Instructions for Form 1065
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2025
Instructions for Form 1065
U.S. Return of Partnership Income
Section references are to the Internal Revenue Code unless
otherwise noted.
Future Developments
For the latest information about developments related to Form
1065 and its instructions, such as legislation enacted after they
were published, go to IRS.gov/Form1065.
What’s New
Electronic payments. The United States is transitioning from
the paper-based payments (including checks and money orders)
to and from the federal government to electronic payments, to
improve efficiency and prevent delays, risks of fraud, lost
payments, and theft.
Making a payment. If there’s a balance due on line 31, go to
IRS.gov/Payments. See the instructions for line 31, later, for
more details.
Direct deposit. To implement Executive Order 14247, we
have added direct deposit fields on lines 32b, 32c, and 32d. If
there’s an overpayment on line 32a, enter your direct deposit
information on lines 32b, 32c, and 32d.
Domestic research or experimental expenditures. P.L.
119-21, commonly known as the One Big Beautiful Bill Act,
added section 174A, domestic research or experimental (R&E)
expenditures. Under section 174A, domestic R&E expenditures
paid or incurred in tax years beginning after 2024 are allowed as
current-year expense deductions. Alternatively, under section
174A(c), taxpayers may elect to charge the expenditures to a
capital account and amortize over a period of at least 60 months.
Certain small businesses may apply the provisions of section
174A retroactively. See Rev. Proc. 2025-28 for more information.
Schedule B, question 19. Question 19 has been updated to
include payments received that are allocable to foreign partners.
Schedules K and K-1, line 13, code X. P.L. 119-21 amended
section 181 to include qualified sound recording production
costs as an elective expense deduction. Taxpayers can elect to
deduct certain costs of qualified sound recording productions
that commence in a tax year ending after July 4, 2025, and
before 2026. See Code X under Line 13e, later, for more
information.
Schedules K and K-1, line 19, distributions. Additional
codes have been activated and the instructions have been
updated to explain where to report different categories of
distributions. See Lines 19a and 19b, later, for more information.
Schedules K and K-1, line 20, code AR. Line 20, code AR,
has been updated to notify partnerships that an employee
identification number (EIN) will be required after 2025 for IRA
partners receiving an unrelated business taxable income (UBTI)
allocation. See Code AR under Line 20c, later, for more
information.
Schedules K and K-1, line 20, code AZ. Code AZ was added
to report reimbursement of preformation expenditures. See Code
AZ under Line 20c, later.
Jan 14, 2026
Schedules K and K-1, line 20, code ZZ. P.L. 119-21 added
section 1062, regarding the gain from the sale or exchange of
qualified farmland property to qualified farmers. For tax years
beginning after July 4, 2025, taxpayers can elect to pay the net
income tax attributable to the gain on the sale or exchange of
qualified farmland property in four equal installments.
Partnerships must provide partners adequate information and a
copy of the covenant needed to file Form 1062, Deferral of Tax
on Gain From the Sale or Exchange of Qualified Farmland
Property to Qualified Farmers, and its Schedule A to help
partners who make the section 1062 election. See Code ZZ
under Line 20c, later, for more information.
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How To Get Tax Help
If you have questions about a tax issue; need help preparing
your tax return; or want to download free publications, forms, or
instructions, go to IRS.gov to find resources that can help you
right away.
Tax reform. Tax reform legislation impacting federal taxes,
credits, and deductions was enacted in P.L. 119-21, commonly
known as the One Big Beautiful Bill Act, on July 4, 2025. Go to
IRS.gov/OBBB for more information and updates on how this
legislation affects your taxes.
Online tax information in other languages. You can find
information on IRS.gov/MyLanguage if English isn’t your native
language.
Over-the-Phone Interpreter (OPI) Service. The IRS serves
taxpayers with limited-English proficiency (LEP) by offering OPI
service. The OPI Service is available at Taxpayer Assistance
Centers (TACs), most IRS offices, and every VITA/TCE tax return
site. The OPI Service is accessible in more than 300 languages.
Accessibility Helpline available for taxpayers with disabilities. Taxpayers who need information about accessibility
services can call 833-690-0598. The Accessibility Helpline can
answer questions related to current and future accessibility
products and services available in alternative media formats (for
example, braille-ready, large print, audio, etc.). The Accessibility
Helpline doesn’t have access to your IRS account. For help with
tax law, refunds, or account-related issues, go to IRS.gov/
LetUsHelp.
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Below is a message to you from the Taxpayer Advocate
Service, an independent organization established by Congress.
Instructions for Form 1065 (2025) Catalog Number 11392V
Department of the Treasury Internal Revenue Service www.irs.gov
The Taxpayer Advocate Service (TAS) Is Here To
Help You
What Is the Taxpayer Advocate Service?
The Taxpayer Advocate Service (TAS) is an independent
organization within the Internal Revenue Service (IRS). TAS
helps taxpayers resolve problems with the IRS, makes
administrative and legislative recommendations to prevent or
correct the problems, and protects taxpayer rights. We work to
ensure that every taxpayer is treated fairly and that you know and
understand your rights under the Taxpayer Bill of Rights. We are
Your Voice at the IRS.
How Can TAS Help Me?
TAS can help you resolve problems that you haven’t been able to
resolve with the IRS on your own. Always try to resolve your
problem with the IRS first, but if you can’t, then come to TAS.
Our services are free.
• TAS helps all taxpayers (and their representatives),
including individuals, businesses, and exempt organizations.
You may be eligible for TAS help if your IRS problem is
causing financial difficulty, if you’ve tried and been unable to
resolve your issue with the IRS, or if you believe an IRS
system, process, or procedure just isn’t working as it should.
• To get help any time with general tax topics, visit
www.TaxpayerAdvocate.IRS.gov. The site can help you with
common tax issues and situations, such as what to do if you
make a mistake on your return or if you get a notice from the
IRS.
• TAS works to resolve large-scale (systemic) problems that
affect many taxpayers. You can report systemic issues at
www.IRS.gov/SAMS. (Be sure not to include any personal
identifiable information.)
How Do I Contact TAS?
TAS has offices in every state, the District of Columbia, and
Puerto Rico. To find your local advocate’s number:
• Go to www.TaxpayerAdvocate.IRS.gov/Contact-Us,
• Check your local directory, or
• Call TAS toll free at 877-777-4778.
What Are My Rights as a Taxpayer?
The Taxpayer Bill of Rights describes ten basic rights that all
taxpayers have when dealing with the IRS. Go to
www.TaxpayerAdvocate.IRS.gov/Taxpayer-Rights for more
information about the rights, what they mean to you, and how
they apply to specific situations you may encounter with the IRS.
TAS strives to protect taxpayer rights and ensure the IRS is
administering the tax law in a fair and equitable way.
How To Get Forms, Instructions, and
Publications
Getting tax forms, instructions, and publications. Go to
IRS.gov/Forms to download current and prior-year forms,
instructions, and publications you may need.
Ordering tax forms, instructions, and publications. Go to
IRS.gov/OrderForms to order current forms, instructions, and
publications; call 800-829-3676 to order prior-year forms and
instructions. The IRS will process your order for forms and
publications as soon as possible. Don’t resubmit requests you’ve
already sent us. You can get forms and publications faster
online.
2
Mobile-friendly forms. You’ll need an IRS Online Account
(OLA) to complete mobile-friendly forms that require signatures.
You’ll have the option to submit your form(s) online or download
a copy for mailing. You’ll need scans of your documents to
support your submission. Go to IRS.gov/MobileFriendlyForms for
more information.
Getting tax publications and instructions in eBook format.
Download and view most tax publications and instructions
(including the Instructions for Form 1040) on mobile devices as
eBooks at IRS.gov/eBooks.
IRS eBooks have been tested using Apple’s iBooks for iPad.
Our eBooks haven’t been tested on other dedicated eBook
readers, and eBook functionality may not operate as intended.
General Instructions
Purpose of Form
Form 1065 is an information return used to report the income,
gains, losses, deductions, credits, and other information from the
operation of a partnership. Generally, a partnership doesn’t pay
tax on its income but passes through any profits or losses to its
partners. Partners must include partnership items on their tax or
information returns.
Definitions
Centralized Partnership Audit Regime
The Bipartisan Budget Act of 2015 (BBA) created the centralized
partnership audit regime effective for partnership tax years
beginning after 2017. It replaced the consolidated audit
proceedings under the Tax Equity and Fiscal Responsibility Act
(TEFRA). The centralized partnership audit regime applies to all
partnerships unless the partnership is an eligible partnership and
elects out by making a valid election using Schedule B-2 (Form
1065).
Electing out of the centralized partnership audit regime.
See Electing Out of the Centralized Partnership Audit Regime,
later.
Adjustment year. An adjustment year is a tax year in which:
• In the case of an adjustment pursuant to the decision of a
court in a proceeding brought under section 6234, such
decision becomes final;
• In the case of an administrative adjustment request (AAR)
under section 6227, such AAR is filed; or
• In any other case, a notice of final partnership adjustment is
mailed under section 6231 or, if the partnership waives the
restrictions under section 6232(b) (regarding limitations on
assessments), the waiver is executed by the IRS.
Reviewed year. A reviewed year is a partnership’s tax year to
which a partnership adjustment relates.
Partnership
A partnership is the relationship between two or more persons
who join to carry on a trade or business, with each person
contributing money, property, labor, or skill and each expecting to
share in the profits and losses of the business whether or not a
formal partnership agreement is made.
The term “partnership” includes a limited partnership,
syndicate, group, pool, joint venture, or other unincorporated
organization, through or by which any business, financial
operation, or venture is carried on, that isn’t, within the meaning
of regulations under section 7701, a corporation, trust, estate, or
sole proprietorship.
Instructions for Form 1065 (2025)
A joint undertaking merely to share expenses isn’t a
partnership. Mere co-ownership of property that is maintained
and leased or rented isn’t a partnership. However, if the
co-owners provide services to the tenants, a partnership exists.
Business owned and operated by spouses. Generally, if you
and your spouse jointly own and operate an unincorporated
business and share in the profits and losses, you’re partners in a
partnership and you must file Form 1065.
Exception—qualified joint venture (QJV). If you and your
spouse materially participate as the only members of a jointly
owned and operated business, and you file a joint return for the
tax year, you can make an election to be treated as a QJV
instead of a partnership. By making the election, you won’t be
required to file Form 1065 for any year the election is in effect
and will instead report the income and deductions directly on
your joint return.
A QJV conducts a trade or business where the only members
of the joint venture are a married couple who file a joint return,
both spouses materially participate in the trade or business
(because mere joint ownership of property isn’t enough), both
spouses elect not to be treated as a partnership, and the
business is co-owned by both spouses and isn’t held in the
name of a state law entity such as a partnership or limited liability
company (LLC).
To make this election, you must divide all items of income,
gain, loss, deduction, and credit between you and your spouse in
accordance with your respective interests in the venture. Each of
you must file a separate Schedule C (Form 1040), Profit or Loss
From Business; or Schedule F (Form 1040), Profit or Loss From
Farming. On each line of your separate Schedule C or F (Form
1040), you must enter your share of the applicable income,
deduction, or loss. Each of you must also file a separate
Schedule SE (Form 1040), Self-Employment Tax, to pay
self-employment tax, as applicable.
If you and your spouse make the election for your rental real
estate business, you each must report your share of income and
deductions on Schedule E (Form 1040), Supplemental Income
and Loss. Rental real estate income isn’t generally included in
net earnings from self-employment subject to self-employment
tax and is generally subject to the passive loss limitation rules.
Electing QJV status doesn’t alter the application of the
self-employment tax or the passive loss limitation rules.
To make the QJV election for 2025, jointly file the 2025 Form
1040 or 1040-SR with the required schedules. This generally
doesn’t increase the total tax on the return, but it does give each
spouse credit for social security earnings on which retirement
benefits are based, provided neither spouse exceeds the social
security wage base limitation.
Once made, the election can’t be revoked without IRS
consent. If you and your spouse filed a Form 1065 for the year
prior to the election, you don’t need to amend that return or file a
final Form 1065 for the year the election takes effect.
For more information on QJVs, go to IRS.gov/QJV.
Foreign Partnership
A foreign partnership is a partnership that isn’t created or
organized in the United States or under the law of the United
States or of any state. In certain instances, a partnership created
or organized in the United States can be treated as a foreign
partnership. See, for example, Regulations section 1.958-1(d)
(1).
In addition, if a domestic section 721(c) partnership is formed
after January 17, 2017, and the gain deferral method is applied,
then a U.S. transferor must treat the section 721(c) partnership
as a foreign partnership and file a Form 8865, Return of U.S.
Persons With Respect to Certain Foreign Partnerships, with
Instructions for Form 1065 (2025)
respect to the partnership. See Form 8865 and its instructions.
See also Regulations section 1.721(c)-6(b)(4).
General Partner
A general partner is a partner who is personally liable for
partnership debts.
General Partnership
A general partnership is composed only of general partners.
Limited Partner
A limited partner is a partner in a partnership formed under a
state limited partnership law, whose personal liability for
partnership debts is limited to the amount of money or other
property that the partner contributed or is required to contribute
to the partnership. Some members of other entities, such as
domestic or foreign business trusts or LLCs that are classified as
partnerships, may be treated as limited partners for certain
purposes.
However, whether a partner qualifies as a limited partner for
purposes of self-employment tax depends on whether the
partner is considered a limited partner under section 1402(a)
(13). See Self-Employment, later.
Limited Partnership
A limited partnership is formed under a state limited partnership
law and composed of at least one general partner and one or
more limited partners.
Limited Liability Partnership (LLP)
An LLP is formed under a state limited liability partnership law.
Generally, a partner in an LLP isn’t personally liable for the debts
of the LLP or any other partner, nor is a partner liable for the acts
or omissions of any other partner solely by reason of being a
partner.
Limited Liability Company (LLC)
An LLC is an entity formed under state law by filing articles of
organization as an LLC. Unlike a partnership, none of the
members of an LLC are personally liable for its debts. An LLC
may be classified for federal income tax purposes as a
partnership, a corporation, or an entity disregarded as an entity
separate from its owner by applying the rules in Regulations
section 301.7701-3. See Form 8832, Entity Classification
Election, for more details.
Tip: A domestic LLC with at least two members that doesn’t file
Form 8832 is classified as a partnership for federal income tax
purposes.
Nonrecourse Loans
Nonrecourse loans are those liabilities of the partnership for
which no partner or related person bears the economic risk of
loss.
Section 721(c) Partnership
A partnership (domestic or foreign) is a section 721(c)
partnership if there is a contribution of section 721(c) property to
the partnership and, after the contribution (and all transactions
related to the contribution), (a) a related foreign person with
respect to the U.S. transferor is a direct or indirect partner in the
partnership; and (b) the U.S. transferor and related persons own
80% or more of the interests in partnership capital, profits,
deductions, or losses. See Regulations section 1.721(c)-1(b)
(14).
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U.S. Transferor
A U.S. transferor is a U.S. person other than a domestic
partnership. See Regulations section 1.721(c)-1(b)(18).
Section 721(c) Property
Section 721(c) property is property (other than excluded
property) with built-in gain that is contributed to a partnership by
a U.S. transferor, including pursuant to a contribution described
in Regulations section 1.721(c)-2(d) (partnership look-through
rule). See Regulations section 1.721(c)-1(b)(15).
Gain Deferral Contribution
A gain deferral contribution is a contribution of section 721(c)
property to a section 721(c) partnership with respect to which
the recognition of gain is deferred under the gain deferral
method. See Regulations section 1.721(c)-1(b)(7).
Gain Deferral Method
The gain deferral method is the method described in Regulations
section 1.721(c)-3(b) applied to avoid the immediate recognition
of gain on a contribution of section 721(c) property to a section
721(c) partnership under Regulations section 1.721(c)-2(b).
Who Must File
Domestic Partnerships
Except as provided below, every domestic partnership must file
Form 1065, unless it neither receives income nor incurs any
expenditures treated as deductions or credits for federal income
tax purposes.
Note: To be certified as a qualified opportunity fund (QOF), the
partnership must file Form 1065 and attach Form 8996, Qualified
Opportunity Fund, even if the partnership had no income or
expenses to report. See Schedule B, question 25, and the
Instructions for Form 8996.
Entities formed as LLCs that are classified as partnerships for
federal income tax purposes have the same filing requirements
as domestic partnerships.
