the partners' SchedulesK-1. If the beginning and ending capitalaccounts reported under these rules differfrom the amounts reported on ScheduleL, attach a statement reconciling anydifferences.

Line 2—Capital Contributed DuringYearInclude on line 2 the amount of moneyand property contributed by each partnerto the partnership as reflected on thepartnership's books and records.

Line 3—Net Income (Loss) perBooksEnter on line 3 the net income (loss)shown on the partnership books fromSchedule M-1, line 1.

Line 6—DistributionsLine 6a—Cash. Enter on line 6a theamount of money distributed to eachpartner by the partnership.Line 6b—Property. Enter the amount ofproperty distributed to each partner by thepartnership as reflected on thepartnership's books and records. Includewithdrawals from inventory for thepersonal use of a partner.

Paperwork Reduction Act Notice. We ask for the information on this form to carryout the Internal Revenue laws of the United States. You are required to give us theinformation. We need it to ensure that you are complying with these laws and toallow us to figure and collect the right amount of tax.

You are not required to provide the information requested on a form that issubject to the Paperwork Reduction Act unless the form displays a valid OMBcontrol number. Books or records relating to a form or its instructions must beretained as long as their contents may become material in the administration of anyInternal Revenue law. Generally, tax returns and return information are confidential,as required by section 6103.

The time needed to complete and file this form and related schedules will varydepending on individual circumstances. The estimated average times are:

If you have comments concerning the accuracy of these time estimates orsuggestions for making these forms simpler, we would be happy to hear from you.You can write to the Tax Forms Committee, Western Area Distribution Center,Rancho Cordova, CA 95743-0001. Do not send the tax form to this address.Instead, see Where To File on page 4.

Form RecordkeepingLearning about the

law or the form Preparing the form

Copying,assembling,and sending

the formto the IRS

1065

Schedule D(Form 1065)

Schedule K-1(Form 1065)

Schedule L(Form 1065)

Schedule M-1(Form 1065)

Schedule M-2(Form 1065)

39 hr., 56 min.

6 hr., 56 min.

27 hr., 2 min.

15 hr., 32 min.

3 hr., 21 min.

2 hr., 52 min.

22 hr., 13 min.

2 hr., 11 min.

10 hr., 8 min.

6 min.

12 min.

6 min.

37 hr., 48 min.

2 hr., 23 min.

11 hr., 2 min.

22 min.

16 min.

9 min.

4 hr., 1 min.


CodeCode

Computer and Electronic ProductManufacturing

Agriculture, Forestry, Fishingand Hunting

111100 Oilseed & Grain Farming111210 Vegetable & Melon Farming

(including potatoes & yams)111300 Fruit & Tree Nut Farming111400 Greenhouse, Nursery, &

Floriculture Production111900 Other Crop Farming (including

tobacco, cotton, sugarcane,hay, peanut, sugar beet & allother crop farming)

Animal Production112111 Beef Cattle Ranching &

Farming112112 Cattle Feedlots112120 Dairy Cattle & Milk Production112210 Hog & Pig Farming112300 Poultry & Egg Production112400 Sheep & Goat Farming112510 Animal Aquaculture (including

shellfish & finfish farms &hatcheries)

112900 Other Animal ProductionForestry and Logging113110 Timber Tract Operations113210 Forest Nurseries & Gathering

of Forest Products113310 LoggingFishing, Hunting and Trapping114110 Fishing114210 Hunting & TrappingSupport Activities for Agriculture andForestry115110 Support Activities for Crop

Production (including cottonginning, soil preparation,planting, & cultivating)

115210 Support Activities for AnimalProduction

115310 Support Activities ForForestry

Mining 211110 Oil & Gas Extraction 212110 Coal Mining 212200 Metal Ore Mining

212320 Sand, Gravel, Clay, & Ceramic& Refractory Minerals Mining& Quarrying

212390 Other Nonmetallic MineralMining & Quarrying

213110 Support Activities for Mining

221100 Electric Power Generation,Transmission & Distribution

221210 Natural Gas Distribution 221300 Water, Sewage & Other

Systems

Construction

233110 Land Subdivision & LandDevelopment

233200 Residential BuildingConstruction

233300 Nonresidential BuildingConstruction

Heavy Construction 234100 Highway, Street, Bridge, &

Tunnel Construction 234900 Other Heavy Construction Special Trade Contractors 235110 Plumbing, Heating, &

