Schedules K — Instruction 1065 — Instructions for Form

Purpose of Schedules Although the partnership isn’t subject to income tax, the partners are liable for tax on their shares of the partnership income, whether or not distributed, and must include their shares on their tax returns.

Schedule K. Schedule K is a summary schedule of all the partners’ shares of the partnership’s income, credits, deductions, etc. All partnerships must complete Schedule K. Rental activity income (loss) and portfolio income aren’t reported on page 1 of Form 1065. These amounts aren’t combined with the trade or business activity income (loss) reported on page 1. Schedule K is used to report the totals of these and other amounts reported on page 1.

Schedule K-1. Schedule K-1 shows each partner’s separate share. Attach a copy of each Schedule K-1 to the Form 1065 filed with the IRS. Keep a copy with a copy of the partnership return as a part of the partnership’s records and furnish a copy to each partner. If the partner is a DE, furnish the Schedule K-1 to the DE partner. If a partnership interest is held by a nominee on behalf of another person, the partnership may be required to furnish Schedule K-1 to the nominee. See Temporary Regulations sections 1.6031(b)-1T and 1.6031(c)-1T for more information.

Give each partner a copy of either the Partner’s Instructions for Schedule K-1 (Form 1065) or specific instructions for each item reported on the partner’s Schedule K-1.

Substitute Forms The partnership doesn’t need IRS approval to use a substitute Schedule K-1 if it’s an exact copy of the IRS schedule. The boxes must use the same numbers and titles and must be in the same order and format as on the comparable IRS Schedule K-1. The substitute schedule must include the OMB number. The partnership must provide each partner with the Partner’s Instructions for Schedule K-1 (Form 1065) or other prepared

specific instructions for each item reported on the partner’s Schedule K-1.

The partnership must request IRS approval to use other substitute Schedules K-1. To request approval, write to:

Internal Revenue Service Attention: Substitute Forms Program SE:W:CAR:MP:P:TP:TP ATSC 4800 Buford Highway Mail Stop 061-N Chamblee, GA 30341 substituteforms@irs.gov

Each partner’s information must be on a separate sheet of paper. Therefore, separate all continuously printed substitutes before you file them with the IRS.

The partnership may be subject to a penalty if it files Schedules K-1 that don’t conform to the specifications discussed in Pub. 1167, General Rules and Specifications for Substitute Forms and Schedules.

How Income Is Shared Among Partners Allocate shares of income, gain, loss, deduction, or credit among the partners according to the partnership agreement for sharing income or loss generally. Partners may agree to allocate specific items in a ratio different from the ratio for sharing income or loss. For instance, if the net income exclusive of specially allocated items is divided evenly among three partners but some special items are allocated 50% to one, 30% to another, and 20% to the third partner, report the specially allocated items on the appropriate line of the applicable partner’s Schedule K-1 and the total on the appropriate line of Schedule K, instead of on the numbered lines on page 1 of Form 1065, Form 1125-A, or Schedule D (Form 1065).

If a partner’s interest changed during the year (such as the entrance of a new partner, the exit of a partner, an increase to a partner’s interest through an additional capital contribution, or a decrease in a partner’s interest through a distribution), see section 706(d) and Regulations section 1.706-4 before determining each partner’s distributive share of any item of income, gain, loss, and deduction, and other items. Partnership items are allocated to a partner only for the part of the year in which that person is a member of the partnership. Generally, for each change in a partner’s interest, the partnership will either allocate its items using a proration method or a closing-of-the-books method. Special rules apply to certain partnerships, certain variations, and certain items. See Regulations section 1.706-4 for additional rules and procedures for making elections. In addition, special rules in section 706(d) (2) apply to certain items of partnerships that report their income on the cash basis, and special rules in section 706(d)(3) apply to tiered partnerships.

Special rules on the allocation of income, gain, loss, and deductions generally apply if a partner contributes property to the partnership and the FMV of that property at the time of contribution differs from the contributing partner’s adjusted tax basis. Under these rules, the partnership must use a reasonable method of making allocations of income, gain, loss, and deductions from the property so that the contributing partner receives the tax burdens and benefits of any built-in gain or loss (that is, precontribution appreciation or diminution of value of the contributed property). See Regulations section 1.704-3 for details on how to make these allocations, including a description of specific allocation methods that are generally reasonable.

See Dispositions of Contributed Property, earlier, for special rules on the allocation of income, gain, loss, and deductions on

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the disposition of property contributed to the partnership by a partner.

If the partnership agreement doesn’t provide for the partner’s share of income, gain, loss, deduction, or credit, or if the allocation under the agreement doesn’t have substantial economic effect, the partner’s share is determined according to the partner’s interest in the partnership. See Regulations section 1.704-1 for more information.