A religious or apostolic organization exempt from income tax
under section 501(d) must file Form 1065 to report its taxable
income, which must be allocated to its members as a dividend,
whether distributed or not. Such an organization must figure its
taxable income on an attached statement to Form 1065 in the
same manner as a corporation. The organization may use Form
1120, U.S. Corporation Income Tax Return, for this purpose.
Enter the organization’s taxable income, if any, on Form 1065,
Schedule K, line 6a, and each member’s distributive share in
box 6a of Schedule K-1 (Form 1065). Net operating losses aren’t
deductible by the members but may be carried back or forward
by the organization under the rules of section 172. The religious
or apostolic organization must also make its annual information
return available for public inspection. For this purpose, an annual
information return includes an exact copy of Form 1065 and all
accompanying schedules and attached statements, except
Schedules K-1. For more details, see Regulations section
301.6104(d)-1.
A qualifying syndicate, pool, joint venture, or similar
organization may elect under section 761(a) not to be treated as
a partnership for federal income tax purposes and won’t be
required to file Form 1065 except for the year of election. For
details, see section 761(a) and Regulations section 1.761-2.
Real estate mortgage investment conduits (REMICs) must file
Form 1066, U.S. Real Estate Mortgage Investment Conduit
(REMIC) Income Tax Return.
Certain publicly traded partnerships (PTPs) treated as
corporations under section 7704 must file Form 1120.
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Note: Notwithstanding the preceding, a partnership that is, or
has a branch that is, a qualified derivatives dealer (QDD) must
file Form 1065. See Qualified derivatives dealers (QDDs), later.
Foreign Partnerships
Generally, a foreign partnership that has gross income that is (or
is treated as) effectively connected with the conduct of a trade or
business within the United States (effectively connected income)
or has gross income derived from sources in the United States
(U.S. source income) must file Form 1065, even if its principal
place of business is outside the United States or all its members
are foreign persons. A foreign partnership required to file a return
must generally report all of its foreign and U.S. partnership items.
A foreign partnership with U.S. source income isn’t required to
file Form 1065 if it qualifies for either of the following two
exceptions.
Note: Notwithstanding the preceding, a partnership that is, or
has a branch that is, a QDD must file Form 1065. See Qualified
derivatives dealers (QDDs), later.
Exception for foreign partnerships with U.S. partners. A
return isn’t required if:
• The partnership had no effectively connected income during
its tax year;
• The partnership had U.S. source income of $20,000 or less
during its tax year;
• Less than 1% of any partnership item of income, gain, loss,
deduction, or credit was allocable in the aggregate to direct
U.S. partners at any time during its tax year; and
• The partnership isn’t a withholding foreign partnership as
defined in Regulations section 1.1441-5(c)(2)(i).
Exception for foreign partnerships with no U.S. partners
and no effectively connected income. A foreign partnership
with U.S. source income isn’t required to file a return if it meets
the following requirements.
• The partnership had no effectively connected income during
its tax year.
• The partnership had no U.S. partners at any time during its
tax year.
• The partnership isn’t a withholding foreign partnership as
defined in Regulations section 1.1441-5(c)(2)(i).
• All required Forms 1042, Annual Withholding Tax Return for
U.S. Source Income of Foreign Persons, and 1042-S,
Foreign Person’s U.S. Source Income Subject to
Withholding, were filed by the partnership or another
withholding agent as required by Regulations sections
1.1461-1(b) and (c).
• The tax liability of each partner for amounts reportable under
Regulations sections 1.1461-1(b) and (c) has been fully
satisfied by the withholding of tax at the source.
A foreign partnership filing Form 1065 solely to make an
election (such as an election to amortize organization expenses)
need only provide its name, address, and employer identification
number (EIN) on page 1 of Form 1065 and attach a statement
citing “Regulations section 1.6031(a)-1(b)(5)” and identifying the
election being made. A foreign partnership filing Form 1065
solely to make an election must obtain an EIN if it doesn’t
already have one.
Qualified derivatives dealers (QDDs) A partnership that is, or
has a branch that is, a QDD (QDD partnership) must file Form
1065 even if it wouldn’t be required to file otherwise. A QDD
partnership must attach a statement (QDD statement) to its
Form 1065 with certain required information as provided in
section 7.01(C) of the qualified intermediary agreement in Rev.
Proc. 2022-43, 2022-52 I.R.B. 570. If the only reason the
partnership is filing Form 1065 is because it’s a QDD
partnership, then the only information it must provide on Form
Instructions for Form 1065 (2025)
1065 in addition to the QDD statement is its tax year, name,
address, and EIN; and it must check item G on page 1 of Form
1065. While a partnership is generally required to use an EIN, if
the only reason the partnership is filing Form 1065 is because it’s
a QDD partnership and it doesn’t have an EIN, it may use its
QI-EIN instead.
Termination of the Partnership
A partnership terminates when all its operations are discontinued
and no part of any business, financial operation, or venture is
continued by any of its partners in a partnership.
The partnership’s tax year ends on the date of termination
which is the date the partnership winds up its affairs. Special
rules apply in the case of a merger, consolidation, or division of a
partnership. See Regulations sections 1.708-1(c) and (d) for
details. Also see IRS.gov/Newsroom/Questions-and-answersabout-technical-terminations-Internal-Revenue-Code-IRCsec-708.
Electronic Filing
Beginning in 2024, partnerships were required to file Form 1065
and related forms and schedules electronically if they file 10 or
more returns of any type during the tax year, including
information, income tax, employment tax, and excise tax returns.
See Regulations section 301.6011-3, updated by T.D. 9972.
Partnerships with more than 100 partners are required to file
Form 1065, Schedules K-1, and other related forms and
schedules electronically.
Exclusions From Electronic Filing
The IRS may waive the electronic filing rules if the partnership
demonstrates that a hardship would result if it were required to
file its return electronically. A partnership interested in requesting
a waiver of the mandatory electronic filing requirement must file
a written request, and request one in the manner prescribed by
the Ogden Submission Processing Center.
All written requests for waivers should be mailed to:
Internal Revenue Service
Ogden Submission Processing Center
Attn: Form 1065 e-file Waiver Request, Stop 1057
Ogden, UT 84201
Use the following address if using an overnight delivery
service.
Internal Revenue Service
Ogden Submission Processing Center
Attn: Form 1065 e-file Waiver Request, Stop 1056
1973 N. Rulon White Blvd.
Ogden, UT 84404
Waiver requests can also be faxed to 877-477-0575.
Contact the e-Help Desk at 866-255-0654 for questions
regarding the waiver procedures or process. For more
information, go to IRS.gov/E-file-Providers/Guidance-onwaivers-for-partnerships-unable-to-meet-e-file-requirements.
Religious. If using the technology required to file
electronically conflicts with the religious beliefs of the partners,
the partnership is exempt from the requirement and may file
using paper forms. Enter “Religious Exemption” at the top of
page 1 of Form 1065 filed in paper form. Also, most filers
claiming the religious exemption who file information returns
subject to the general electronic filing requirements prescribed
by Regulations section 301.6011-2 (for example, Forms 1099
and Forms W-2) have the option to notify the IRS that they
qualify for a religious exemption in advance of filing returns and
Instructions for Form 1065 (2025)
other documents. Filers are encouraged to notify the IRS in
advance that they’re claiming a religious exemption by filing
Form 8508, Application for a Waiver from Electronic Filing of
Information Returns, in accordance with the form’s instructions.
For additional information, see Notice 2024-18, 2024-5 I.R.B.
625, available at IRS.gov/irb/2024-05_IRB#NOT-2024-18.
The requirement to file electronically doesn’t apply to certain
returns, including:
• Bankruptcy returns, and
• Returns with pre-computed penalty and interest.
See Rev. Proc. 2012-17, available at IRS.gov/pub/irs-irbs/
irb12-17.pdf, for the requirements for furnishing substitute
Schedule K-1 in electronic format.
For more details on electronic filing using the Modernized
e-File system, see:
• Pub. 3112, IRS e-file Application & Participation;
• Pub. 4163, Modernized e-File (MeF) Information for
Authorized IRS e-File Providers for Business Returns;
• Pub. 4164, Modernized e-File (MeF) Guide for Software
Developers and Transmitters;
• Form 8453-PE, E-file Declaration for Form 1065; and
• Form 8879-PE, E-file Authorization for Form 1065.
For More Information on Filing Electronically
• Call the e-Help Desk at 866-255-0654.
• Go to IRS.gov/Filing.
When To File
Generally, a domestic partnership must file Form 1065 by the
15th day of the 3rd month following the date its tax year ended
as shown at the top of Form 1065. For calendar-year
partnerships, the due date is March 15.
If the due date falls on a Saturday, Sunday, or legal holiday in
the District of Columbia or the state in which you file your return,
a return filed by the next day that isn’t a Saturday, Sunday, or
legal holiday will be treated as timely. Calendar-year
partnerships may therefore timely file their returns for the 2025
partnership year by March 16, 2026.
Private Delivery Services (PDSs)
Partnerships can use certain PDSs designated by the IRS to
meet the “timely mailing as timely filing/paying” rule for tax
returns. Go to IRS.gov/PDS for the current list of designated
services. The PDS can tell you how to get written proof of the
mail date.
For the IRS mailing address to use if you’re using a PDS, go
to IRS.gov/PDSStreetAddresses.
Caution: A PDS can’t deliver items to P.O. boxes. You must use
the U.S. Postal Service to mail any item to an IRS P.O. box
address.
Extension of Time To File
File Form 7004, Application for Automatic Extension of Time To
File Certain Business Income Tax, Information, and Other
Returns, to request an extension of time to file. File Form 7004
by the regular due date of the partnership return. Form 7004 can
be electronically filed. See the Instructions for Form 7004.
Period Covered
The 2025 Form 1065 is an information return for calendar year
2025 and fiscal years that begin in 2025 and end in 2026. For a
fiscal year or a short tax year, fill in the tax year space at the top
of Form 1065 and each Schedule K-1 or K-3, if applicable.
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Where To File
File Form 1065 at the applicable IRS address listed below. If Schedule M-3 is filed, Form 1065 must be filed at the Ogden Internal
Revenue Service Center as shown below.
If the partnership’s principal business,
office, or agency is located in:
And the total assets at the end of the tax Use the following address:
year (Form 1065, page 1, item F) are:
Connecticut, Delaware, District of Columbia,
Georgia, Illinois, Indiana, Kentucky, Maine,
Maryland, Massachusetts, Michigan, New
Hampshire, New Jersey, New York, North
Carolina, Ohio, Pennsylvania, Rhode Island,
South Carolina, Tennessee, Vermont, Virginia,
West Virginia, Wisconsin
Less than $10 million and Schedule M-3
isn’t filed
Department of the Treasury
Internal Revenue Service Center
Kansas City, MO 64999-0011
Connecticut, Delaware, District of Columbia,
Georgia, Illinois, Indiana, Kentucky, Maine,
Maryland, Massachusetts, Michigan, New
Hampshire, New Jersey, New York, North
Carolina, Ohio, Pennsylvania, Rhode Island,
South Carolina, Tennessee, Vermont, Virginia,
West Virginia, Wisconsin
$10 million or more or
less than $10 million and
Schedule M-3 is filed
Department of the Treasury
Internal Revenue Service Center
Ogden, UT 84201-0011
Alabama, Alaska, Arizona, Arkansas, California,
Colorado, Florida, Hawaii, Idaho, Iowa, Kansas,
Louisiana, Minnesota, Mississippi, Missouri,
Montana, Nebraska, Nevada, New Mexico,
North Dakota, Oklahoma, Oregon, South
Dakota, Texas, Utah, Washington, Wyoming
Any amount
Department of the Treasury
Internal Revenue Service Center
Ogden, UT 84201-0011
Any amount
Internal Revenue Service
P.O. Box 409101
Ogden, UT 84409
A foreign country or U.S. territory
The 2025 Form 1065 may also be used if:
• The partnership has a tax year of less than 12 months that
begins and ends in 2026, and
• The 2026 Form 1065 isn’t available by the time the
partnership is required to file its return.
However, the partnership must show its 2026 tax year on the
2025 Form 1065 and incorporate any tax law changes that are
effective for tax years beginning after 2025.
Who Must Sign
Any Partner or LLC Member
Form 1065 isn’t considered to be a return unless it’s signed by a
partner or LLC member. When a return is made for a partnership
by a receiver, trustee, or assignee, the fiduciary must sign the
return, instead of the partner or LLC member. Returns and forms
signed by a receiver or trustee in bankruptcy on behalf of a
partnership must be accompanied by a copy of the order or
instructions of the court authorizing signing of the return or form.
In the case of an entity partner, an individual who is authorized
under state law to act for the entity partner must sign the
partnership return.
Signatures required when filing an AAR. When filing an
AAR, Form 1065 must be signed by the partnership
representative (PR) (or the designated individual (DI) if the PR is
an entity) for the reviewed year.
Paid Preparer’s Information
If a partner, member, or employee of the partnership completes
Form 1065, the paid preparer’s space should remain blank. Only
paid preparers with a valid preparer tax identification number
(PTIN) should complete this section.
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Generally, anyone who is paid to prepare the partnership
return must do the following.
• Sign the return in the space provided for the preparer’s
signature.
• Fill in the other blanks in the Paid Preparer Use Only section
of the return. A paid preparer can’t use a social security
number (SSN) in the Paid Preparer Use Only section. The
paid preparer must use a PTIN.
• Give the partnership a copy of the return in addition to the
copy to be filed with the IRS.
Tip: A paid preparer may sign original or amended returns by
rubber stamp, mechanical device, or computer software
program.
Paid Preparer Authorization
If the partnership wants to allow the paid preparer to discuss its
2025 Form 1065 with the IRS, check “Yes” in the signature area
of the return. The authorization applies only to the individual
whose signature appears in the Paid Preparer Use Only section
of its return. It doesn’t apply to the firm, if any, shown in the
section.
If “Yes” is checked, the partnership is authorizing the IRS to
call the paid preparer to answer any questions that may arise
during the processing of its return. The partnership is also
authorizing the paid preparer to:
• Give the IRS any information that is missing from its return,
• Call the IRS for information about the processing of its
return, and
• Respond to certain IRS notices about math errors and return
preparation.
The partnership isn’t authorizing the paid preparer to bind the
partnership to anything or otherwise represent the partnership
before the IRS. If the partnership wants to expand the paid
Instructions for Form 1065 (2025)
preparer’s authorization, see Pub. 947, Practice Before the IRS
and Power of Attorney.
The authorization can’t be revoked. However, the
authorization will automatically end no later than the due date
(excluding extensions) for filing the 2026 return.
Penalties
Late Filing of Return
A penalty is assessed against the partnership if it’s required to
file a partnership return and it (a) fails to file the return by the due
date, including extensions; or (b) files a return that fails to show
all the information required, unless such failure is due to
reasonable cause. The penalty is $255 for each month or part of
a month (for a maximum of 12 months) the failure continues,
multiplied by the total number of persons who were partners in
the partnership during any part of the partnership’s tax year for
which the return is due. If the partnership receives a notice about
a penalty after it files the return, the partnership may send the
IRS an explanation and the IRS will determine if the explanation
meets reasonable-cause criteria. Don’t attach an explanation
when filing the return.
Failure To Furnish Information Timely
For each failure to furnish Schedule K-1 (and Schedule K-3, if
applicable) to a partner when due and each failure to include on
Schedule K-1 (and Schedule K-3, if applicable) all the
information required to be shown (or the inclusion of incorrect
information), a $340 penalty may be imposed for each
Schedule K-1 (and Schedule K-3, if applicable) for which a
failure occurs. For all such failures during a calendar year, the
maximum penalty for entities with gross receipts over
$5,000,000 is $4,098,500; and $1,366,000 for entities with gross
receipts at or below $5,000,000. If the requirement to report
correct information is intentionally disregarded, each $340
penalty is increased to $680 or, if greater, 10% of the aggregate
amount of items required to be reported. There’s no limit to the
amount of the penalty in the case of intentional disregard.