Air-Conditioning Contractors 235210 Painting & Wall Covering

Contractors 235310 Electrical Contractors 235400 Masonry, Drywall, Insulation,

& Tile Contractors 235500 Carpentry & Floor Contractors235610 Roofing, Siding, & Sheet

Metal Contractors 235710 Concrete Contractors 235810 Water Well Drilling

Contractors 235900 Other Special Trade

Contractors

Manufacturing Food Manufacturing 311110 Animal Food Mfg 311200 Grain & Oilseed Milling 311300 Sugar & Confectionery

Product Mfg311400 Fruit & Vegetable Preserving

& Specialty Food Mfg 311500 Dairy Product Mfg 311610 Animal Slaughtering &

Processing 311710 Seafood Product Preparation

& Packaging

212310 Stone Mining & Quarrying

Building, Developing, and General Contracting

311800 Bakeries & Tortilla Mfg 311900 Other Food Mfg (including

coffee, tea, flavorings &seasonings)

Beverage and Tobacco ProductManufacturing 312110 Soft Drink & Ice Mfg 312120 Breweries 312130 Wineries 312140 Distilleries 312200 Tobacco Manufacturing Textile Mills and Textile ProductMills 313000 Textile Mills 314000 Textile Product Mills Apparel Manufacturing 315100 Apparel Knitting Mills 315210 Cut & Sew Apparel

Contractors315220 Men’s & Boys’ Cut & Sew

Apparel Mfg 315230 Women’s & Girls’ Cut & Sew

Apparel Mfg 315290 Other Cut & Sew Apparel Mfg315990 Apparel Accessories & Other

Apparel Mfg Leather and Allied ProductManufacturing 316110 Leather & Hide Tanning &

Finishing316210 Footwear Mfg (including

rubber & plastics) 316990 Other Leather & Allied

Product Mfg Wood Product Manufacturing 321110 Sawmills & Wood

Preservation 321210 Veneer, Plywood, &

Engineered Wood ProductMfg

321900 Other Wood Product Mfg Paper Manufacturing 322100 Pulp, Paper, & Paperboard

Mills 322200 Converted Paper Product MfgPrinting and Related SupportActivities 323100 Printing & Related Support

Activities Petroleum and Coal ProductsManufacturing324110 Petroleum Refineries

(including integrated) 324120 Asphalt Paving, Roofing, &

Saturated Materials Mfg 324190 Other Petroleum & Coal

Products Mfg Chemical Manufacturing 325100 Basic Chemical Mfg 325200 Resin, Synthetic Rubber, &

Artificial & Synthetic Fibers &Filaments Mfg

325300 Pesticide, Fertilizer, & OtherAgricultural Chemical Mfg

325410 Pharmaceutical & MedicineMfg

325500 Paint, Coating, & AdhesiveMfg

325600 Soap, Cleaning Compound, &Toilet Preparation Mfg

325900 Other Chemical Product &Preparation Mfg

Plastics and Rubber ProductsManufacturing326100 Plastics Product Mfg 326200 Rubber Product Mfg Nonmetallic Mineral ProductManufacturing 327100 Clay Product & Refractory

Mfg 327210 Glass & Glass Product Mfg 327300 Cement & Concrete Product

Mfg 327400 Lime & Gypsum Product Mfg 327900 Other Nonmetallic Mineral

Product Mfg Primary Metal Manufacturing 331110 Iron & Steel Mills & Ferroalloy

Mfg 331200 Steel Product Mfg from

Purchased Steel 331310 Alumina & Aluminum

Production & Processing 331400 Nonferrous Metal (except

Aluminum) Production &Processing

331500 Foundries Fabricated Metal ProductManufacturing 332110 Forging & Stamping 332210 Cutlery & Handtool Mfg 332300 Architectural & Structural

