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.

2 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

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).

Instructions for Form 1065 (2025) 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).