Trust Fund Recovery Penalty
This penalty may apply if certain excise, income, social security,
and Medicare taxes that must be collected or withheld aren’t
collected or withheld, or these taxes aren’t paid. These taxes are
generally reported on:
• Form 720, Quarterly Federal Excise Tax Return;
• Form 941, Employer’s QUARTERLY Federal Tax Return;
• Form 943, Employer’s Annual Federal Tax Return for
Agricultural Employees;
• Form 944, Employer’s ANNUAL Federal Tax Return; and
• Form 945, Annual Return of Withheld Federal Income Tax.
The trust fund recovery penalty may be imposed on all
persons who are determined by the IRS to have been
responsible for collecting, accounting for, or paying over these
taxes, and who acted willfully in not doing so. The penalty is
equal to the unpaid trust fund tax. See the Instructions for Form
720; Pub. 15 (Circular E), Employer’s Tax Guide; or Pub. 15-T,
Federal Income Tax Withholding Methods, for more details,
including the definition of a “responsible person.”
Accounting Methods
An accounting method is a set of rules used to determine when
and how income and expenditures are reported. The method of
accounting used must be reconcilable with the partnership’s
books and records. In all cases, the method used must clearly
reflect income. Generally, the following rules apply. For more
information, see Pub. 538, Accounting Periods and Methods.
Permissible overall methods of accounting include:
• Cash,
Instructions for Form 1065 (2025)
• Accrual, or
• Any other method authorized by the Internal Revenue Code
(the Code).
Generally, a partnership may use the cash method of
accounting unless it’s required to maintain inventories, has a C
corporation as a partner, or is a tax shelter (as defined in section
448(d)(3)). However, for tax years beginning after 2017, any
partnership qualifying as a small business taxpayer (defined
below) may use the cash method.
Tax shelter election. A taxpayer that is a tax shelter, as defined
in section 448(d)(3), isn’t permitted to use the cash method
pursuant to section 448(a)(3), and is also not permitted to use
the small business taxpayer exemptions contained in sections
163(j)(3) (limitation on business interest), 263A(i) (uniform
capitalization), 460(e)(1)(B) (percentage of completion method),
and 471(c) (general inventory method). Under section 448(d)(3),
a taxpayer that is a syndicate is considered a tax shelter. For
purposes of section 448(d)(3), a syndicate is a partnership or
other entity (other than a C corporation) if more than 35% of the
losses of such entity during the tax year are allocated to limited
partners or limited entrepreneurs.
The final regulations under section 448 permit a taxpayer to
make an annual election to use its allocations made in the
immediately preceding tax year, instead of using the current tax
year’s allocation, to determine whether the taxpayer is a
syndicate under section 448(d)(3) for the current tax year. The
election is made on the timely filed original return (including
extensions) for the tax year for which it’s made. The election is
valid only for the tax year for which it’s made and, once made,
can’t be revoked. See Regulations section 1.448-2(b)(2)(iii)(B)
(2) for guidance on the time and manner of making the annual
election and effective dates.
Small business taxpayer. For tax years beginning after 2017,
a small business taxpayer (defined below) can adopt or change
its accounting method to account for inventories (a) in the same
manner as materials and supplies that are nonincidental; or (b)
to conform to the taxpayer’s treatment of inventories in an
applicable financial statement (as defined in section 451(b)(3)),
or, if the taxpayer doesn’t have an applicable financial statement,
the method of accounting used in the taxpayer’s books and
records prepared in accordance with the taxpayer’s accounting
procedures. See section 471(c)(1), and Change in accounting
method, later.
For tax years beginning after 2017, a small business taxpayer
can adopt or change its accounting method to not capitalize
costs to property produced or acquired for resale under section
263A. See section 263A(i), and Change in accounting method
and Limitations on Deductions, later.
Small business taxpayer defined. For 2025, a small
business taxpayer is a taxpayer that (a) has average annual
gross receipts of $31 million or less for the prior 3 tax years, and
(b) isn’t a tax shelter (as defined in section 448(d)(3)).
Accrual method. Generally, under the accrual method, an
amount is includible in income when:
1. All the events have occurred that fix the right to receive
income, which is the earliest date:
a. Payment is earned through the required performance,
b. Payment is due to the taxpayer,
c. Payment is received by the taxpayer,
d. When title passes, or
e. When the income is reported as revenue in an
applicable financial statement (AFS); and
2. When the amount can be determined with reasonable
accuracy.
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See Regulations sections 1.451-1(a) and -3(c) for details.
Generally, an accrual-basis taxpayer can deduct accrued
expenses in the tax year in which:
• All events that establish the liability have occurred,
• The amount of the liability can be figured with reasonable
accuracy, and
• Economic performance takes place with respect to the
expense.
For property and service liabilities, for example, economic
performance occurs as the property or service is provided.
There are special economic performance rules for certain items,
including recurring expenses. See section 461(h) and the related
regulations for the rules for determining when economic
performance takes place.
Nonaccrual-experience method. Accrual method
partnerships aren’t required to accrue certain amounts to be
received from the performance of services that, on the basis of
their experience, won’t be collected if:
• The services are in the field of health, law, engineering,
architecture, accounting, actuarial science, performing arts,
or consulting; or
• The partnership’s average annual gross receipts don’t
exceed $31 million for all prior tax years. For more details,
see section 448(d)(5).
This provision doesn’t apply to any amount if interest is
required to be paid on the amount or if there’s any penalty for
failure to timely pay the amount. For information, see section
448(d)(5) and Regulations section 1.448-2. For reporting
requirements, see the instructions for line 1a, later.
Percentage of completion method. Long-term contracts
(except for certain real property construction contracts) must
generally be accounted for using the percentage of completion
method described in section 460. See section 460 and the
underlying regulations for rules on long-term contracts.
Mark-to-market accounting method. Dealers in securities
must use the mark-to-market accounting method described in
section 475. Under this method, any security that is inventory to
the dealer must be included in inventory at its fair market value
(FMV). Any security that isn’t inventory and that is held at the
close of the tax year is treated as sold at its FMV on the last
business day of the tax year, and any gain or loss must be taken
into account for the tax year. The gain or loss taken into account
is generally treated as ordinary gain or loss. For details, including
exceptions, see section 475 and the related regulations, and
Rev. Rul. 97-39, 1997-39 I.R.B. 4.
Dealers in commodities and traders in securities and
commodities can elect to use the mark-to-market accounting
method. To make the election, the partnership must file a
statement describing the election, the first tax year the election is
to be effective, and, in the case of an election for traders in
securities or commodities, the trade or business for which the
election is made. Except for new taxpayers, the statement must
be filed by the due date (not including extensions) of the return
for the tax year immediately preceding the election year and
attached to that return or, if applicable, to a request for an
extension of time to file that return. For more details, see Rev.
Proc. 99-17, 1999-7 I.R.B. 52; Rev. Proc. 2025-23, 2025-24
I.R.B. 1476; and sections 475(e) and (f).
Change in accounting method. Generally, the partnership
must get IRS consent to change its method of accounting used
to report income or expense (for income or expense as a whole
or for any material item). To do so, the partnership must
generally file Form 3115, Application for Change in Accounting
Method, during the tax year for which the change is requested.
See the Instructions for Form 3115 and Pub. 538 for more
information and exceptions.
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Section 481(a) adjustment. The partnership may have to
make an adjustment to prevent amounts of income or expenses
from being omitted or duplicated. This is called a section 481(a)
adjustment. The section 481(a) adjustment period is generally 1
year for a net negative adjustment and 4 years for a net positive
adjustment. However, in some instances, a partnership can elect
to modify the section 481(a) adjustment period. The partnership
must complete the appropriate lines of Form 3115 to make the
election. See the Instructions for Form 3115.
Include any net positive section 481(a) adjustment on page 1
of Form 1065, line 7. If the net section 481(a) adjustment is
negative, report it on page 1, line 21.
There are some instances when the partnership can obtain
automatic consent from the IRS to change to certain accounting
methods. See the Instructions for Form 3115.
Accounting Periods
A partnership is generally required to have one of the following
tax years.
1. The tax year of a majority of its partners (majority tax year).
2. If there’s no majority tax year, then the tax year common to
all of the partnership’s principal partners (partners with an
interest of 5% or more in the partnership profits or capital).
3. If there’s neither a majority tax year nor a tax year common
to all principal partners, then the tax year that results in the
least aggregate deferral of income.
Note: In determining the tax year of a partnership under
(1), (2), or (3) above, the tax years of certain tax-exempt and
foreign partners are disregarded. See Regulations section
1.706-1(b) for more details.
4. Some other tax year if one of the following applies.
a. The partnership can establish that there’s a business
purpose for the tax year.
b. The partnership elects under section 444 to have a tax
year other than a required tax year by filing Form 8716,
Election To Have a Tax Year Other Than a Required Tax
Year. For a partnership to have this election in effect, it
must make the payments required by section 7519 and
file Form 8752, Required Payment or Refund Under
Section 7519.
A section 444 election ends if a partnership changes
its accounting period to its required tax year or some
other permitted year or it’s penalized for willfully failing
to comply with the requirements of section 7519. If the
termination results in a short tax year, enter at the top of
the first page of Form 1065 for the short tax year,
“SECTION 444 ELECTION TERMINATED.”
c. The partnership elects to use a 52–53-week tax year
that ends with reference to either its required tax year or
a tax year elected under section 444.
Change of tax year. To change its tax year or to adopt or
retain a tax year other than its required tax year, the partnership
must file Form 1128, Application To Adopt, Change, or Retain a
Tax Year, unless the partnership is making an election under
section 444.
Tip: The tax year of a common trust fund must be the calendar
year.
Rounding Off to Whole Dollars
The partnership may enter decimal points and cents when
preparing its return. However, it should round off cents to whole
dollars on its return, forms, and schedules to make completing
its return easier. The partnership must either round off all
Instructions for Form 1065 (2025)
amounts on the return to whole dollars, or use cents for all
amounts. To round, drop amounts under 50 cents and increase
amounts from 50 to 99 cents to the next dollar. For example,
$8.40 rounds to $8 and $8.50 rounds to $9.
If two or more amounts are added to figure the amount to
enter on a line, include cents when adding the amounts and
round off only the total.
Recordkeeping
The partnership must keep its records as long as they may be
needed for the administration of any provision of the Code. The
partnership must usually keep records that support an item of
income, deduction, or credit on the partnership return for 3 years
from the date the return is due or is filed, whichever is later.
These records must usually be kept for 3 years from the date
each partner’s return is due or is filed, whichever is later. It must
also keep records that verify the partnership’s basis in property
for as long as they are needed to figure the basis of the original
or replacement property.
The partnership should also keep copies of all returns it has
filed. They help in preparing future returns and in making
computations when filing an amended return.
Other forms and statements. See Pub. 541, Partnerships, for
a list of other forms and statements a partnership may need to
file in addition to the forms and statements discussed throughout
these instructions.
Administrative Adjustment Request
(AAR)
A partnership that is subject to the BBA centralized partnership
audit regime must file an AAR to request an administrative
adjustment in the amount or other treatment of one or more
partnership-related items.
A BBA partnership filing an AAR shouldn’t file an amended
tax return or amended Schedules K-1 and/or K-3. For an
exception where a BBA partnership is itself a partner in a BBA
partnership and is filing an amended return, see Partner
amended return filed as part of modification of the IU during a
BBA examination, later.
Electronically filed AARs. If the AAR will be filed electronically,
complete Form 1065 with the corrected amounts and check box
G(5). In addition, complete Form 8082, Notice of Inconsistent
Treatment or Administrative Adjustment Request (AAR). See the
Instructions for Form 8082 for detailed instructions. For AARs
filed on paper, see Paper-filed amended returns and AARs, later.
AARs for which payment is made. A partnership that hasn’t
made a valid election out of the BBA centralized partnership
audit regime, which is filing an AAR and that doesn’t elect to
have its partners take adjustments into account, and that has
adjustments that result in an imputed underpayment (IU), should
report the IU and any interest and penalties on Form 1065,
page 1, line 26. See the Instructions for Form 8082 for
information on how to figure a BBA IU and what to do when an
adjustment requested by an AAR doesn’t result in an IU. Also
see IU Under the Centralized Partnership Audit Regime in the
Instructions for Form 8082 for the required schedule to be
included with Form 1065 that details the IU, prepaid interest, and
prepaid penalties. See section 6233 for information about
interest and penalties on the IU. Include the following information
on your payment.
• Name of partnership.
• Form 1065.
• Taxpayer identification number (TIN).
• Tax year.
• BBA AAR Imputed Underpayment.
• Checks must be made payable to “United States Treasury.”
Instructions for Form 1065 (2025)
Mail payment to:
Internal Revenue Service
Ogden Service Center
Ogden, UT 84201-0011
Payments can be made by check or electronically. If making an
electronic payment, choose the payment description “BBA AAR
Imputed Underpayment” from the list of payment types.
If the partnership has an IU, the partnership may elect to have
its partners take the adjustments into account instead of paying
the IU. See the Instructions for Form 8082 for information on how
to make the election.
Amended Return
The procedures to follow when filing an amended partnership
return depend on whether the amended return is filed
electronically or on paper. The rules for determining when a
return must be filed electronically (see Electronic Filing, earlier)
also apply to amended returns.
Electronically filed amended returns. If the amended return
will be filed electronically, complete Form 1065 and check box
G(5) to indicate that you’re filing an amended return. Attach a
statement that identifies the line number of each amended item,
the corrected amount or other treatment of the item, and an
explanation of the reason(s) for each change. If the income,
deductions, credits, or other information provided to any partner
on Schedule K-1 or K-3, as applicable, is incorrect, file an
amended Schedule K-1 or K-3 for that partner with the amended
Form 1065. Also give a copy of the amended Schedule K-1 or
K-3 to that partner. Check the “Amended K-1” box at the top of
Schedule K-1 or the “Amended K-3” box in item F of
Schedule K-3 to indicate that it’s an amended Schedule K-1 or
K-3.
Partner amended return filed as part of modification of the
IU during a BBA examination. Section 6225(c)(2) allows a
BBA partnership under examination to request specific types of
modifications of any IU proposed by the IRS. One type of
modification that may be requested is when one or more
partners, including partnership-partners, file amended returns for
the tax years of the partners which include the end of the
reviewed year of the BBA partnership under examination and for
any tax year with respect to which tax attributes are affected. Go
to IRS.gov/BBAAAR.
A modification amended return filing must meet a number of
requirements. Therefore, a partnership-partner filing a
modification amended return must refer to Form 8982, Affidavit
for Partner Modification Amended Return Under IRC 6225(c)(2)
(A) or Partner Alternative Procedure Under IRC 6225(c)(2)(B).
The instructions for Form 8982, Section A, explain the
modification of amended returns, requirements for payment and
submission, and the requirement to provide Form 8982,
Section A, to the PR of the BBA partnership. See Filing
Instructions for Partner Modification Amended Returns and
Paying the Amount You Owe in the instructions for Form 8982.
Partnership-partners who are filing amended returns
electronically as part of the modification will report the applicable
payment of tax and interest and any penalties on Form 1065,
page 1, line 26. A payment made with an amended Form 1065
should detail the amount of the payment to be applied separately
to tax, interest, and penalties. The partnership should consider
all guidance issued by the IRS when figuring the amount due. In
general, the partnership should figure its amount due in
accordance with Regulations sections 301.6225-2(d)(2)(vi)(A)
and 301.6226-3(e)(4)(iii).
Paper-filed amended returns and AARs. If the amended
return or AAR won’t be filed electronically, complete Form
9
1065-X, Amended Return or Administrative Adjustment Request
(AAR), to file the amended return or AAR. See Form 1065-X and
its separate instructions for information on completing and filing
the form.
Tip: When a partnership’s federal return is amended or changed
for any reason, it may affect the partnership’s state tax return. For
more information, contact the state tax agency for the state in
which the partnership return was filed.
What if You Can’t Pay Now?
Go to IRS.gov/Payments for more information about your
options.
• Apply for an online payment agreement (IRS.gov/OPA) to
meet your tax obligation in monthly installments if you can’t
pay your taxes in full today. Once you complete the online
process, you will receive immediate notification of whether
your agreement has been approved.
• Use the Offer in Compromise Pre-Qualifier (IRS.gov/OIC) to
see if you can settle your tax debt for less than the full
amount you owe.
Assembling the Return
When submitting Form 1065, organize the pages of the return in
the following order.
• Pages 1–6.
• Schedule F (Form 1040), Profit or Loss From Farming (if
required).