Metals Mfg 332400 Boiler, Tank, & Shipping

Container Mfg 332510 Hardware Mfg 332610 Spring & Wire Product Mfg 332700 Machine Shops; Turned

Product; & Screw, Nut, & BoltMfg

332810 Coating, Engraving, HeatTreating, & Allied Activities

332900 Other Fabricated MetalProduct Mfg

Machinery Manufacturing 333100 Agriculture, Construction, &

Mining Machinery Mfg 333200 Industrial Machinery Mfg 333310 Commercial & Service

Industry Machinery Mfg 333410 Ventilation, Heating,

Air-Conditioning, &Commercial RefrigerationEquipment Mfg

333510 Metalworking Machinery Mfg 333610 Engine, Turbine & Power

Transmission Equipment Mfg 333900 Other General Purpose

Machinery Mfg

334110 Computer & PeripheralEquipment Mfg

334200 Communications EquipmentMfg

334310 Audio & Video Equipment Mfg334410 Semiconductor & Other

Electronic Component Mfg 334500 Navigational, Measuring,

Electromedical, & ControlInstruments Mfg

334610 Manufacturing & ReproducingMagnetic & Optical Media

Electrical Equipment, Appliance, andComponent Manufacturing 335100 Electric Lighting Equipment

Mfg 335200 Household Appliance Mfg 335310 Electrical Equipment Mfg 335900 Other Electrical Equipment &

Component Mfg Transportation EquipmentManufacturing 336100 Motor Vehicle Mfg 336210 Motor Vehicle Body & Trailer

Mfg 336300 Motor Vehicle Parts Mfg 336410 Aerospace Product & Parts

Mfg 336510 Railroad Rolling Stock Mfg 336610 Ship & Boat Building 336990 Other Transportation

Equipment Mfg Furniture and Related ProductManufacturing 337000 Furniture & Related Product

Manufacturing Miscellaneous Manufacturing 339110 Medical Equipment &

Supplies Mfg 339900 Other Miscellaneous

Manufacturing

Wholesale Trade Wholesale Trade, Durable Goods 421100 Motor Vehicle & Motor Vehicle

Parts & Supplies Wholesalers421200 Furniture & Home Furnishing

Wholesalers421300 Lumber & Other Construction

Materials Wholesalers421400 Professional & Commercial

Equipment & SuppliesWholesalers

421500 Metal & Mineral (exceptPetroleum) Wholesalers

421600 Electrical Goods Wholesalers

Crop Production

Utilities

Code

Code

This list of Principal Business Activities and theirassociated codes is designed to classify anenterprise by the type of activity in which it isengaged to facilitate the administration of theInternal Revenue Code. These Principal BusinessActivity Codes are based on the North AmericanIndustry Classification System.

Using the list of activities and codes below,determine from which activity the business

Once the Principal Business Activity isdetermined, enter the six-digit code from the listbelow on page 1, item C. Also enter a briefdescription of the business activity in item A andthe principal product or service of the businessin item B.

Codes for Principal Business Activity and Principal Product or Service

derives the largest percentage of its “totalreceipts.” Total receipts is defined as the sum ofgross receipts or sales (page 1, line 1a), all otherincome (page 1, lines 4 through 7), income(receipts only) reported on Schedule K, lines 3aand 4a through f, and income (receipts only)reported on Form 8825, lines 2, 19, and 20a. Ifthe business purchases raw materials andsupplies them to a subcontractor to produce thefinished product, but retains title to the product,

the business is considered a manufacturer andmust use one of the manufacturing codes(311110-339900).


