# Instructions for Form 1065 > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/agency%3Airs%3A1b6920c00254729d ## Record - **Collection:** Agency decision - **Document type:** Agency decision ## Text 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. Photographs of Missing Children The Internal Revenue Service is a proud partner with the National Center for Missing & Exploited Children® (NCMEC). Photographs of missing children selected by the Center may appear in instructions on pages that would otherwise be blank. You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child. 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. ———————————————————————— 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). 3 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. 4 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. 5 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. 6 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. 7 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. 8 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 11 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. 15 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. I [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/agency%3Airs%3A1b6920c00254729d. Public record. Not legal advice.