• Form 8825, Rental Real Estate Income and Expenses of a
Partnership or an S Corporation (if required).
• Schedule D (Form 1065), Capital Gains and Losses (if
required).
• Form 4797, Sales of Business Property (if required).
• Form 8949, Sales and Other Dispositions of Capital Assets
(if required).
• Form 8996, Qualified Opportunity Fund (if required).
• Form 1125-A, Cost of Goods Sold (if required).
• Form 8941, Credit for Small Employer Health Insurance
Premiums (if required).
• Form 3800, General Business Credit (if required).
• Form 6252, Installment Sale Income (if required).
• Form 8997, Initial and Annual Statement of Qualified
Opportunity Fund (QOF) Investments (if required).
• Form 8283, Noncash Charitable Contributions (if required).
• Schedule A (Form 8936), Clean Vehicle Credit Amount (if
required).
• Form 4255, Certain Credit Recapture, Excessive Payments,
and Penalties.
• Schedule K-1 (Form 1065), Partner’s Share of Income,
Deductions, Credits, etc.
• Form 8938, Statement of Specified Foreign Financial Assets
(if required).
• Any other schedules in alphabetical order, including
Schedules K-2 and K-3.
• Any other forms in numerical order.
Complete every applicable entry space on Form 1065 and
Schedule K-1. Don’t enter “See attached” instead of completing
the entry spaces. Penalties may be assessed if the partnership
files an incomplete return. If you need more space on the forms
or schedules, attach separate sheets and place them at the end
of the return using the same size and format as on the printed
forms. Show the totals on the printed forms. Also be sure to put
the partnership’s name and EIN on each supporting statement.
Entity Classification Election
Use Form 8832 to make a change in classification. Except for
certain business entities always classified as corporations, a
business entity with at least two members may choose to be
classified either as a partnership or an association taxable as a
10
corporation. A domestic eligible entity with at least two members
that doesn’t file Form 8832 is classified under the default rules as
a partnership. However, a foreign eligible entity with at least two
members is classified under the default rules as a partnership
only if the entity doesn’t provide limited liability to at least one
member. File Form 8832 only if the entity doesn’t want to be
classified under these default rules or if it wants to change its
classification.
Caution: Attach a copy of Form 8832 to the partnership’s Form
1065 for the tax year of the election.
Elections Made by the Partnership
Generally, the partnership decides how to figure income from its
operations. For example, it chooses the accounting method and
depreciation methods it will use. The partnership also makes
elections under the following sections.
1. Section 179 (election to expense certain property).
2. Section 614 (definition of property—mines, wells, and other
natural deposits). This election must be made before the
partners figure their individual depletion allowances under
section 613A(c)(7)(D).
3. Section 1033 (involuntary conversions).
4. Section 754 (manner of electing optional adjustment to
basis of partnership property).
Under section 754, a partnership may elect to adjust the
basis of partnership property when property is distributed or
when a partnership interest is transferred. If the election is
made regarding a transfer of a partnership interest (section
743(b)) and the assets of the partnership constitute a trade
or business for purposes of section 1060(c), then the value
of any goodwill transferred must be determined in the
manner provided in Regulations section 1.1060-1. Once an
election is made under section 754, it applies both to all
distributions and to all transfers made during the tax year
and in all subsequent tax years unless the election is
revoked.
This election must be made in a statement that is filed
with the partnership’s timely filed return (including any
extension) for the tax year during which the distribution or
transfer occurs. See Regulations section 1.754-1(b)(1). The
statement must include:
a. The name and address of the partnership, and
b. A declaration that the partnership elects under section
754 to apply the provisions of section 734(b) and
section 743(b).
The partnership can get an automatic 12-month
extension to make the section 754 election, provided
corrective action is taken within 12 months of the original
deadline for making the election. For details, see
Regulations section 301.9100-2.
See section 754 and the related regulations for more
information.
If there’s a distribution of property consisting of an
interest in another partnership, see section 734(b).
The partnership is required to attach a statement for any
section 743(b) basis adjustments. See below for details.
To revoke a section 754 election, the partnership must
file the revocation request using Form 15254, Request for
Section 754 Revocation. See the instructions for Form
15254 for more information.
5. Section 743(e) (electing investment partnership).
Instructions for Form 1065 (2025)
6. Regulations section 1.1411-10(g) (section 1411 election
regarding controlled foreign corporations (CFCs) and
qualified electing fund (QEF)).
A domestic partnership that directly or indirectly owns
stock of a CFC (within the meaning of section 953(c)(1)(B)
or 957(a)) or a passive foreign investment company (PFIC)
(within the meaning of section 1297(a)) that the domestic
partnership treats as a QEF under section 1293 may make
the election provided in Regulations section 1.1411-10(g).
The election must be made no later than the first tax year
beginning after 2013 during which the partnership:
a. Includes an amount in gross income for chapter 1
purposes under section 951(a) or section 1293(a)(1)(A)
for the CFC or QEF, and
b. Has a direct or indirect owner that is subject to tax under
section 1411 or would have been if the election were
made.
This election must be made on an entity-by-entity basis, and
applies only to the particular CFCs and QEFs for which an
election is made. In general, for purposes of section 1411, if
an election is in effect for a CFC or QEF, the amounts
included in income under sections 951 and 1293 derived
from the CFC or QEF are included in net investment
income, and distributions described in section 959(d) or
1293(c) are excluded from net investment income. An
election that is made under Regulations section
1.1411-10(g) can’t be revoked. For more information
regarding this election, see Regulations section
1.1411-10(g).
The election must be made in a statement that is filed
with the partnership’s original or amended return for the tax
year in which the election is made. An election can be made
on an amended return only if the tax year for which the
election is made, and all tax years affected by the election,
aren’t closed by the period of limitations on assessments
under section 6501. The statement must include:
a. The name and EIN of the partnership making the
election;
b. A declaration that the partnership elects under
Regulations section 1.1411-10(g) to apply the rules in
Regulations section 1.1411-10(g) to the CFCs and
QEFs identified in the statement; and
c. The following information for each CFC and QEF for
which an election is made: (a) the name of the CFC or
QEF; and (b) either the EIN of the CFC or QEF, or, if an
EIN isn’t available, the reference ID number of the CFC
or QEF.
7. Section 41(h) (payroll tax credit election).
Effect of Section 743(b) Basis Adjustment on
Partnership Items
If the basis of partnership property has been adjusted for a
transferee partner under section 743(b), the partnership must
adjust the transferee’s distributive share of the items of
partnership income, deduction, gain, or loss in accordance with
Regulations sections 1.743-1(j)(3) and (4). These adjustments
(other than adjustments to depletable oil and gas property
allocable to the partner under section 613A(c)(7)(D)) must be
reported on Schedule K and the transferee partner’s
Schedule K-1. Report the adjustments on an attached statement
to Schedule K, line 20c, code U. See the instructions for
Schedule K, line 20. Identify the partnership item being adjusted
and the amount of the adjustment. If the adjustments are to
partnership items from more than one trade or business, report
the adjustments separately for each activity.
Instructions for Form 1065 (2025)
Electing Out of the Centralized Partnership
Audit Regime
A partnership can elect out of the centralized partnership audit
regime for a tax year if the partnership is an eligible partnership
that year. See Question 33 under Schedule B, later.
Elections Made by Each Partner
Elections under the following sections are made by each partner
separately on the partner’s tax return.
• Section 59(e) (election to deduct ratably certain qualified
expenditures such as intangible drilling costs, mining
exploration expenses, or research and experimental (R&E)
expenditures).
• Section 108 (income from discharge of indebtedness).
• Section 617 (deduction and recapture of certain mining
exploration expenditures paid or incurred).
• Section 901 (foreign tax credit).
Partner’s Dealings With Partnership
If a partner engages in a transaction with the partnership, other
than in the capacity as a partner, the partner is treated as not
being a member of the partnership for that transaction. Special
rules apply to sales or exchanges of property between
partnerships and certain persons, as explained in Pub. 541.
Contributions to the Partnership
Generally, no gain (loss) is recognized to the partnership or any
of the partners when property is contributed to the partnership in
exchange for an interest in the partnership. This rule doesn’t
apply to any gain realized on a transfer of property to a
partnership that would be treated as an investment company
(within the meaning of section 351(e)) if the partnership were
incorporated. If, as a result of a transfer of property to a
partnership, there’s a direct or indirect transfer of money or other
property to the transferring partner, the partner may have to
recognize gain on the exchange.
The basis to the partnership of property contributed by a
partner is the adjusted basis in the hands of the partner at the
time it was contributed, plus any gain recognized (under section
721(b)) by the partner at that time. See section 723 for more
information.
See Regulations sections 1.721(c)-1(b)(7) and -3(b) for more
information on a gain deferral contribution of section 721(c)
property to a section 721(c) partnership. Also see Section 721(c)
Partnership, Section 721(c) Property, and Gain Deferral Method
under Definitions, earlier.
Dispositions of Contributed Property
Generally, if the partnership disposes of property contributed to
the partnership by a partner, income, gain, loss, and deductions
from that property must be allocated among the partners to take
into account the difference between the property’s basis and its
FMV at the time of the contribution. However, if the adjusted
basis of the contributed property exceeds its FMV at the time of
the contribution, the built-in loss can only be taken into account
by the contributing partner. For all other partners, the basis of the
property in the hands of the partnership is treated as equal to its
FMV at the time of the contribution (see section 704(c)(1)(C)).
For property contributed to the partnership, the contributing
partner must recognize gain or loss on a distribution of the
property to another partner within 7 years of being contributed.
The gain or loss is equal to the amount that the contributing
partner should have recognized if the property had been sold for
its FMV when distributed, because of the difference between the
property’s basis and its FMV at the time of contribution.
See section 704(c) for details and other rules on dispositions
of contributed property. See section 724 for the character of any
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gain or loss recognized on the disposition of unrealized
receivables, inventory items, or capital loss property contributed
to the partnership by a partner.
See Regulations sections 1.721(c)-4 and -5 for more
information on certain dispositions of contributed section 721(c)
property to which the gain deferral method applies. Also see
Section 721(c) Partnership, Section 721(c) Property, and Gain
Deferral Method under Definitions, earlier.
Recognition of Precontribution Gain
on Certain Partnership Distributions
A partner who contributes appreciated property to the
partnership must include in income any precontribution gain to
the extent the FMV of other property (other than money)
distributed to the partner by the partnership exceeds the
adjusted basis of the partner’s partnership interest just before
the distribution. Precontribution gain is the net gain, if any, that
would have been recognized under section 704(c)(1)(B) if the
partnership had distributed to another partner all the property
that had been contributed to the partnership by the distributee
partner within 7 years of the distribution and that was held by the
partnership just before the distribution.
Appropriate basis adjustments are to be made to the adjusted
basis of the distributee partner’s interest in the partnership and
the partnership’s basis in the contributed property to reflect the
gain recognized by the partner.
For more details and exceptions, see Pub. 541.
Unrealized Receivables and Inventory
Items
Generally, if a partner sells or exchanges a partnership interest
where unrealized receivables or inventory items are involved, the
transferor partner must notify the partnership, in writing, within 30
days of the exchange. The partnership must then file Form 8308,
Report of a Sale or Exchange of Certain Partnership Interests.
See the Instructions for Form 8308 for additional information.
If a partnership distributes unrealized receivables or
substantially appreciated inventory items in exchange for all or
part of a partner’s interest in other partnership property
(including money), treat the transaction as a sale or exchange
between the partner and the partnership. Treat the partnership
gain (loss) as ordinary business income (loss). The income
(loss) is specially allocated only to partners other than the
distributee partner.
If a partnership gives other property (including money) for all
or part of that partner’s interest in the partnership’s unrealized
receivables or substantially appreciated inventory items, treat the
transaction as a sale or exchange of the property.
See Rev. Rul. 84-102, 1984-2 C.B. 119, for information on the
tax consequences that result when a new partner joins a
partnership that has liabilities and unrealized receivables. Also
see Pub. 541 for more information on unrealized receivables and
inventory items.
At-Risk Limitations
In general, section 465 limits the amount of deductible losses
partners can claim from certain activities. The at-risk limitations
don’t apply to the partnership, but instead apply to each partner’s
share of net losses attributable to each activity. Because the
treatment of each partner’s share of partnership losses depends
on the nature of the activity that generated it, the partnership
must report the items of income, loss, and deduction separately
for each activity. The at-risk limitations apply to individuals,
estates, trusts, and certain closely held C corporations. See Pub.
12
925, Passive Activity and At-Risk Rules, for additional
information.
Activities covered by the at-risk rules. If the partnership is
involved in one of the following activities as a trade or business
or for the production of income, the partner may be subject to the
at-risk rules.
1. Holding, producing, or distributing motion picture films or
videotapes.
2. Farming.
3. Leasing section 1245 property, including personal property
and certain other tangible property that’s depreciable or
amortizable.
4. Exploring for, or exploiting, oil and gas.
5. Exploring for, or exploiting, geothermal deposits (for wells
started after September 1978).
6. Any other activity not included in items 1 through 5, above,
that’s carried on as a trade or business or for the production
of income.
Aggregation of activities. Activities described in item 6 above
that constitute a trade or business are treated as one activity if:
• You actively participate in the management of the trade or
business, or
• The trade or business is carried on by a partnership or S
corporation and 65% or more of its losses for the tax year
are allocable to persons who actively participate in the
management of the trade or business.
Similar rules apply to activities described in items 1 through 5
above. For more information, see Pub. 925.
If you aggregate your activities under these rules for section
465 purposes, check the appropriate box in item K below the
name and address block on page 1 of Form 1065.
At-risk activity reporting requirements. If the partnership
items of income, loss, or deduction reported on Schedule K-1
are from more than one activity covered by the at-risk rules, the
partnership should report on an attachment to Schedule K-1
information relating to each activity as is required by Item K1,
later. See the Instructions for Form 6198 and Pub. 925 for
additional information needed to help the partner compute the
profit or loss from each at-risk activity and the amount at risk that
may be required to be separately reported.
Passive Activity Limitations
In general, section 469 limits the amount of losses, deductions,
and credits that partners can claim from passive activities. The
passive activity limitations don’t apply to the partnership.
Instead, they apply to each partner’s share of any income or loss
and credit attributable to a passive activity. Because the
treatment of each partner’s share of partnership income or loss
and credit depends on the nature of the activity that generated it,
the partnership must report income or loss and credits
separately for each activity.
The following instructions and the instructions for Schedules
K and K-1, later, explain the applicable passive activity limitation
rules and specify the type of information the partnership must
provide to its partners for each activity. If the partnership had
more than one activity, it must report information for each activity
on an attached statement to Schedules K and K-1.
Generally, passive activities include (a) activities that involve
the conduct of a trade or business if the partner doesn’t
materially participate in the activity, and (b) all rental activities
(defined later) regardless of the partner’s participation. For
exceptions, see Activities That Aren’t Passive Activities, later.
Instructions for Form 1065 (2025)
The level of each partner’s participation in an activity must be
determined by the partner.
The passive activity rules provide that losses and credits from
passive activities can generally be applied only against income
and tax from passive activities. Thus, passive losses and credits
can’t be applied against income from salaries, wages,
professional fees, or a business in which the partner materially
participates; against portfolio income (defined later); or against
the tax related to any of these types of income.
Special provisions apply to certain activities. First, the passive
activity limitations must be applied separately for a net loss from
passive activities held through a PTP. Second, special rules
require that net income from certain activities that would
otherwise be treated as passive income must be recharacterized
as nonpassive income for purposes of the passive activity
limitations.
To allow each partner to correctly apply the passive activity
limitations, the partnership must report income or loss and
credits separately by activity for each of the following.
• Trade or business activities.
• Rental real estate activities.
• Rental activities other than real estate.
• Portfolio income.
Activities That Aren’t Passive Activities
The following aren’t passive activities.
1. Trade or business activities in which the partner materially
participated for the tax year.
2. Any rental real estate activity in which the partner materially
participated if the partner met both of the following
conditions for the tax year.
a. More than half of the personal services the partner
performed in trades or businesses were performed in
real property trades or businesses in which the partner
materially participated.
b. The partner performed more than 750 hours of services
in real property trades or businesses in which the
partner materially participated.
Note: For a partner that is a closely held C corporation
(defined in section 465(a)(1)(B)), the above conditions are
treated as met if more than 50% of the corporation’s gross
receipts are from real property trades or businesses in
which the corporation materially participated.