CodeCodeCode Code

Electronics and Appliance Stores 443111 Household Appliance Stores 443112 Radio, Television, & Other

Electronics Stores 443120 Computer & Software Stores 443130 Camera & Photographic

Supplies StoresBuilding Material and GardenEquipment and Supplies Dealers 444110 Home Centers 444120 Paint & Wallpaper Stores 444130 Hardware Stores 444190 Other Building Material

Dealers444200 Lawn & Garden Equipment &

Supplies Stores Food and Beverage Stores 445110 Supermarkets and Other

Grocery (except Convenience)Stores

445120 Convenience Stores

445210 Meat Markets 445220 Fish & Seafood Markets 445230 Fruit & Vegetable Markets 445291 Baked Goods Stores 445292 Confectionery & Nut Stores 445299 All Other Specialty Food

Stores445310 Beer, Wine, & Liquor Stores Health and Personal Care Stores 446110 Pharmacies & Drug Stores 446120 Cosmetics, Beauty Supplies,

& Perfume Stores 446130 Optical Goods Stores446190 Other Health & Personal Care

Stores Gasoline Stations 447100 Gasoline Stations (including

convenience stores with gas) Clothing and Clothing AccessoriesStores 448110 Men’s Clothing Stores 448120 Women’s Clothing Stores 448130 Children’s & Infants’ Clothing

Stores 448140 Family Clothing Stores 448150 Clothing Accessories Stores 448190 Other Clothing Stores448210 Shoe Stores 448310 Jewelry Stores 448320 Luggage & Leather Goods

Stores Sporting Goods, Hobby, Book, andMusic Stores 451110 Sporting Goods Stores 451120 Hobby, Toy, & Game Stores 451130 Sewing, Needlework, & Piece

Goods Stores 451140 Musical Instrument & Supplies

Stores 451211 Book Stores 451212 News Dealers & Newsstands 451220 Prerecorded Tape, Compact

Disc, & Record Stores General Merchandise Stores 452110 Department stores 452900 Other General Merchandise

Stores Miscellaneous Store Retailers453110 Florists 453210 Office Supplies & Stationery

Stores 453220 Gift, Novelty, & Souvenir

Stores453310 Used Merchandise Stores 453910 Pet & Pet Supplies Stores 453920 Art Dealers 453930 Manufactured (Mobile) Home

Dealers 453990 All Other Miscellaneous Store

Retailers (including tobacco,candle, & trophy shops)

Nonstore Retailers 454110 Electronic Shopping &

Mail-Order Houses 454210 Vending Machine Operators 454311 Heating Oil Dealers 454312 Liquefied Petroleum Gas

(Bottled Gas) Dealers 454319 Other Fuel Dealers 454390 Other Direct Selling

Establishments (includingdoor-to-door retailing, frozenfood plan providers, partyplan merchandisers, &coffee-break serviceproviders)

Transportation andWarehousing Air, Rail, and Water Transportation 481000 Air Transportation 482110 Rail Transportation 483000 Water Transportation

Truck Transportation 484110 General Freight Trucking,

Local

484120 General Freight Trucking,Long-distance

484200 Specialized Freight Trucking Transit and Ground PassengerTransportation 485110 Urban Transit Systems 485210 Interurban & Rural Bus

Transportation 485310 Taxi Service 485320 Limousine Service 485410 School & Employee Bus

Transportation 485510 Charter Bus Industry 485990 Other Transit & Ground

Passenger Transportation Pipeline Transportation 486000 Pipeline Transportation

487000 Scenic & SightseeingTransportation

Support Activities for Transportation 488100 Support Activities for Air

Transportation 488210 Support Activities for Rail

Transportation 488300 Support Activities for Water

Transportation 488410 Motor Vehicle Towing488490 Other Support Activities for

Road Transportation 488510 Freight Transportation

Arrangement 488990 Other Support Activities for

Transportation Couriers and Messengers 492110 Couriers 492210 Local Messengers & Local

Delivery Warehousing and Storage 493100 Warehousing & Storage

(except lessors ofminiwarehouses & self-storage units)

Information Publishing Industries 511110 Newspaper Publishers 511120 Periodical Publishers 511130 Book Publishers 511140 Database & Directory

Publishers 511190 Other Publishers 511210 Software Publishers Motion Picture and Sound RecordingIndustries 512100 Motion Picture & Video

Industries (except videorental)

512200 Sound Recording Industries

513100 Radio & TelevisionBroadcasting

513200 Cable Networks & ProgramDistribution

513300 Telecommunications(including paging, cellular,satellite, & othertelecommunications)

Information Services and DataProcessing Services 514100 Information Services

(including news syndicates,libraries, & on-line informationservices)

