Income — Instruction 1065 — Instructions for Form

Caution: Report only trade or business activity income on lines 1a through 8. Don’t report rental activity income or portfolio income on these lines. See Passive Activity Limitations , earlier, for definitions of “rental activity income” and “portfolio income.” Rental activity income and portfolio income are reported on Schedules K and K-1. Rental real estate activities are also reported on Form 8825.

Tax-exempt income. Don’t include any tax-exempt income on lines 1a through 8. A partnership that receives any tax-exempt income other than interest, or holds any property or engages in any activity that produces tax-exempt income, reports this income on Schedule K, line 18b, and in box 18 of Schedule K-1 using code B.

Report tax-exempt interest income, including exempt-interest dividends received as a shareholder in a mutual fund or other RIC, on Schedule K, line 18a, and in box 18 of Schedule K-1 using code A.

See Deductions , later, for information on how to report expenses related to tax-exempt income.

Line 1a. Gross Receipts or Sales Enter on line 1a gross receipts or sales from all trade or business operations, except for amounts that must be reported on lines 4 through 7. If a cost offset method under section 451(b) or (c) is used, the resulting gross income is reported on line 1a.

Special rules apply to certain income, as discussed below. For example, don’t include gross receipts from farming on line 1a. Instead, show the net profit (loss) from farming on line 5. Also, don’t include on line 1a rental activity income or portfolio income.

In general, advance payments are reported in the year of receipt. For exceptions to this general rule for partnerships that use the accrual method of accounting, see the following.

To report income from long-term contracts, see section 460.
For permissible methods that allow a limited deferral of advance payments beyond the current tax year, see section 451(c) and Regulations section 1.451-8.
For information on adopting or changing to a permissible method for reporting advance payment for goods and services by an accrual-method partnership, see the Instructions for Form 3115.

Installment sales. Generally, the installment method can’t be used for dealer dispositions of property. A dealer disposition is any disposition of:

Personal property by a person who regularly sells or otherwise disposes of personal property of the same type on the installment plan, or
Real property held for sale to customers in the ordinary course of the taxpayer’s trade or business.

Exception. These restrictions on using the installment method don’t apply to dispositions of property used or produced in a farming business or sales of timeshares and residential lots. However, if the partnership elects to report dealer dispositions of

timeshares and residential lots on the installment method, each partner’s tax liability must be increased by the partner’s distributive share of the interest payable under section 453(l)(3).

Include on line 1a the gross profit on collections from installment sales for any of the following.

Dealer dispositions of property before March 1, 1986.
Dispositions of property used or produced in the trade or business of farming.
Certain dispositions of timeshares and residential lots reported under the installment method.

Attach a statement showing the following information for the current year and the preceding 3 years.

Gross sales.
Cost of goods sold.
Gross profits.
Percentage of gross profits to gross sales.
Amount collected.
Gross profit on the amount collected.

Nonaccrual-experience method. Partnerships that qualify to use the nonaccrual-experience method (described earlier) should attach a statement showing total gross receipts, the amount not accrued as a result of the application of section 448(d)(5), and the net amount accrued. Include the net amount on line 1a.

Line 2. Cost of Goods Sold If the partnership has a cost of goods sold deduction, complete and attach Form 1125-A. Enter on Form 1065, page 1, line 2, the amount from Form 1125-A, line 8. See Form 1125-A and its instructions.

Line 4. Ordinary Income (Loss) From Other Partnerships, Estates, and Trusts Enter the ordinary income (loss) shown on Schedule K-1 (Form 1065) or Schedule K-1 (Form 1041), or other ordinary income (loss) from a foreign partnership, estate, or trust. Show the partnership’s, estate’s, or trust’s name, address, and EIN on a separate statement attached to this return. If the amount entered is from more than one source, identify the amount from each source.

Don’t include portfolio income or rental activity income (loss) from other partnerships, estates, or trusts on this line. Instead, report these amounts on Schedules K and K-1, or on Form 8825, line 22a, if the amount is from a rental real estate activity.

Ordinary income (loss) from another partnership that is a PTP isn’t reported on this line. Instead, report the amount separately on Schedule K, line 11, and in box 11 of Schedule K-1 using code ZZ.

Treat shares of other items separately reported on Schedule K-1 issued by the other entity as if the items were realized or incurred by this partnership.

If there’s a loss from another partnership, the amount of the loss that may be claimed is subject to the basis limitations as appropriate.

If the tax year of your partnership doesn’t coincide with the tax year of the other partnership, estate, or trust, include the ordinary income (loss) from the other entity in the tax year in which the other entity’s tax year ends.

Line 5. Net Farm Profit (Loss) Enter the partnership’s net farm profit (loss) from Schedule F (Form 1040). Attach Schedule F (Form 1040) to Form 1065. Don’t include on this line any farm profit (loss) from other partnerships. Report those amounts on line 4. In figuring the

Instructions for Form 1065 (2025) 19

partnership’s net farm profit (loss), don’t include any section 179 expense deduction; this amount must be separately stated.

Also report the partnership’s fishing income on this line.

For a special rule concerning the method of accounting for a farming partnership with a corporate partner and for other tax information on farms, see Pub. 225, Farmer’s Tax Guide.

Tip: Because the partner, and not the partnership, makes the election to deduct the expenses of raising any plant with a preproductive period of more than 2 years, farm partnerships that aren’t required to use an accrual method shouldn’t capitalize such expenses. Instead, state them separately on an attached statement to Schedule K, line 13e, and in box 13 of Schedule K-1 using code P. See section 263A(d) for more information.

Line 6. Net Gain (Loss) From Form 4797 Caution: Include only ordinary gains or losses from the sale, exchange, or involuntary conversion of assets used in a trade or business activity. Ordinary gains or losses from the sale, exchange, or involuntary conversion of rental activity assets are reported separately on Form 8825, line 21, or Schedule K, line 3c, and in box 3 of Schedule K-1, generally as a part of the net income (loss) from the rental activity.

A partnership that is a partner in another partnership must include on Form 4797 its share of ordinary gains (losses) from sales, exchanges, or involuntary conversions (other than casualties or thefts) of the other partnership’s trade or business assets.

Partnerships shouldn’t use Form 4797 to report the sale or other disposition of property if a section 179 expense deduction was previously passed through to any of its partners for that property. Instead, report it in box 20 of Schedule K-1 using code L. See Dispositions of property with section 179 deductions (code L) , later, for details.

Line 7. Other Income (Loss) Enter any other trade or business income (loss) not included on lines 1a through 6. List the type and amount of income on an attached statement. Examples of other income include the following.

Interest income derived in the ordinary course of the partnership’s trade or business, such as interest charged on receivable balances.
Recoveries of bad debts deducted in prior years under the specific charge-off method.
Taxable income from insurance proceeds.
Any amount included in income from Form 6478, Biofuel Producer Credit, line 2, if applicable.
Any amount included in income from Form 8864, line 9, if applicable.
The recapture amount under section 280F if the business use of listed property drops to 50% or less. To figure the recapture amount, complete Form 4797, Part IV.
All section 481 income adjustments resulting from changes in accounting methods. Show the computation of the section 481 adjustments on an attached statement.
Part or all of the proceeds received from certain employer-owned life insurance contracts issued after August 17, 2006. Partnerships that own one or more employer-owned life insurance contracts issued after that date must file Form 8925, Report of Employer-Owned Life Insurance Contracts. See section 101(j) for details.

Don’t include items requiring separate computations that must be reported on Schedules K and K-1. See the instructions for Schedules K and K-1, later.

Don’t report portfolio or rental activity income (loss) on this line.