For purposes of this rule, each interest in rental real
estate is a separate activity, unless the partner elects to
treat all interests in rental real estate as one activity.
If the partner is married filing jointly, either the partner or
the partner’s spouse must separately meet both of the
above conditions, without taking into account services
performed by the other spouse.
A real property trade or business is any real property
development, redevelopment, construction, reconstruction,
acquisition, conversion, rental, operation, management,
leasing, or brokerage trade or business. Services the
partner performed as an employee aren’t treated as
performed in a real property trade or business unless the
partner owned more than 5% of the stock (or more than 5%
of the capital or profits interest) in the employer.
3. An interest in an oil or gas well drilled or operated under a
working interest if at any time during the tax year the partner
held the working interest directly or through an entity that
didn’t limit the partner’s liability (for example, an interest as a
general partner). This exception applies regardless of
whether the partner materially participated for the tax year.
Instructions for Form 1065 (2025)
4. The rental of a dwelling unit used by a partner for personal
purposes during the year for more than the greater of 14
days or 10% of the number of days that the residence was
rented at fair rental value.
5. An activity of trading personal property for the account of
owners of interests in the activity. For purposes of this rule,
“personal property” means property that is actively traded,
such as stocks, bonds, and other securities. See Temporary
Regulations section 1.469-1T(e)(6).
Trade or Business Activities
A trade or business activity is an activity (other than a rental
activity or an activity treated as incidental to an activity of holding
property for investment) that:
• Involves the conduct of a trade or business (within the
meaning of section 162),
• Is conducted in anticipation of starting a trade or business,
or
• Involves research or experimental expenditures deductible
under section 174 or 174A (or that would be if you chose to
deduct rather than capitalize them).
If the partner doesn’t materially participate in the activity, a
trade or business activity conducted through a partnership is
generally a passive activity of the partner.
Each partner must determine if the partner materially
participated in an activity. As a result, while the partnership’s
ordinary business income (loss) is reported on page 1 of Form
1065, the specific income and deductions from each separate
trade or business activity must be reported on attached
statements to Form 1065. Similarly, while each partner’s
distributive share of the partnership’s ordinary business income
(loss) is reported in box 1 of Schedule K-1, each partner’s
distributive share of the income and deductions from each trade
or business activity must be reported on attached statements to
each Schedule K-1. See Passive Activity Reporting
Requirements, later, for more information.
Rental Activities
Generally, except as noted below, if the gross income from an
activity consists of amounts paid principally for the use of real or
personal tangible property held by the partnership, the activity is
a rental activity.
There are several exceptions to this general rule. Under these
exceptions, an activity involving the use of real or personal
tangible property isn’t a rental activity if any of the following
apply.
• The average period of customer use (defined below) for
such property is 7 days or less.
• The average period of customer use for such property is 30
days or less and significant personal services (defined
below) are provided by or on behalf of the partnership.
• Extraordinary personal services (defined below) are
provided by or on behalf of the partnership.
• The rental of such property is treated as incidental to a
nonrental activity of the partnership under Temporary
Regulations section 1.469-1T(e)(3)(vi) and Regulations
section 1.469-1(e)(3)(vi)(D).
• The partnership customarily makes the property available
during defined business hours for nonexclusive use by
various customers.
• The partnership provides property for use in a nonrental
activity of a partnership or joint venture in its capacity as an
owner of an interest in such partnership or joint venture.
Whether the partnership provides property used in an
activity of another partnership or of a joint venture in the
partnership’s capacity as an owner of an interest in the
partnership or joint venture is determined on the basis of all
the facts and circumstances.
13
In addition, a guaranteed payment described in section
707(c) is never income from a rental activity.
Average period of customer use. Figure the average period
of customer use for a class of property by dividing the total
number of days in all rental periods by the number of rentals
during the tax year. If the activity involves renting more than one
class of property, multiply the average period of customer use of
each class by the ratio of the gross rental income from that class
to the activity’s total gross rental income. The activity’s average
period of customer use equals the sum of these class-by-class
average periods weighted by gross income. See Regulations
section 1.469-1(e)(3)(iii).
Significant personal services. Personal services include only
services performed by individuals. To determine if personal
services are significant personal services, consider all the
relevant facts and circumstances. Relevant facts and
circumstances include:
• How often the services are provided,
• The type and amount of labor required to perform the
services, and
• The value of the services in relation to the amount charged
for use of the property.
The following services aren’t considered in determining
whether personal services are significant.
• Services necessary to permit the lawful use of the rental
property.
• Services performed in connection with improvements or
repairs to the rental property that extend the useful life of the
property substantially beyond the average rental period.
• Services provided in connection with the use of any
improved real property that are similar to those commonly
provided in connection with long-term rentals of high-grade
commercial or residential property. Examples include
cleaning and maintenance of common areas, routine
repairs, trash collection, elevator service, and security at
entrances.
Extraordinary personal services. Services provided in
connection with making rental property available for customer
use are extraordinary personal services only if the services are
performed by individuals and the customers’ use of the rental
property is incidental to their receipt of the services.
For example, a patient’s use of a hospital room is generally
incidental to the care received from the hospital’s medical staff.
Similarly, a student’s use of a dormitory room in a boarding
school is incidental to the personal services provided by the
school’s teaching staff.
Rental activity incidental to a nonrental activity. An activity
isn’t a rental activity if the rental of the property is incidental to a
nonrental activity, such as the activity of holding property for
investment, a trade or business activity, or the activity of dealing
in property.
Rental of property is incidental to an activity of holding
property for investment if both of the following apply.
• The main purpose for holding the property is to realize a
gain from the appreciation of the property.
• The gross rental income from such property for the tax year
is less than 2% of the smaller of the property’s unadjusted
basis or its FMV.
Rental of property is incidental to a trade or business activity
if all of the following apply.
• The partnership owns an interest in the trade or business at
all times during the year.
• The rental property was mainly used in the trade or business
activity during the tax year or during at least 2 of the 5
preceding tax years.
14
• The gross rental income from the property for the tax year is
less than 2% of the smaller of the property’s unadjusted
basis or its FMV.
The sale or exchange of property that is also rented during
the tax year (in which the gain or loss is recognized) is treated as
incidental to the activity of dealing in property if, at the time of the
sale or exchange, the property was held primarily for sale to
customers in the ordinary course of the partnership’s trade or
business.
See Temporary Regulations section 1.469-1T(e)(3) and
Regulations section 1.469-1(e)(3) for more information on the
definition of rental activities for purposes of the passive activity
limitations.
Reporting of rental activities. In reporting the partnership’s
income or losses and credits from rental activities, the
partnership must separately report rental real estate activities
and rental activities other than rental real estate activities.
Partners who actively participate in a rental real estate activity
may be able to deduct part or all of their rental real estate losses
(and the deduction equivalent of rental real estate credits)
against income (or tax) from nonpassive activities. The
combined amount of rental real estate losses and the deduction
equivalent of rental real estate credits from all sources (including
rental real estate activities not held through the partnership) that
may be claimed is limited to $25,000. This $25,000 amount is
generally reduced for high-income partners.
Report rental real estate activity income (loss) on Form 8825
and Schedule K, line 2, and in box 2 of Schedule K-1, rather than
on page 1 of Form 1065. Report credits related to rental real
estate activities on Schedule K, lines 15c and 15d (box 15,
codes E and F, of Schedule K-1), and low-income housing
credits on Schedule K, lines 15a and 15b (box 15, codes C and
D, of Schedule K-1).
See Line 3. Other Net Rental Income (Loss), later, for
reporting other net rental income (loss) other than rental real
estate.
Portfolio Income
Generally, portfolio income includes all gross income, other than
income derived in the ordinary course of a trade or business,
that is attributable to interest; dividends; royalties; income from a
real estate investment trust (REIT), a regulated investment
company (RIC), a REMIC, a common trust fund, a CFC, a QEF,
or a cooperative; income from the disposition of property that
produces income of a type defined as portfolio income; and
income from the disposition of property held for investment. See
Self-Charged Interest, later, for an exception.
Solely for purposes of the preceding paragraph, gross
income derived in the ordinary course of a trade or business
includes (and portfolio income, therefore, doesn’t include) the
following types of income.
• Interest income on loans and investments made in the
ordinary course of a trade or business of lending money.
• Interest on accounts receivable arising from the
performance of services or the sale of property in the
ordinary course of a trade or business of performing such
services or selling such property, but only if credit is
customarily offered to customers of the business.
• Income from investments made in the ordinary course of a
trade or business of furnishing insurance or annuity
contracts or reinsuring risks underwritten by insurance
companies.
• Income or gain derived in the ordinary course of an activity
of trading or dealing in any property if such activity
constitutes a trade or business (unless the dealer held the
property for investment at any time before such income or
gain is recognized).
Instructions for Form 1065 (2025)
• Royalties derived by the taxpayer in the ordinary course of a
•
•
trade or business of licensing intangible property.
Amounts included in the gross income of a patron of a
cooperative by reason of any payment or allocation to the
patron based on patronage as a result of a trade or business
of the patron.
Other income identified by the IRS as income derived by the
taxpayer in the ordinary course of a trade or business.
See Temporary Regulations section 1.469-2T(c)(3) for more
information on portfolio income.
Report portfolio income and related deductions on
Schedule K rather than on page 1 of Form 1065.
Self-Charged Interest
Certain self-charged interest income and deductions may be
treated as passive activity gross income and passive activity
deductions if the loan proceeds are used in a passive activity.
Generally, self-charged interest income and deductions result
from loans between the partnership and its partners and also
include loans between the partnership and another partnership if
each owner in the borrowing entity has the same proportional
ownership interest in the lending entity.
The self-charged interest rules don’t apply to a partner’s
interest in a partnership if the partnership makes an election
under Regulations section 1.469-7(g) to avoid the application of
these rules. To make the election, the partnership must attach to
its original or amended partnership return a statement that
includes the name, address, and EIN of the partnership and a
declaration that the election is being made under Regulations
section 1.469-7(g). The election will apply to the tax year in
which it was made and all subsequent tax years. Once made,
the election may only be revoked with the consent of the IRS.
For more details on the self-charged interest rules, see
Regulations section 1.469-7.
Grouping Activities
Generally, one or more trade or business or rental activities may
be treated as a single activity if the activities make up an
appropriate economic unit for measurement of gain or loss under
the passive activity rules. Whether activities make up an
appropriate economic unit depends on all the relevant facts and
circumstances. The factors given the greatest weight in
determining whether activities make up an appropriate economic
unit are:
• Similarities and differences in types of trades or businesses,
• The extent of common control,
• The extent of common ownership,
• Geographical location, and
• Reliance between or among the activities.
Example. The partnership has a significant ownership
interest in a bakery and a movie theater in Baltimore and a
bakery and a movie theater in Philadelphia. Depending on the
relevant facts and circumstances, there may be more than one
reasonable method for grouping the partnership’s activities. For
instance, the following groupings may or may not be permissible.
• A single activity.
• A movie theater activity and a bakery activity.
• A Baltimore activity and a Philadelphia activity.
• Four separate activities.
Once the partnership chooses a grouping under these rules,
it must continue using that grouping in later tax years unless a
material change in the facts and circumstances makes it clearly
inappropriate.
The IRS may regroup the partnership’s activities if the
partnership’s grouping fails to reflect one or more appropriate
Instructions for Form 1065 (2025)
economic units and one of the primary purposes of the grouping
is to avoid the passive activity limitations.
Limitation on grouping certain activities. The following
activities may not be grouped together.
1. A rental activity with a trade or business activity unless the
activities being grouped together make up an appropriate
economic unit and:
a. The rental activity is insubstantial relative to the trade or
business activity or vice versa, or
b. Each owner of the trade or business activity has the
same proportionate ownership interest in the rental
activity. If so, the portion of the rental activity involving
the rental of property to be used in the trade or business
activity can be grouped with the trade or business
activity.
2. An activity involving the rental of real property with an
activity involving the rental of personal property (except
personal property provided in connection with the real
property or vice versa).
3. Any activity with another activity in a different type of
business and in which the partnership holds an interest as a
limited partner or as a limited entrepreneur (as defined in
section 461(k)(4)) if that other activity engages in holding,
producing, or distributing motion picture films or videotapes;
farming; leasing section 1245 property; or exploring for or
exploiting oil and gas resources or geothermal deposits.
Activities conducted through other partnerships. Once a
partnership determines its activities under these rules, the
partnership as a partner can use these rules to group those
activities with:
• Each other,
• Activities conducted directly by the partnership, or
• Activities conducted through other partnerships.
A partner can’t treat as separate activities those activities
grouped together by a partnership.
If you group your activities under these rules for section 469
purposes, check the appropriate box in item K below the name
and address block on page 1 of Form 1065.
Recharacterization of Passive Income
Under Temporary Regulations section 1.469-2T(f) and
Regulations section 1.469-2(f), net passive income from certain
passive activities must be treated as nonpassive income. Net
passive income is the excess of an activity’s passive activity
gross income over its passive activity deductions (current-year
deductions and prior-year unallowed losses).
Any net passive income recharacterized as nonpassive
income is treated as investment income for purposes of figuring
investment interest expense limitations if it’s from (a) an activity
of renting substantially nondepreciable property from an
equity-financed lending activity, or (b) an activity related to an
interest in a pass-through entity that licenses intangible property.
The amount of income from the activities in the first three
paragraphs below that any partner will be required to
recharacterize as nonpassive income may be limited under
Temporary Regulations section 1.469-2T(f)(8). Because the
partnership won’t have information regarding all of a partner’s
activities, it must identify all partnership activities meeting the
definitions under Certain nondepreciable rental property
activities and Passive equity-financed lending activities below as
activities that may be subject to recharacterization.
Income from the following six sources is subject to
recharacterization.
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Significant participation passive activities. A significant
participation passive activity is any trade or business activity in
which the partner participated for more than 100 hours during
the tax year but didn’t materially participate. Because each
partner must determine the partner’s level of participation, the
partnership won’t be able to identify significant participation
passive activities.
Certain nondepreciable rental property activities. Net
passive income from a rental activity is nonpassive income if less
than 30% of the unadjusted basis of the property used or held for
use by customers in the activity is subject to depreciation under
section 167.
Passive equity-financed lending activities. If the partnership
has net income from a passive equity-financed lending activity,
the smaller of the net passive income or the equity-financed
interest income from the activity is nonpassive income.
Rental of property incidental to a development activity. Net
rental activity income is the excess of passive activity gross
income from renting or disposing of property over passive
activity deductions (current-year deductions and prior-year
unallowed losses) that are reasonably allocable to the rented
property. Net rental activity income is nonpassive income for a
partner if all of the following apply.
• The partnership recognizes gain from the sale, exchange, or
other disposition of the rental property during the tax year.
• The use of the item of property in the rental activity started
less than 12 months before the date of disposition. The use
of an item of rental property begins on the first day that (a)
the partnership owns an interest in the property, (b)
substantially all of the property is either rented or held out for
rent and ready to be rented, and (c) no significant
value-enhancing services remain to be performed.
• The partner materially or significantly participated for any tax
year in an activity that involved performing services to
enhance the value of the property (or any other item of
property if the basis of the property disposed of is
determined in whole or in part by reference to the basis of
that item of property).
Because the partnership can’t determine a partner’s level of
participation, the partnership must identify net income from
property described earlier under Rental Activities (without regard
to the partner’s level of participation) as income that may be
subject to recharacterization.
Rental of property to a nonpassive activity. If a taxpayer
rents property to a trade or business activity in which the
taxpayer materially participates, the taxpayer’s net rental activity
income from the property is nonpassive income.
Acquisition of an interest in a pass-through entity that licenses intangible property. Generally, net royalty income
from intangible property is nonpassive income if the taxpayer
acquired an interest in the pass-through entity after the
pass-through entity created the intangible property or performed
substantial services or incurred substantial costs in developing
or marketing the intangible property. Net royalty income is the
excess of passive activity gross income from licensing or
transferring any right in intangible property over passive activity
deductions (current-year deductions and prior-year unallowed
losses) that are reasonably allocable to the intangible property.
See Temporary Regulations section 1.469-2T(f)(7)(iii) for
exceptions to this rule.
Passive Activity Reporting Requirements
To allow partners to correctly apply the passive activity loss and
credit limitation rules, the partnership must do the following.