514210 Data Processing Services

Finance and Insurance Depository Credit Intermediation 522110 Commercial Banking 522120 Savings Institutions 522130 Credit Unions 522190 Other Depository Credit

Intermediation Nondepository Credit Intermediation 522210 Credit Card Issuing

522220 Sales Financing 522291 Consumer Lending 522292 Real Estate Credit (including

mortgage bankers &originators)

522293 International Trade Financing 522294 Secondary Market Financing 522298 All Other Nondepository

Credit Intermediation Activities Related to CreditIntermediation 522300 Activities Related to Credit

Intermediation (including loanbrokers)

Securities, Commodity Contracts,and Other Financial Investments andRelated Activities 523110 Investment Banking &

Securities Dealing 523120 Securities Brokerage 523130 Commodity Contracts Dealing523140 Commodity Contracts

Brokerage 523210 Securities & Commodity

Exchanges 523900 Other Financial Investment

Activities (including portfoliomanagement & investmentadvice)

Insurance Carriers and RelatedActivities 524140 Direct Life, Health, & Medical

Insurance & ReinsuranceCarriers

524150 Direct Insurance &Reinsurance (except Life,Health & Medical) Carriers

524210 Insurance Agencies &Brokerages

524290 Other Insurance RelatedActivities

Funds, Trusts, and Other FinancialVehicles 525100 Insurance & Employee Benefit

Funds 525910 Open-End Investment Funds

(Form 1120-RIC) 525920 Trusts, Estates, & Agency

Accounts 525930 Real Estate Investment Trusts

(Form 1120-REIT) 525990 Other Financial Vehicles

Real Estate and Rental andLeasing Real Estate 531110 Lessors of Residential

Buildings & Dwellings

531120 Lessors of NonresidentialBuildings (exceptMiniwarehouses)

531130 Lessors of Miniwarehouses &Self-Storage Units

531190 Lessors of Other Real EstateProperty

531210 Offices of Real Estate Agents& Brokers

531310 Real Estate PropertyManagers

531320 Offices of Real EstateAppraisers

531390 Other Activities Related toReal Estate

Rental and Leasing Services 532100 Automotive Equipment Rental

& Leasing 532210 Consumer Electronics &

Appliances Rental 532220 Formal Wear & Costume

Rental 532230 Video Tape & Disc Rental

Broadcasting andTelecommunications 442210 Floor Covering Stores

442291 Window Treatment Stores 442299 All Other Home Furnishings

Stores

421700 Hardware, & Plumbing &Heating Equipment &Supplies Wholesalers

421800 Machinery, Equipment, &Supplies Wholesalers

421910 Sporting & RecreationalGoods & SuppliesWholesalers

421920 Toy & Hobby Goods &Supplies Wholesalers

421930 Recyclable MaterialWholesalers

421940 Jewelry, Watch, PreciousStone, & Precious MetalWholesalers

421990 Other Miscellaneous DurableGoods Wholesalers

441110 New Car Dealers 441120 Used Car Dealers 441210 Recreational Vehicle Dealers 441221 Motorcycle Dealers 441222 Boat Dealers 441229 All Other Motor Vehicle

Dealers 441300 Automotive Parts,

Accessories, & Tire Stores

442110 Furniture Stores

Retail TradeMotor Vehicle and Parts Dealers

Furniture and Home FurnishingsStores

422400 Grocery & Related ProductWholesalers

422500 Farm Product Raw MaterialWholesalers

422600 Chemical & Allied ProductsWholesalers

422700 Petroleum & PetroleumProducts Wholesalers

422800 Beer, Wine, & DistilledAlcoholic BeverageWholesalers

422910 Farm Supplies Wholesalers 422920 Book, Periodical, &

Newspaper Wholesalers 422930 Flower, Nursery Stock, &

Florists’ Supplies Wholesalers422940 Tobacco & Tobacco Product

Wholesalers 422950 Paint, Varnish, & Supplies

Wholesalers 422990 Other Miscellaneous

Nondurable GoodsWholesalers

Wholesale Trade, Nondurable Goods 422100 Paper & Paper Product

Wholesalers422210 Drugs & Druggists’ Sundries

Wholesalers 422300 Apparel, Piece Goods, &

Notions Wholesalers

Scenic & Sightseeing Transportation

“Offices of Bank Holding Companies”and “Offices of Other HoldingCompanies” are located underManagement of Companies (HoldingCompanies) on page 34.

