Schedule L. Balance Sheets per Books

Tip: Schedules L, M-1, and M-2 aren’t required to be completed if the partnership answered “Yes” to question 4 in Schedule B.

Note: Lines that aren’t discussed are self-explanatory.

The balance sheets should agree with the partnership’s books and records. Attach a statement explaining any differences. There are additional requirements for completing Schedule L for partnerships that are required to file Schedule M-3 (see the Instructions for Schedule M-3 (Form 1065) for details).

Partnerships reporting to the Interstate Commerce Commission (ICC) or to any national, state, municipal, or other public officer may send copies of their balance sheets prescribed by the ICC or national, state, or municipal authorities, as of the beginning and end of the tax year, instead of completing Schedule L. However, statements filed under this procedure must contain sufficient information to enable the IRS to reconstruct a balance sheet similar to that contained on Form 1065 without contacting the partnership during processing.

All amounts on the balance sheet should be reported in U.S. dollars. If the partnership’s books and records are kept in a foreign currency, the balance sheet should be translated in accordance with U.S. generally accepted accounting principles (GAAP).

Exception. If the partnership or any qualified business unit of the partnership uses the U.S. dollar approximate separate transactions method, Schedule L should reflect the tax balance sheet prepared and translated into U.S. dollars according to Regulations section 1.985-3(d), and not a U.S. GAAP balance sheet.

Partnerships Required To File Schedule M-3 For partnerships required to file Schedule M-3, the amounts reported on Schedule L must be amounts from financial statements used to complete Schedule M-3. If the partnership prepares non-tax-basis financial statements, Schedule M-3 and Schedule L must report non-tax-basis financial statement amounts. If the partnership doesn’t prepare non-tax-basis financial statements, Schedule L must be based on the partnership’s books and records and may show tax-basis balance sheet amounts if the partnership’s books and records reflect only tax-basis amounts.

Line 5. Tax-Exempt Securities Include on this line:

• State and local government obligations, the interest on which is excludable from gross income under section 103(a); and

• Stock in a mutual fund or other RIC that distributed exempt-interest dividends during the tax year of the partnership.

Line 7a. Loans to Partners (or Persons Related to Partners) Include on this line loans to partners or persons related to partners. Persons are related if they have a relationship specified in section 267(b) or 707(b). Amounts included here shouldn’t be included elsewhere on lines 1 through 13.

Line 14. Total Assets Generally, total assets at the beginning of the year (column (b) of Schedule L, line 14) must equal total assets at the close of the

prior tax year (column (d) of Schedule L, line 14). If total assets at the beginning of the year don’t equal total assets at the close of the prior year, attach a statement explaining the difference.

For purposes of measuring total assets at the end of the year, the partnership’s assets may not be netted against or reduced by partnership liabilities. In addition, asset amounts may not be reported as a negative number. If the partnership has an interest in another partnership and uses a tax-basis method for Schedule L, it must show as an asset the adjusted basis of its interest in the other partnership and separately show as a liability its share of the other partnership’s liabilities (which are included in the computation of its adjusted basis). See the Partner’s Instructions for Schedule K-1 (Form 1065) for details on how to figure the adjusted basis of a partnership interest. If Schedule L is non-tax-basis, investment in a partnership may be shown as appropriate under the non-tax-basis accounting method of the partnership including, if required by the non-tax-basis accounting method of the partnership, the equity method of accounting for investments, but must be shown as a non-negative amount.

Example. Partnership A prepares a tax-basis Schedule L and is a general partner in Partnership B, a general partnership. Partnership A’s adjusted basis in Partnership B at the end of the year is $16 million. Partnership A’s share of Partnership B’s liabilities is $20 million, which is included in the $16 million adjusted basis amount. On its Schedule L, Partnership A must report $16 million on line 8 as the amount of its investment asset in Partnership B and report on line 20 its $20 million share of Partnership B’s liabilities. These amounts can’t be netted on Schedule L.

Line 18. All Nonrecourse Loans Nonrecourse loans are those liabilities of the partnership for which no partner bears the economic risk of loss. If the partnership’s nonrecourse liabilities include its share of the liabilities of another partnership, the partnership’s share of those liabilities must be reflected on line 18.

Line 19a. Loans From Partners (or Persons Related to Partners) Include on this line loans from partners or persons related to partners. Persons are related if they have a relationship specified in section 267(b) or 707(b). Amounts included here shouldn’t be included elsewhere on lines 15 through 21.

Line 20. Other Liabilities A partnership that is a partner in a tiered partnership must include as a liability on line 20 the partner’s share of the tiered partnership’s liabilities to the extent they are recourse liabilities to the partner.