16
1. If the partnership carries on more than one activity, provide
an attached statement for each activity conducted through
the partnership that identifies the type of activity conducted
(trade or business, rental real estate, or rental activity other
than rental real estate). See Grouping Activities, earlier.
2. On the attached statement for each activity, provide a
statement, using the same box numbers as shown on
Schedule K-1, detailing the net income (loss), credits, and
all items required to be separately stated under section
702(a) from each trade or business activity, from each rental
real estate activity, from each rental activity other than a
rental real estate activity, and from investments. If the
partnership grouped separate activities, the attachments
must identify each group. The attached group activity
description must be sufficient for a partner to determine if its
other activities qualify to be grouped with any groups
provided by the partnership.
3. Identify the net income (loss) and credits from each oil or
gas well drilled or operated under a working interest that any
partner (other than a partner whose only interest in the
partnership during the year is as a limited partner) holds
through the partnership. Further, if any partner had an
interest as a general partner in the partnership during less
than the entire year, the partnership must identify both the
disqualified deductions from each well that the partner must
treat as passive activity deductions, and the ratable portion
of the gross income from each well that the partner must
treat as passive activity gross income.
4. Identify the net income (loss) and the partner’s share of
partnership interest expense from each activity of renting a
dwelling unit that any partner uses for personal purposes
during the year for more than the greater of 14 days or 10%
of the number of days that the residence is rented at fair
rental value.
5. Identify the net income (loss) and the partner’s share of
partnership interest expense from each activity of trading
personal property conducted through the partnership.
6. For any gain (loss) from the disposition of an interest in an
activity or of an interest in property used in an activity
(including dispositions before 1987 from which gain is being
recognized after 1986):
a. Identify the activity in which the property was used at
the time of disposition;
b. If the property was used in more than one activity during
the 12 months preceding the disposition, identify the
activities in which the property was used and the
adjusted basis allocated to each activity; and
c. For gains only, if the property was substantially
appreciated at the time of the disposition and the
applicable holding period specified in Regulations
section 1.469-2(c)(2)(iii)(A) wasn’t satisfied, identify the
amount of the nonpassive gain and indicate whether the
gain is investment income under Regulations section
1.469-2(c)(2)(iii)(F).
7. Specify the amount of gross portfolio income, the interest
expense properly allocable to portfolio income, and
expenses other than interest expense that are clearly and
directly allocable to portfolio income.
8. Identify separately any of the following types of payments to
partners.
a. Payments to a partner for services other than in the
partner’s capacity as a partner under section 707(a).
b. Guaranteed payments to a partner for services under
section 707(c).
Instructions for Form 1065 (2025)
c. Guaranteed payments for use of capital.
d. If section 736(a)(2) payments are made for unrealized
receivables or for goodwill, the amount of the payments
and the activities to which the payments are attributable.
e. If section 736(b) payments are made, the amount of the
payments and the activities to which the payments are
attributable.
9. Identify the ratable portion of any section 481 adjustment
(whether a net positive or a net negative adjustment)
allocable to each partnership activity.
10. Identify the amount of gross income from each oil or gas
property of the partnership.
11. Identify any gross income from sources specifically
excluded from passive activity gross income, including:
proceeds were used in more than one activity, allocate
the interest to each activity based on the amount of the
proceeds used in each activity.
b. Loans between the partnership and another partnership
or S corporation. If the partnership’s partners have the
same proportional ownership interest in the partnership
and the other partnership or S corporation, identify each
partner’s share of the interest income or expense from
the loan. If the partnership was the borrower, also
identify the activity in which the loan proceeds were
used. If the loan proceeds were used in more than one
activity, allocate the interest to each activity based on
the amount of the proceeds used in each activity.
Net Investment Income Tax (NIIT) Reporting
Requirements
a. Income from intangible property if the partner is an
individual whose personal efforts significantly
contributed to the creation of the property;
The information described in this section should be given directly
to the partner and shouldn’t be reported by the partnership to the
IRS.
b. Income from state, local, or foreign income tax refunds;
and
To allow partners to correctly figure the NIIT where a partner
disposes of an interest in the partnership during the tax year, the
partnership may be required to provide the partner with certain
information. The NIIT is a tax imposed on an individual’s, trust’s,
or estate’s net investment income. Net investment income
includes the net gains or losses from the sale of an interest in the
partnership. A partner who is actively involved in one or more of
the partnership’s or lower-tier pass-through entities’ trades or
businesses (other than trading in financial instruments or
commodities) can reduce the amount of the gain or loss from the
sale of the partnership or lower-tier pass-through entity interest
included in its net investment income. However, to figure its net
investment income, the active partner needs certain information
from the partnership.
c. Income from a covenant not to compete if the partner is
an individual who contributed the covenant to the
partnership.
12. Identify any deductions that aren’t passive activity
deductions.
13. If the partnership makes a full or partial disposition of its
interest in another entity, identify the gain (loss) allocable to
each activity conducted through the entity, and the gain
allocable to a passive activity that would have been
recharacterized as nonpassive gain had the partnership
disposed of its interest in property used in the activity
(because the property was substantially appreciated at the
time of the disposition, and the gain represented more than
10% of the partner’s total gain from the disposition).
14. Identify the following items from activities that may be
subject to the recharacterization rules. See
Recharacterization of Passive Income, earlier.
a. Net income from an activity of renting substantially
nondepreciable property.
b. The smaller of equity-financed interest income or net
passive income from an equity-financed lending activity.
c. Net rental activity income from property developed (by
the partner or the partnership), rented, and sold within
12 months after the rental of the property commenced.
d. Net rental activity income from the rental of property by
the partnership to a trade or business activity in which
the partner had an interest (either directly or indirectly).
e. Net royalty income from intangible property if the
partner acquired the partner’s interest in the partnership
after the partnership created the intangible property or
performed substantial services, or incurred substantial
costs in developing or marketing the intangible property.
15. Identify separately the credits from each activity conducted
by or through the partnership.
16. Identify the partner’s distributive share of the partnership’s
self-charged interest income or expense (see Self-Charged
Interest, earlier).
a. Loans between a partner and the partnership. Identify
the lending or borrowing partner’s share of the
self-charged interest income or expense. If the partner
made the loan to the partnership, also identify the
activity in which the loan proceeds were used. If the
Instructions for Form 1065 (2025)
Generally, the partnership must provide certain information to
the partner if the partnership knows, or has reason to know, the
following.
• The partner disposed of an interest in the partnership.
• The partner materially participates (within the meaning of
the passive activity loss rules (section 469)) in one or more
of the trades or businesses (within the meaning of section
162) of the partnership or a lower-tier pass-through entity
(other than trading in financial instruments or commodities).
• The partner doesn’t qualify for the optional simplified
reporting method for figuring its net investment income
associated with the disposition of the interest. For more
information, see the instructions for Form 8960, line 5c.
Information to be provided to partner. Generally, the
partnership must provide the partner with its distributive share of
the net gain and loss from the deemed sale for FMV of the
partnership’s property, other than property that relates to the
trades or businesses in which the partner materially participates,
as determined under the passive activity loss rules applicable to
the transfer of an interest in a pass-through entity. For more
information, see the instructions for Form 8960, line 5c.
Specific Instructions
These instructions follow the line numbers on the first page of
Form 1065. The accompanying schedules are discussed
separately. Specific instructions for most of the lines are
provided. Lines that aren’t discussed are self-explanatory.
Fill in all applicable lines and schedules.
Enter any items specially allocated to the partners in the
appropriate box of the applicable partner’s Schedule K-1. Enter
the total amount on the appropriate line of Schedule K. Don’t
17
enter separately stated amounts on the numbered lines on Form
1065; Form 1125-A, page 1; or Schedule D (Form 1065).
File all six pages of Form 1065. However, if the answer to
Schedule B, question 4, is “Yes,” Schedules L, M-1, and M-2 on
page 6 are optional. Also attach a Schedule K-1 to Form 1065
for each partner.
File only one Form 1065 for each partnership. Mark
“Duplicate Copy” on any copy you give to a partner.
If a syndicate, pool, joint venture, or similar group files Form
1065, it must attach a copy of the agreement and all
amendments to the return, unless a copy has previously been
filed.
Tip: A foreign partnership required to file a return must generally
report all of its foreign and U.S. partnership items. For rules
regarding whether a foreign partnership must file Form 1065, see
Who Must File, earlier.
Name and Address
Enter the legal name of the partnership, address, and EIN on the
appropriate lines. If the partnership has changed its name, check
box G(3). Include the suite, room, or other unit number after the
street address. If the post office doesn’t deliver mail to the street
address and the partnership has a P.O. box, show the box
number instead.
If the partnership receives its mail in care of a third party
(such as an accountant or an attorney), enter “C/O” on the street
address line, followed by the third party’s name and street
address or P.O. box.
If the partnership’s address is outside the United States or
U.S. territories, enter the information on the lines for “City or
town,” “State or province,” “Country,” and “ZIP or foreign postal
code” in the following order: city, province or state, and the
foreign country. Follow the foreign country’s practice in placing
the postal code in the address. Don’t abbreviate the country
name.
If the partnership has changed its address since it last filed a
return (including a change to an “in care of” address), check box
G(4) for “Address change.”
Tip: If the partnership changes its mailing address or the
responsible party after filing its return, it can notify the IRS by
filing Form 8822-B, Change of Address or Responsible
Party—Business.
Partnerships With Adjustments in the Current
Year That Didn’t Result in an IU
If a partnership has an adjustment from a BBA audit which
doesn’t result in an IU, the partnership shouldn’t take the
adjustment into account until the adjustment year (see
Definitions, earlier). With its Form 1065 for the adjustment year,
the partnership should provide a statement describing the
adjustments, including the line numbers to which the
adjustments relate, and incorporate those adjustments into its
adjustment year return. If there’s a reallocation adjustment being
reported on the adjustment year return, ensure the statement
identifies the partner receiving the reallocation adjustment. If
there’s an adjustment to a separately stated item or to a credit,
the partnership must adjust that item or that credit in the
adjustment year. See Examples 1 and 2 in Regulations section
301.6225-3.
Items A and C
Enter the applicable activity name and the code number from the
list, Codes for Principal Business Activity and Principal Product
or Service, near the end of these instructions.
18
For example, if, as its principal business activity, the
partnership (a) purchases raw materials, (b) subcontracts out for
labor to make a finished product from the raw materials, and (c)
retains title to the goods, the partnership is considered to be a
manufacturer and must enter “Manufacturer” in item A and enter
in item C one of the codes (311110 through 339900) listed under
“Manufacturing” on the list, Codes for Principal Business Activity
and Principal Product or Service, near the end of these
instructions. For nonstore retailers, select the Principal Business
Activity (PBA) code by the primary product that your
establishment sells. For example, establishments primarily
selling prescription and non-prescription drugs, select PBA code
456110 Pharmacies & Drug Retailers.
Item D. Employer Identification Number (EIN)
Show the correct EIN in item D. If the partnership doesn’t have
an EIN, it must apply for one in one of the following ways.
• Online—Go to IRS.gov/EIN. The EIN is issued immediately
once the application information is validated.
• By mailing or faxing Form SS-4, Application for Employer
Identification Number.
An LLC must determine which type of federal tax entity it will
be (partnership, corporation, or disregarded entity (DE)) before
applying for an EIN (see Form 8832 for details). If the partnership
hasn’t received its EIN by the time the return is due, enter
“Applied for” and the application date in the space for the EIN.
For more details, see the Instructions for Form SS-4.
Note: The online application process isn’t yet available for
partnerships with addresses in foreign countries. If you’re
located outside the United States, call 267-941-1099.
Item F. Total Assets
You aren’t required to complete item F if the answer to
Schedule B, question 4, is “Yes.”
If you’re required to complete this item, enter the partnership’s
total assets at the end of the tax year, as determined by the
accounting method regularly used in keeping the partnership’s
books and records. If there were no assets at the end of the tax
year, enter zero.
Item J. Schedule C and Schedule M-3
A partnership must file Schedule M-3, Net Income (Loss)
Reconciliation for Certain Partnerships, instead of Schedule M-1,
if any of the following apply.
• The amount of total assets at the end of the tax year
reported in column (d) of Schedule L, line 14, is $10 million
or more.
• The amount of adjusted total assets for the tax year is $10
million or more. “Adjusted total assets” is defined in the
Instructions for Schedule M-3.
• The amount of total receipts (as defined later in the
instructions for Schedule B, question 4) for the tax year is
$35 million or more.
• An entity that is a reportable entity partner of the partnership
owns or is deemed to own, directly or indirectly, an interest
of 50% or more in the partnership’s capital, profit, or loss on
any day during the tax year of the partnership. “Reportable
entity partner” is defined in the Instructions for
Schedule M-3.
A partnership filing Form 1065 that isn’t required to file
Schedule M-3 may voluntarily file Schedule M-3 instead of
Schedule M-1.
Any partnership that files Schedule M-3 must also complete
and file Schedule C (Form 1065), Additional Information for
Schedule M-3 Filers. See Eased requirements next.
Eased requirements. Partnerships that (a) are required to
file Schedule M-3 and have less than $50 million in total assets
Instructions for Form 1065 (2025)
at tax-year-end, or (b) aren’t required to file Schedule M-3 and
voluntarily file Schedule M-3, must either (i) complete
Schedule M-3 entirely, or (ii) complete Schedule M-3 through
Part I and complete Schedule M-1 instead of completing Parts II
and III of Schedule M-3.
In addition, partnerships that meet the requirements of (a)
and (b) above aren’t required to file Schedule C (Form 1065) or
Form 8916-A.
See the instructions for Schedule C and Schedule M-3 for
more information.
Income
Caution: Report only trade or business activity income on lines
1a through 8. Don’t report rental activity income or portfolio
income on these lines. See Passive Activity Limitations, earlier,
for definitions of “rental activity income” and “portfolio income.”
Rental activity income and portfolio income are reported on
Schedules K and K-1. Rental real estate activities are also
reported on Form 8825.
Tax-exempt income. Don’t include any tax-exempt income on
lines 1a through 8. A partnership that receives any tax-exempt
income other than interest, or holds any property or engages in
any activity that produces tax-exempt income, reports this
income on Schedule K, line 18b, and in box 18 of Schedule K-1
using code B.
Report tax-exempt interest income, including exempt-interest
dividends received as a shareholder in a mutual fund or other
RIC, on Schedule K, line 18a, and in box 18 of Schedule K-1
using code A.
See Deductions, later, for information on how to report
expenses related to tax-exempt income.
Line 1a. Gross Receipts or Sales
Enter on line 1a gross receipts or sales from all trade or business
operations, except for amounts that must be reported on lines 4
through 7. If a cost offset method under section 451(b) or (c) is
used, the resulting gross income is reported on line 1a.
Special rules apply to certain income, as discussed below.
For example, don’t include gross receipts from farming on
line 1a. Instead, show the net profit (loss) from farming on line 5.
Also, don’t include on line 1a rental activity income or portfolio
income.
In general, advance payments are reported in the year of
receipt. For exceptions to this general rule for partnerships that
use the accrual method of accounting, see the following.
• To report income from long-term contracts, see section 460.
• For permissible methods that allow a limited deferral of
advance payments beyond the current tax year, see section
451(c) and Regulations section 1.451-8.
• For information on adopting or changing to a permissible
method for reporting advance payment for goods and
services by an accrual-method partnership, see the
Instructions for Form 3115.
Installment sales. Generally, the installment method can’t be
used for dealer dispositions of property. A dealer disposition is
any disposition of:
• Personal property by a person who regularly sells or
otherwise disposes of personal property of the same type on
the installment plan, or
• Real property held for sale to customers in the ordinary
course of the taxpayer’s trade or business.
Exception. These restrictions on using the installment
method don’t apply to dispositions of property used or produced
in a farming business or sales of timeshares and residential lots.
However, if the partnership elects to report dealer dispositions of
Instructions for Form 1065 (2025)
timeshares and residential lots on the installment method, each
partner’s tax liability must be increased by the partner’s
distributive share of the interest payable under section 453(l)(3).
Include on line 1a the gross profit on collections from
installment sales for any of the following.
• Dealer dispositions of property before March 1, 1986.
• Dispositions of property used or produced in the trade or
business of farming.
• Certain dispositions of timeshares and residential lots
reported under the installment method.