531114 Cooperative Housing


CodeCodeCode Code

Administrative and Supportand Waste Management andRemediation Services Administrative and Support Services 561110 Office Administrative Services561210 Facilities Support Services 561300 Employment Services 561410 Document Preparation

Services 561420 Telephone Call Centers561430 Business Service Centers

(including private mail centers& copy shops)

561440 Collection Agencies 561450 Credit Bureaus 561490 Other Business Support

Services (includingrepossession services, courtreporting, & stenotypeservices)

561500 Travel Arrangement &Reservation Services

561600 Investigation & SecurityServices

561710 Exterminating & Pest ControlServices

561720 Janitorial Services 561730 Landscaping Services 561740 Carpet & Upholstery Cleaning

Services 561790 Other Services to Buildings &

Dwellings 561900 Other Support Services

(including packaging &labeling services, &convention & trade showorganizers)

Waste Management andRemediation Services 562000 Waste Management &

Remediation Services

Educational Services 611000 Educational Services

(including schools, colleges, &universities)

Offices of Physicians and Dentists 621111 Offices of Physicians (except

mental health specialists) 621112 Offices of Physicians, Mental

Health Specialists 621210 Offices of Dentists

621310 Offices of Chiropractors 621320 Offices of Optometrists 621330 Offices of Mental Health

Practitioners (exceptPhysicians)

621340 Offices of Physical,Occupational & SpeechTherapists, & Audiologists

Offices of Other Health Practitioners

621391 Offices of Podiatrists621399 Offices of All Other

Miscellaneous HealthPractitioners

Outpatient Care Centers 621410 Family Planning Centers 621420 Outpatient Mental Health &

Substance Abuse Centers 621491 HMO Medical Centers 621492 Kidney Dialysis Centers 621493 Freestanding Ambulatory

Surgical & EmergencyCenters

621498 All Other Outpatient CareCenters

Medical and Diagnostic Laboratories621510 Medical & Diagnostic

Laboratories Home Health Care Services 621610 Home Health Care Services Other Ambulatory Health CareServices 621900 Other Ambulatory Health Care

Services (includingambulance services & blood& organ banks)

Hospitals 622000 Hospitals Nursing and Residential CareFacilities 623000 Nursing & Residential Care

Facilities Social Assistance 624100 Individual & Family Services 624200 Community Food & Housing,

& Emergency & Other ReliefServices

624310 Vocational RehabilitationServices

624410 Child Day Care Services

Arts, Entertainment, andRecreation Performing Arts, Spectator Sports,and Related Industries 711100 Performing Arts Companies 711210 Spectator Sports (including

sports clubs & racetracks) 711300 Promoters of Performing Arts,

Sports, & Similar Events 711410 Agents & Managers for

Artists, Athletes, Entertainers,& Other Public Figures

711510 Independent Artists, Writers,& Performers

Museums, Historical Sites, andSimilar Institutions 712100 Museums, Historical Sites, &

Similar Institutions Amusement, Gambling, andRecreation Industries 713100 Amusement Parks & Arcades 713200 Gambling Industries 713900 Other Amusement &

Recreation Industries(including golf courses, skiingfacilities, marinas, fitnesscenters, & bowling centers)

Accommodation andFood Services Accommodation 721110 Hotels (except casino hotels)

& Motels 721120 Casino Hotels 721191 Bed & Breakfast Inns 721199 All Other Traveler

Accommodation 721210 RV (Recreational Vehicle)

Parks & Recreational Camps 721310 Rooming & Boarding Houses Food Services and Drinking Places 722110 Full-Service Restaurants 722210 Limited-Service Eating Places722300 Special Food Services

(including food servicecontractors & caterers)