Attach a statement showing the following information for the
current year and the preceding 3 years.
• Gross sales.
• Cost of goods sold.
• Gross profits.
• Percentage of gross profits to gross sales.
• Amount collected.
• Gross profit on the amount collected.
Nonaccrual-experience method. Partnerships that qualify to
use the nonaccrual-experience method (described earlier)
should attach a statement showing total gross receipts, the
amount not accrued as a result of the application of section
448(d)(5), and the net amount accrued. Include the net amount
on line 1a.
Line 2. Cost of Goods Sold
If the partnership has a cost of goods sold deduction, complete
and attach Form 1125-A. Enter on Form 1065, page 1, line 2, the
amount from Form 1125-A, line 8. See Form 1125-A and its
instructions.
Line 4. Ordinary Income (Loss) From Other
Partnerships, Estates, and Trusts
Enter the ordinary income (loss) shown on Schedule K-1 (Form
1065) or Schedule K-1 (Form 1041), or other ordinary income
(loss) from a foreign partnership, estate, or trust. Show the
partnership’s, estate’s, or trust’s name, address, and EIN on a
separate statement attached to this return. If the amount entered
is from more than one source, identify the amount from each
source.
Don’t include portfolio income or rental activity income (loss)
from other partnerships, estates, or trusts on this line. Instead,
report these amounts on Schedules K and K-1, or on Form 8825,
line 22a, if the amount is from a rental real estate activity.
Ordinary income (loss) from another partnership that is a PTP
isn’t reported on this line. Instead, report the amount separately
on Schedule K, line 11, and in box 11 of Schedule K-1 using
code ZZ.
Treat shares of other items separately reported on
Schedule K-1 issued by the other entity as if the items were
realized or incurred by this partnership.
If there’s a loss from another partnership, the amount of the
loss that may be claimed is subject to the basis limitations as
appropriate.
If the tax year of your partnership doesn’t coincide with the tax
year of the other partnership, estate, or trust, include the ordinary
income (loss) from the other entity in the tax year in which the
other entity’s tax year ends.
Line 5. Net Farm Profit (Loss)
Enter the partnership’s net farm profit (loss) from Schedule F
(Form 1040). Attach Schedule F (Form 1040) to Form 1065.
Don’t include on this line any farm profit (loss) from other
partnerships. Report those amounts on line 4. In figuring the
19
partnership’s net farm profit (loss), don’t include any section 179
expense deduction; this amount must be separately stated.
Also report the partnership’s fishing income on this line.
For a special rule concerning the method of accounting for a
farming partnership with a corporate partner and for other tax
information on farms, see Pub. 225, Farmer’s Tax Guide.
Tip: Because the partner, and not the partnership, makes the
election to deduct the expenses of raising any plant with a
preproductive period of more than 2 years, farm partnerships
that aren’t required to use an accrual method shouldn’t capitalize
such expenses. Instead, state them separately on an attached
statement to Schedule K, line 13e, and in box 13 of
Schedule K-1 using code P. See section 263A(d) for more
information.
Line 6. Net Gain (Loss) From Form 4797
Caution: Include only ordinary gains or losses from the sale,
exchange, or involuntary conversion of assets used in a trade or
business activity. Ordinary gains or losses from the sale,
exchange, or involuntary conversion of rental activity assets are
reported separately on Form 8825, line 21, or Schedule K,
line 3c, and in box 3 of Schedule K-1, generally as a part of the
net income (loss) from the rental activity.
A partnership that is a partner in another partnership must
include on Form 4797 its share of ordinary gains (losses) from
sales, exchanges, or involuntary conversions (other than
casualties or thefts) of the other partnership’s trade or business
assets.
Partnerships shouldn’t use Form 4797 to report the sale or
other disposition of property if a section 179 expense deduction
was previously passed through to any of its partners for that
property. Instead, report it in box 20 of Schedule K-1 using code
L. See Dispositions of property with section 179 deductions
(code L), later, for details.
Line 7. Other Income (Loss)
Enter any other trade or business income (loss) not included on
lines 1a through 6. List the type and amount of income on an
attached statement. Examples of other income include the
following.
• Interest income derived in the ordinary course of the
partnership’s trade or business, such as interest charged on
receivable balances.
• Recoveries of bad debts deducted in prior years under the
specific charge-off method.
• Taxable income from insurance proceeds.
• Any amount included in income from Form 6478, Biofuel
Producer Credit, line 2, if applicable.
• Any amount included in income from Form 8864, line 9, if
applicable.
• The recapture amount under section 280F if the business
use of listed property drops to 50% or less. To figure the
recapture amount, complete Form 4797, Part IV.
• All section 481 income adjustments resulting from changes
in accounting methods. Show the computation of the section
481 adjustments on an attached statement.
• Part or all of the proceeds received from certain
employer-owned life insurance contracts issued after August
17, 2006. Partnerships that own one or more
employer-owned life insurance contracts issued after that
date must file Form 8925, Report of Employer-Owned Life
Insurance Contracts. See section 101(j) for details.
Don’t include items requiring separate computations that
must be reported on Schedules K and K-1. See the instructions
for Schedules K and K-1, later.
Don’t report portfolio or rental activity income (loss) on this
line.
20
Deductions
Caution: Report only trade or business activity deductions on
lines 9 through 21.
Don’t report the following expenses on lines 9 through 21.
• Rental activity expenses. Report these expenses on Form
8825 or Schedule K, line 3b.
• Deductions allocable to portfolio income. Report these
•
•
•
deductions on Schedule K, line 13e, and in box 13 of
Schedule K-1 using code I or L.
Nondeductible expenses (for example, expenses connected
with the production of tax-exempt income). Report
nondeductible expenses on Schedule K, line 18c, and in
box 18 of Schedule K-1 using code C.
Qualified expenditures to which an election under section
59(e) may apply. The instructions for Schedule K, line 13d,
and for box 13, code J, of Schedule K-1 explain how to
report these amounts.
Items the partnership must state separately that require
separate computations by the partners. Examples include
expenses incurred for the production of income instead of in
a trade or business, charitable contributions, foreign taxes
paid or accrued, intangible drilling and development costs,
soil and water conservation expenditures, amortizable basis
of reforestation expenditures, and exploration expenditures.
The distributive shares of these expenses are reported
separately to each partner on Schedule K-1.
Limitations on Deductions
Section 263A uniform capitalization rules. The uniform
capitalization rules of section 263A generally require
partnerships to capitalize certain costs incurred in connection
with the following.
• The production of real property and tangible personal
property held in inventory or held for sale in the ordinary
course of business.
• Real property or personal property (tangible and intangible)
acquired for resale.
• The production of real property and tangible personal
property by a partnership for use in its trade or business or
in an activity engaged in for profit.
Tangible personal property produced by a partnership
includes a film, sound recording, videotape, book, or similar
property.
The costs required to be capitalized under section 263A
aren’t deductible until the property to which the costs relate is
sold, used, or otherwise disposed of by the partnership.
Exceptions. For tax years beginning after 2017, a small
business taxpayer, defined earlier, can adopt or change its
method of accounting to not capitalize costs under section 263A.
See section 263A(i) and Accounting Methods, earlier.
Section 263A doesn’t apply to the following.
• Timber.
• Most property produced under a long-term contract.
• Certain property produced in a farming business. See the
note at the end of the instructions for line 5, earlier.
• Geological and geophysical costs amortized under section
167(h).
• Certain plants bearing fruits and nuts under section 168(k)
(5).
The partnership must report the following costs separately to
the partners for purposes of determinations under section 59(e).
• R&E costs under section 174A.
• Intangible drilling costs for oil, gas, and geothermal property.
• Mining exploration and development costs.
Instructions for Form 1065 (2025)
Indirect costs. Partnerships subject to the uniform
capitalization rules are required to capitalize not only direct costs
but an allocable part of most indirect costs (including taxes) that
benefit the assets produced or acquired for resale, or are
incurred because of the performance of production or resale
activities.
For inventory, indirect costs that must be capitalized include
the following.
• Administration expenses.
• Taxes.
• Depreciation.
• Insurance.
• Compensation paid to officers attributable to services.
• Rework labor.
• Contributions to pension, stock bonus, and certain
profit-sharing, annuity, or deferred compensation plans.
Regulations section 1.263A-1(e)(3) specifies other indirect
costs that relate to production or resale activities that must be
capitalized and those that may be currently deductible.
Interest expense paid or incurred during the production
period of designated property must be capitalized and is
governed by special rules. For more details, see Regulations
sections 1.263A-8 through -15.
For more details on the uniform capitalization rules, see
Regulations sections 1.263A-1 through -3.
Transactions between related taxpayers. Generally, an
accrual-basis partnership can deduct business expenses and
interest owed to a related party (including any partner) only in the
tax year of the partnership that includes the day on which the
payment is includible in the income of the related party. See
section 267 for details.
Business interest. Business interest expense (BIE) is limited
for tax years beginning after 2017. See section 163(j) for
limitations on deductions for business interest, and section
163(j)(4) for rules specific to partnerships.
Business startup and organizational costs. Generally, a
partnership can elect to deduct a limited amount of startup or
organizational costs paid or incurred. Any costs not deducted
must be amortized as explained below. See sections 195(b) and
709(b).
Time for making an election. The partnership generally
elects to deduct startup or organizational costs by claiming the
deduction on its return filed by the due date (including
extensions) for the tax year in which the active trade or business
begins.
If the partnership timely filed its return for the year without
making an election, it can still make an election by filing an
amended return within 6 months of the due date of the return
(excluding extensions). Clearly indicate the election on the
amended return and enter “Filed pursuant to section
301.9100-2” at the top of the amended return. File the amended
return at the same address the partnership filed its original
return. The election applies when figuring income for the current
tax year and all subsequent years.
The partnership can choose to forgo the above elections by
clearly electing to capitalize its startup or organizational costs on
its return filed by the due date (including extensions) for the tax
year in which the active trade or business begins.
The election to either amortize or capitalize startup or
organizational costs is irrevocable and applies to all startup and
organizational costs that are related to the trade or business.
Amortization. Any costs not deducted under the above rules
must be amortized ratably over a 180-month period, beginning
with the month the partnership begins business. See the
Instructions for Form 4562 for details.
Instructions for Form 1065 (2025)
Report the deductible amount of these costs and any
amortization on line 21. For amortization that began during the
tax year, complete and attach Form 4562, Depreciation and
Amortization.
Syndication costs. Costs for issuing and marketing interests in
the partnership, such as commissions, professional fees, and
printing costs, must be capitalized. They can’t be depreciated or
amortized. See the instructions for line 10, later, for the treatment
of syndication fees paid to a partner.
Reducing certain expenses for which credits are allowable.
The partnership may need to reduce the otherwise allowable
deductions for expenses used to figure certain credits. The
following are examples of such credits. (Don’t reduce the amount
of the allowable deduction for any portion of the credit that was
passed through to the partnership from another pass-through
entity.)
• Work opportunity credit.
• Credit for increasing research activities.
• Disabled access credit.
• Empowerment zone employment credit, if applicable.
• Credit for employer social security and Medicare taxes paid
on certain employee tips.
• Orphan drug credit.
• Small employer pension plan startup costs and employer
contributions credit.
• Credit for employer-provided childcare facilities and
services.
• Low sulfur diesel fuel production credit.
• Credit for employer differential wage payments.
• Credit for small employer health insurance premiums.
• Employer credit for paid family and medical leave (Form
8994).
Note: Wages taken into account in determining the credit for
qualified sick and family leave on Form 941 can’t be taken into
account in determining the employer credit for paid family and
medical leave on Form 8994. See the Instructions for Form 8994.
If the partnership has any of the credits listed above, figure
each current-year credit before figuring the deductions for
expenses on which the credit is based.
Line 9. Salaries and Wages
Enter the salaries and wages paid or incurred for the tax year,
reduced by the amount of the following credit(s).
• Work Opportunity Credit (Form 5884).
• Empowerment Zone Employment Credit (Form 8844), if
applicable.
• Credit for Employer Differential Wage Payments (Form
8932).
Don’t reduce the amount of the allowable deduction for any
portion of the credit that was passed through to the partnership
from another pass-through entity. See the instructions for the
credit form for more information.
Don’t include salaries and wages reported elsewhere on the
return, such as amounts included in cost of goods sold, elective
contributions to a section 401(k) cash or deferred arrangement,
or amounts contributed under a salary reduction simplified
employee pension (SEP) agreement or a Savings Incentive
Match Plan for Employees (SIMPLE) IRA plan.
Line 10. Guaranteed Payments to Partners
Deduct payments or credits to a partner for services or for the
use of capital if the payments or credits are determined without
regard to partnership income and are allocable to a trade or
business activity. Also include on line 10 amounts paid during
the tax year for insurance that constitutes medical care for a
21
partner, a partner’s spouse, a partner’s dependents, or a
partner’s children under age 27 who aren’t dependents.
The lease term began:
For information on how to treat the partnership’s contribution
to a partner’s health savings account (HSA), see Notice 2005-8,
2005-4 I.R.B. 368.
Automobiles other than trucks and vans
Don’t include any payments and credits that should be
capitalized. For example, although payments or credits to a
partner for services rendered in syndicating a partnership may
be guaranteed payments, they aren’t deductible on line 10. They
are capital expenditures. However, they should be reported as
guaranteed payments on the applicable line of Schedule K,
line 4b, and in box 4b of Schedule K-1.
Don’t include distributive shares of partnership profits.
Report the guaranteed payments to the appropriate partners
using the applicable box 4 of Schedule K-1.
Line 11. Repairs and Maintenance
Enter the cost of repairs and maintenance not claimed
elsewhere on the return, such as labor and supplies, that aren’t
payments for improvements to the partnership’s property.
Amounts are paid for improvements if they’re for betterments to
the property or for restorations of the property (such as the
replacements of major components or substantial structural
parts), or if they adapt the property to a new or different use.
Improvements must be capitalized. See Regulations section
1.263(a)-3.
The partnership can deduct repair and maintenance
expenses only to the extent they relate to a trade or business
activity. See Regulations section 1.162-4. The partnership may
elect to capitalize certain repair and maintenance costs
consistent with its books and records. See Regulations section
1.263(a)-3(n) for information on how to make the election.
Line 12. Bad Debts
Enter the total debts that became worthless in whole or in part
during the year, but only to the extent such debts relate to a trade
or business activity. Report deductible nonbusiness bad debts
as a short-term capital loss on Form 8949.
Caution: Partnerships can’t take a bad debt deduction unless
the amount was previously included in income.
Line 13. Rent
Enter rent paid on business property used in a trade or business
activity. Don’t deduct rent for a dwelling unit occupied by any
partner for personal use.
If the partnership rented or leased a vehicle, enter the total
annual rent or lease expense paid or incurred in the trade or
business activities of the partnership. Also complete Form 4562,
Part V. If the partnership leased a vehicle for a term of 30 days or
more, the deduction for vehicle lease expense may have to be
reduced by an amount called the inclusion amount. The
partnership may have an inclusion amount if:
And the vehicle’s FMV on the first day of
the lease exceeded:
During calendar year 2025
. . . . . . . . . . . . . . . . . .
$64,000
During calendar year 2024
. . . . . . . . . . . . . . . . . .
$62,000
During calendar year 2023
. . . . . . . . . . . . . . . . . .
$60,000
During calendar year 2022
. . . . . . . . . . . . . . . . . .
$56,000
During calendar year 2021
. . . . . . . . . . . . . . . . . .
$51,000
After 12/31/2017 but before 1/1/2021
. . . . . . . . . . . .
$50,000
After 12/31/12 and before 1/1/18
. . . . . . . . . . . . . .
$19,000
After 12/31/09 but before 1/1/13
. . . . . . . . . . . . . . .
$18,500
During calendar year 2025
. . . . . . . . . . . . . . . . . .
$64,000
During calendar year 2024
. . . . . . . . . . . . . . . . . .
$62,000
During calendar year 2023
. . . . . . . . . . . . . . . . . .
$60,000
During calendar year 2022
. . . . . . . . . . . . . . . . . .
$56,000
During calendar year 2021
. . . . . . . . . . . . . . . . . .
$51,000
Trucks and vans
After 12/31/2017 but before 1/1/2021
. . . . . . . . . . . .
$50,000
After 12/31/13 and before 1/1/18
. . . . . . . . . . . . . .
$19,500
After 12/31/09 and before 1/1/14
. . . . . . . . . . . . . .
$19,000
The inclusion amount for lease terms beginning in 2026 will be published in the
Internal Revenue Bulletin in early 2026.
See Pub. 463, Travel, Gift, and Car Expenses, for instructions
on figuring the inclusion amount.
Line 14. Taxes and Licenses
Enter taxes and licenses paid or incurred in the trade or business
activities of the partnership if not reflected elsewhere on the
return. Federal import duties and federal excise and stamp taxes
are deductible only if paid or incurred in carrying on the trade or
business of the partnership. Foreign taxes are included on
line 14 only if they are taxes not creditable but deductible under
sections 901 and 903. See column (g) of Schedule K-2, Part II,
Section 2, line 45.
Don’t deduct the following taxes on line 14.
• Taxes not imposed on the partnership.
• Federal income taxes or taxes reported elsewhere on the
return.
• Creditable foreign taxes under sections 901 and 903. Report
•
•
these taxes separately on Schedule K, line 21, and in box 21
of Schedule K-1.
Taxes allocable to a rental activity. Report taxes allocable to
rental real estate activity on Form 8825. Report taxes
allocable to a rental activity other than a rental real estate
activity on Schedule K, line 3b.
Taxes paid or incurred for the production or collection of
income, or for the management, conservation, or
maintenance of property held to produce income. Report
these taxes separately on Schedule K, line 13e, and in
box 13 of Schedule K-1 using code ZZ.
See section 263A(a) for rules on capitalization of allocable
costs (including taxes) for any property.
• Taxes, including state or local sales taxes, that are paid or
•
incurred in connection with an acquisition or disposition of
property (these taxes must be treated as a part of the cost of
the acquired property or, in the case of a disposition, as a
reduction in the amount realized on the disposition).
Taxes assessed against local benefits that increase the
value of the property assessed (such as for paving, etc.).
See section 164(d) for information on apportionment of taxes
on real property between seller and purchaser.
22
Instructions for Form 1065 (2025)
Line 15. Interest
Include only interest incurred in the trade or business activities of
the partnership that isn’t claimed elsewhere on the return.
Don’t include interest expense on the following.
• Debt used to purchase rental property or debt used in a
•
•
•
rental activity. Interest allocable to a rental real estate activity
is reported on Form 8825 and is used in arriving at net
income (loss) from rental real estate activities on
Schedule K, line 2, and in box 2 of Schedule K-1. Interest
allocable to a rental activity other than a rental real estate
activity is included on Schedule K, line 3b, and is used in
arriving at net income (loss) from a rental activity (other than
a rental real estate activity). This net amount is reported on
Schedule K, line 3c, and in box 3 of Schedule K-1.
Debt used to buy property held for investment. Interest that
is clearly and directly allocable to interest, dividend, royalty,
or annuity income not derived in the ordinary course of a
trade or business is reported on Schedule K, line 13c, and in
box 13 of Schedule K-1 using code H. See the instructions
for Schedule K, line 13c; box 13, code H, of Schedule K-1;
and Form 4952, Investment Interest Expense Deduction, for
more information on investment property.
Debt proceeds allocated to distributions made to partners
during the tax year. Instead, report such interest on
Schedule K, line 13e, and in box 13 of Schedule K-1 using
code AC.
Debt required to be allocated to the production of
designated property. Designated property includes real
property, personal property that has a class life of 20 years
or more, and other tangible property requiring more than 2
years (1 year in the case of property with a cost of more than
$1 million) to produce or construct. Interest allocable to
designated property produced by a partnership for its own
use or for sale must be capitalized. In addition, a partnership
must also capitalize to the basis of the designated property
any interest on debt allocable to an asset used to produce
designated property. A partner may have to capitalize
interest that the partner incurs during the tax year for the
partnership’s production expenditures. Similarly, interest
incurred by a partnership may have to be capitalized by a
partner for the partner’s own production expenditures. The
information required by the partner to properly capitalize
interest for this purpose must be provided by the partnership
on an attached statement for box 20 of Schedule K-1 using
code R. See section 263A(f) and Regulations sections
1.263A-8 through -15.
Special rules apply to the following.
• Allocating interest expense among activities so that the
•
•
•
limitations on passive activity losses, investment interest,
and personal interest can be properly figured. Generally,
interest expense is allocated in the same manner as debt is
allocated. Debt is allocated by tracing disbursements of the
debt proceeds to specific expenditures. Temporary
Regulations section 1.163-8T gives rules for tracing debt
proceeds to expenditures. Also see Proposed Regulations
1.163-14 for a special rule for allocating interest expense
with respect to pass-through entities.
Interest paid by a partnership to a partner for the use of
capital, which should be entered on line 10 as guaranteed
payments.
Prepaid interest, which can generally only be deducted over
the term of the debt. See section 461(g) and Regulations
sections 1.163-7, 1.446-2, and 1.1273-2(g) for details.
Interest that is allocable to unborrowed policy cash values of
life insurance, endowment, or annuity contracts issued after
June 8, 1997, when the partnership is a policyholder or
beneficiary. See section 264(f). Attach a statement showing
the computation of the deduction.
Instructions for Form 1065 (2025)
Limitation on deduction. Business interest expense deduction
is generally limited to the sum of business interest income, 30%
of the adjusted taxable income (ATI), and floor plan financing
interest. This limitation generally applies at the partnership level.
See section 163(j)(4) for additional information about the
application of the business interest expense limitation to
partnerships. See Form 8990, Limitation on Business Interest
Expense Under Section 163(j), and its instructions for more
information. BIE includes any interest expense properly allocable
to a trade or business. A small business taxpayer that isn’t a tax
shelter (as defined in section 448(d)(3)) and that meets the
gross receipts test isn’t required to limit BIE under section 163(j).
A taxpayer meets the gross receipts test if the taxpayer has
average annual gross receipts of $31 million or less for the 3
prior tax years under the gross receipts test of section 448(c).
Gross receipts include the aggregate gross receipts from all
persons treated as a single employer such as a controlled group
of corporations, commonly controlled partnerships or
proprietorships, and affiliated service groups. If the partnership
fails to meet the gross receipts test, Form 8990 is generally
required. Also see Schedule B, questions 23 and 24.
Line 16. Depreciation
On line 16a, enter only the depreciation claimed on assets used
in a trade or business activity. Enter on line 16b the depreciation
included elsewhere on the return (for example, on page 1, line 2)
that is attributable to assets used in trade or business activities.
See the Instructions for Form 4562, or Pub. 946, How To
Depreciate Property, to figure the amount of depreciation to
enter on this line.
Complete and attach Form 4562 only if the partnership
placed property in service during the tax year or claims
depreciation on any car or other listed property.
Don’t include any section 179 expense deduction on this line.
This amount isn’t deducted by the partnership. Instead, it’s
passed through to the partners in box 12 of Schedule K-1.
Generally, the basis of a partnership’s section 179 property must
be reduced to reflect the amount of section 179 expense elected
by the partnership. This reduction must be made in the basis of
partnership property even if the limitations of section 179(b) and
Regulations section 1.179-2 prevent a partner from deducting all
or a portion of the amount of the section 179 expense allocated
by the partnership.
Line 17. Depletion
If the partnership claims a deduction for timber depletion,
complete and attach Form T (Timber), Forest Activities
Schedule.
Caution: Don’t deduct depletion for oil and gas properties. Each
partner figures depletion on oil and gas properties. See the
instructions for Schedule K-1, box 20, Code T. Depletion
information—oil and gas, for the information on oil and gas
depletion that must be supplied to the partners by the
partnership.
Line 18. Retirement Plans, etc.
Don’t deduct payments for partners to retirement or deferred
compensation plans, including IRAs, qualified plans, and SEP
and SIMPLE IRA plans, on this line. These amounts are reported
in box 13 of Schedule K-1 using code R and are deducted by the
partners on their own returns.
Enter the deductible contributions not claimed elsewhere on
the return made by the partnership for its common-law
employees under a qualified pension, profit-sharing, annuity, or
SEP or SIMPLE IRA plan, and under any other deferred
compensation plan.
23
If the partnership contributes to an IRA for employees, include
the contribution in salaries and wages on page 1, line 9, or Form
1125-A, line 3, and not on line 18.
Employers who maintain a pension, profit-sharing, or other
funded deferred compensation plan (other than a SEP or
SIMPLE IRA), whether or not the plan is qualified under the
Code and whether or not a deduction is claimed for the current
year, must generally file the applicable form listed below.
• Form 5500, Annual Return/Report of Employee Benefit Plan.
• Form 5500-SF, Short Form Annual Return/Report of Small
Employee Benefit Plan (generally filed instead of Form 5500
if there are under 100 participants at the beginning of the
plan year).
Don’t deduct the following on line 21.
• Items that must be reported separately on Schedules K and
K-1.
• Fines or similar penalties. Generally, no deduction is allowed
Tip: Form 5500 and Form 5500-SF must be filed
electronically under the computerized ERISA Filing
Acceptance System (EFAST2). For more information, see
the EFAST2 website at EFAST.dol.gov.
• Form 5500-EZ, Annual Return of A One-Participant
(Owners/Partners and Their Spouses) Retirement Plan or A
Foreign Plan. File this form for a plan that only covers one or
more partners (or partners and their spouses) or a foreign
plan that is required to file an annual return and doesn’t file
the annual return electronically on Form 5500-SF.
•
•
•
Line 19. Employee Benefit Programs
Enter the partnership’s contributions to employee benefit
programs not claimed elsewhere on the return (for example,
insurance, health, and welfare programs) that aren’t part of a
pension, profit-sharing, etc., plan included on line 18.
Don’t include amounts paid during the tax year for insurance
that constitutes medical care for a partner, a partner’s spouse, a
partner’s dependents, or a partner’s children under age 27 who
aren’t dependents. Instead, include these amounts on line 10 as
guaranteed payments on the applicable line of Schedule K,
line 4, and the applicable line of box 4 of Schedule K-1, of each
partner on whose behalf the amounts were paid. Also report
these amounts on Schedule K, line 13e, and in box 13 of
Schedule K-1, using code M, of each partner on whose behalf
the amounts were paid.
Line 20. Energy Efficient Commercial Building
Deduction
Deduction for certain energy efficient commercial building
property. See the Instructions for Form 7205 and section 179D
for more information. Complete and attach Form 7205 if claiming
this deduction.
Line 21. Other Deductions
Enter the total allowable trade or business deductions that aren’t
deductible elsewhere on page 1 of Form 1065. Attach a
statement listing by type and amount each deduction included
on this line. Examples of other deductions include the following.
• Amortization. See the Instructions for Form 4562 for more
information. Complete and attach Form 4562 if the
partnership is claiming amortization of costs that began
during the tax year.
• Insurance premiums.
• Legal and professional fees.
• Supplies used and consumed in the business.
• Utilities.
• Certain business startup and organizational costs. See
Limitations on Deductions, earlier, for more details.
• Any net negative section 481(a) adjustment.
Also see Special Rules, later.
24
•
•
for fines or similar penalties paid or incurred to or at the
direction of a government or governmental entity for violating
any law except amounts that constitute restitution (including
remediation of property), amounts paid or incurred to come
into compliance with the law, amounts paid or incurred as
the result of orders or agreements in which no government
or governmental entity is a party, and amounts paid or
incurred for taxes due to the extent the amount would have
been allowed as a deduction if timely paid. No deduction is
allowed unless the amounts are specifically identified in the
order or agreement and the taxpayer establishes that the
amounts were paid for that purpose. Also, any amount paid
or incurred as reimbursement to the government for the
costs of any investigation or litigation aren’t eligible for the
exceptions and are nondeductible. See section 162(f).
Report nondeductible amounts on Schedule K, line 18c.
Expenses allocable to tax-exempt income. Report these
expenses on Schedule K, line 18c.
Net operating losses. Only individuals and corporations may
claim a net operating loss deduction.
Amounts paid or incurred to participate or intervene in any
political campaign on behalf of a candidate for public office,
or to influence the general public regarding legislative
matters, elections, or referendums. Report these expenses
on Schedule K, line 18c.
Lobbying expenses. Generally, lobbying expenses aren’t
deductible. These expenses include amounts paid or
incurred in connection with influencing federal, state, or local
legislation; or amounts paid or incurred in connection with
any communication with certain federal executive branch
officials in an attempt to influence the official actions or
positions of the officials. See Regulations section 1.162-29
for the definition of “influencing legislation.” Dues and other
similar amounts paid to certain tax-exempt organizations
may not be deductible. If certain in-house lobbying
expenditures don’t exceed $2,000, the general rule denying
deductions for lobbying expenses doesn’t apply to these
amounts. See section 162(e)(4)(B).
Amounts paid or incurred for any settlement or payout
related to sexual harassment or sexual abuse that is subject
to a nondisclosure agreement, as well as any attorney’s fees
related to the settlement or payout. See section 162(q).
Special Rules
Travel, meals, and entertainment. Subject to limitations and
restrictions discussed below, a partnership can deduct ordinary
and necessary travel and non-entertainment-related meal
expenses paid or incurred in its trade or business. Generally,
entertainment expenses, membership dues, and facilities used
in connection with these activities can’t be deducted. Also,
special rules apply to deductions for gifts, luxury water travel,
and convention expenses. See section 274 and Pub. 463 for
details.
Travel. The partnership can’t deduct travel expenses of any
individual accompanying a partner or partnership employee,
including a spouse or dependent of the partner or employee,
unless:
• That individual is an employee of the partnership, and
• The travel is for a bona fide business purpose and would
otherwise be deductible by that individual.
Meals. Generally, the partnership can deduct only 50% of the
amount otherwise allowable for non-entertainment meal
expenses paid or incurred in its trade or business.
Instructions for Form 1065 (2025)
Entertainment-related meals are generally disallowed. In
addition (subject to exceptions under section 274(k)(2)):
• Meals must not be lavish or extravagant, and
• A partner or employee of the partnership must be present at
the meal.
See section 274(n)(3) for a special rule that applies to
expenses for meals consumed by individuals subject to the
hours of service limits of the Department of Transportation.
Membership dues. The partnership may deduct amounts
paid or incurred for membership dues in civic or public service
organizations, professional organizations (such as bar and
medical associations), business leagues, trade associations,
chambers of commerce, boards of trade, and real estate boards.
However, no deduction is allowed if a principal purpose of the
organization is to entertain, or provide entertainment facilities for,
members or their guests. In addition, the partnership may not
deduct membership dues in any club organized for business,
pleasure, recreation, or other social purpose. This includes
country clubs, golf and athletic clubs, airline and hotel clubs, and
clubs operated to provide meals under conditions favorable to
business discussion.
Entertainment facilities. The partnership can’t deduct an
expense paid or incurred for a facility (such as a yacht or hunting
lodge) used for an activity usually considered entertainment,
amusement, or recreation.
Amounts treated as compensation. Generally, the
partnership may be able to deduct otherwise nondeductible
entertainment, amusement, or recreation expenses if the
amounts are treated as compensation to the recipient and
reported on Form W-2 for an employee or on Form 1099-NEC for
an independent contractor.
Reforestation expenditures. If the partnership made an
election to deduct a portion of its reforestation expenditures on
Schedule K, line 13e, it must amortize over an 84-month period
the portion of these expenditures in excess of the amount
deducted on Schedule K (see section 194). Deduct on line 21
only the amortization of these excess reforestation expenditures.
See Code S. Reforestation expense deduction, later.
Tax and Payment
The IRS recommends paying electronically whenever possible.
Options to pay electronically include using your bank account at
IRS.gov/DirectPay, your debit or credit card, your digital wallet, or
your IRS business account at IRS.gov/BusinessAccount. Go to
IRS.gov/Payments to see all your payment options.
Line 24. Interest due under the look-back method for completed long-term contracts. For partnerships that aren’t
closely held, attach Form 8697. If paying by check, make it
payable to “United States Treasury.” Enter the partnership’s EIN,
daytime phone number, and “Form 8697 Interest” on the check
or money order.
Line 25. Interest due under the look-back method for property depreciated under the income forecast method. For
partnerships that aren’t closely held, attach Form 8866. If paying
by check, make it payable to “United States Treasury.” Enter the
partnership’s EIN, daytime phone number, and “Form 8866
Int
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