722410 Drinking Places (AlcoholicBeverages)

Other Services Repair and Maintenance 811110 Automotive Mechanical &

Electrical Repair &Maintenance

811120 Automotive Body, Paint,Interior, & Glass Repair

811190 Other Automotive Repair &Maintenance (including oilchange & lubrication shops &car washes)

811210 Electronic & PrecisionEquipment Repair &Maintenance

811310 Commercial & IndustrialMachinery & Equipment(except Automotive &Electronic) Repair &Maintenance

811410 Home & Garden Equipment &Appliance Repair &Maintenance

811420 Reupholstery & FurnitureRepair

811430 Footwear & Leather GoodsRepair

811490 Other Personal & HouseholdGoods Repair & Maintenance

Personal and Laundry Services 812111 Barber Shops 812112 Beauty Salons 812113 Nail Salons 812190 Other Personal Care Services

(including diet & weightreducing centers)

812210 Funeral Homes & FuneralServices

812220 Cemeteries & Crematories 812310 Coin-Operated Laundries &

Drycleaners 812320 Drycleaning & Laundry

Services (exceptCoin-Operated)

812330 Linen & Uniform Supply 812910 Pet Care (except Veterinary)

Services 812920 Photofinishing812930 Parking Lots & Garages 812990 All Other Personal Services Religious, Grantmaking, Civic,Professional, and SimilarOrganizations 813000 Religious, Grantmaking, Civic,

Professional, & SimilarOrganizations (includingcondominium andhomeowners associations)

Health Care and SocialAssistance

532290 Other Consumer GoodsRental

532310 General Rental Centers 532400 Commercial & Industrial

Machinery & EquipmentRental & Leasing

Lessors of Nonfinancial IntangibleAssets (except copyrighted works)533110 Lessors of Nonfinancial

Intangible Assets (exceptcopyrighted works)

Professional, Scientific, andTechnical Services

541110 Offices of Lawyers 541190 Other Legal Services Accounting, Tax Preparation,Bookkeeping, and Payroll Services 541211 Offices of Certified Public

Accountants 541213 Tax Preparation Services 541214 Payroll Services 541219 Other Accounting Services Architectural, Engineering, andRelated Services 541310 Architectural Services541320 Landscape Architecture

Services 541330 Engineering Services 541340 Drafting Services 541350 Building Inspection Services

Legal Services

Management of Companies(Holding Companies) 551111 Offices of Bank Holding

Companies 551112 Offices of Other Holding

Companies

Other Professional, Scientific, andTechnical Services 541600 Management, Scientific, &

Technical Consulting Services541700 Scientific Research &

Development Services 541800 Advertising & Related

Services 541910 Marketing Research & Public

Opinion Polling 541920 Photographic Services 541930 Translation & Interpretation

Services 541940 Veterinary Services 541990 All Other Professional,

Scientific, & TechnicalServices

541360 Geophysical Surveying &Mapping Services

541370 Surveying & Mapping (exceptGeophysical) Services

541380 Testing Laboratories

541400 Specialized Design Services(including interior, industrial,graphic, & fashion design)

Computer Systems Design andRelated Services 541511 Custom Computer

Programming Services 541512 Computer Systems Design

Services 541513 Computer Facilities

Management Services 541519 Other Computer Related

Services

Specialized Design Services


Index

A Accounting methods ........................... 4 Accounting periods ............................. 5

Adjustments for certain credits ......... 15Allocation of partnership items:

Contributed property ..................... 20 Liabilities ....................................... 21 Nonrecourse liabilities .................. 21 Partnership agreement ................. 20 Special allocations ........................ 21

Alternative minimum tax:Adjustments and tax preference

items ......................................... 26Analysis of partner's capital account 21Assembling the Return ....................... 7

Audits:Consolidated audit procedures .... 19Tax Matters Partner ..................... 19

BBusiness start-up expenses ............. 15

CCapital construction fund ............ 23, 29Change of address ........................... 13

Charitable contribution ..................... 23 Codes:

Entity ............................................. 21Principal business activity and

principal product or service ...... 31Contributions to the partnership ......... 8Cost of goods sold ............... 13, 17, 18

Inventory ....................................... 18 Credits:

Energy .................................... 24, 29Federal tax paid on fuels ............. 28

Low-income housing .................... 24 Reforestation .......................... 24, 29

Rehabilitation (rental real estate) . 24 Rental activities ............................ 24

D Deductions:

Bad debts ..................................... 15 Depletion ...................................... 16 Depreciation ................................. 16

Employee benefit programs ......... 17 Entertainment facilities ................. 17 Guaranteed payments .................. 15

How to report ................................ 14 Interest .......................................... 16 Limitations .................................... 14

Meals and entertainment .............. 17 Membership dues ......................... 17 Rent .............................................. 15

Repairs and maintenance ............ 15 Retirement plans .......................... 16

Salaries and wages ................ 15, 22Taxes and licenses ...................... 16Transactions between related

taxpayers .................................. 15 Travel ............................................ 17 Wages .................................... 15, 24

Definitions ........................................... 2 Depletion:Oil and gas wells .......................... 26 Depreciation ..................................... 16 Depreciation:Income forecast method ............... 30

Dispositions of contributed property ... 8 Distributions:

Cash ............................................. 28 Property ........................................ 28

Recognition of precontribution gain 8

E Elections:By each partner .............................. 8By the partnership .......................... 7 Electronic filing ................................... 3 Extension ............................................ 3

F Foreign accounts .............................. 19

Foreign partners, withholding ........... 19Foreign Trusts, transactions ............. 19

Forms ............................................. 2, 6Forms you may need ..................... 6How to get them ............................. 2

GGain (loss), section 1231 ................. 22

General partner .................................. 2 General partnership ............................ 2

IIncome, trade or business ................ 13Indian employment credit ................. 29

Installment sales ............................... 13Interest on production expenditures . 16

Inventory valuation ........................... 18Investment interest expense ............ 24

LLimited liability company .................... 2Limited liability partnership ................. 2

Limited partner ................................... 2 Limited partnership ............................. 2

N Nondeductible expenses .................. 28 Nonrecourse liabilities ...................... 21 Nonrecourse loans ....................... 2, 21Also see Nonrecourse liabilities ... 21

O Organization costs ............................ 15

PPassive activity limitations:

Grouping activities ........................ 10Passive activities defined ............... 8

Rental activities .............................. 9 Reporting requirements ................ 12

Trade or business activities ........... 9 Penalties ............................................. 4 Portfolio income ................................ 10 Publicly tradedpartnerships ................ 3, 7, 9, 14, 30

QQualified electric vehicle credit ........ 29

RReal estate investment trust

(REIT) ..................................... 10, 28 Recapture:

Investment credit .......................... 29Low-income housing credit .......... 28Mining exploration expenditures .. 29Section 179 expense

deduction ............................ 14, 29 Regulated investmentcompany ........................... 10, 13, 28 Rental activities .................................. 9

SSale of partnership interests .............. 8Sale of small business stock:

Exclusion ...................................... 22 Rollover ........................................ 22

Schedule: A ................................................... 17 B ................................................... 18 K ................................................... 20 K-1 ................................................ 20 L .................................................... 30 M-1 ............................................... 30 M-2 ............................................... 30

Section 179 expense deduction ....... 23Section 59(e) expenditures 8, 14, 26, 28

Self-employment ............................... 25Separately stated items ...................... 7

Signature ............................................ 4 Special allocations ............................ 21 Substitute forms ............................... 20 Syndication costs ............................. 15

T Tax shelter:

Registration .................................. 19 Registration number ..................... 21

Termination of partnership ................. 3Travel, meals, and entertainment .... 17

UUniform capitalization rules .............. 14Unrealized receivables and inventory 8

Sale of partnership interests .......... 8Unrecaptured section 1250 gain ...... 29

WWhen to file ........................................ 3Where to file ....................................... 4Who must file ..................................... 2


Documents

2000 Instructions for 1065 - Internal Revenue Service · 2012. 7. 16. · 2 0 00 Department of the Treasury Internal Revenue Service Instructions for Form 1065 U.S. Return of Partnership