Limitations on Losses, Deductions, and Credits

There are potential limitations on partnership losses that you can deduct on your return. These limitations and the order in which you must apply them are as follows: the basis limitations, the at-risk limitations, the passive activity limitations, and the excess business loss limitations. These limitations are discussed below.

Other limitations may apply to specific deductions (for example, the section 179 expense deduction). Generally, specific limitations apply before the at-risk and passive loss limitations.

Basis Limitations Generally, a partner may only claim their share of a partnership loss (including a capital loss) to the extent it doesn’t exceed their adjusted basis in the partnership at the end of the partnership’s tax year. Any losses and deductions not allowed can be carried forward.

It’s the partner’s responsibility to track and maintain the information necessary to figure their adjusted basis in the partnership (also known as outside basis). Regulations section 1.705-1(a)(1) requires a partner to determine the adjusted basis in their partnership interest as necessary to determine their tax liability. For example, a determination is required when a partner sells or exchanges all or part of their partnership interest or when a partner’s entire partnership interest is liquidated. In general, a partner’s adjusted basis is determined under the principles of subchapter K, including sections 705, 722, 733, and 742.

Although the partnership provides an analysis of the partner’s capital account in item L of Schedule K-1, that information is based on the partnership’s books and records and can’t be used to figure the partner’s adjusted basis.

Use the Worksheet for Adjusting the Basis of a Partner’s Interest in the Partnership to figure the basis of your interest in the partnership.

For partnership tax years beginning after 2017, a partner’s share of the adjusted basis in partnership charitable contributions (defined in section 170(c)) and taxes, described in section 901, paid or accrued to foreign countries and to U.S. territories is subject to this basis limitation (defined in section 704(d)).

Partnership Basis Worksheet Specific Instructions There may be some transactions or certain distributions that require you to determine the adjusted basis of your partnership interest at the point in time of the transaction or distribution rather than in the order and amounts specified in these instructions.

Part I—Partner Basis

Line 1. Enter your adjusted basis at the beginning of the partnership’s tax year. This will equal your adjusted basis at the end of the prior year. Basis can’t be less than zero.

Section A—Increases

Line 2. Enter the purchase price of any partnership interests acquired during the year plus the amount of money or cash equivalents contributed to the partnership and the adjusted basis of property contributed to the partnership minus any liabilities associated with the property. If liabilities associated with the property are greater than your adjusted basis in the property, then include the excess liabilities as liabilities assumed by the partnership on line 9b. Include the fair market value (FMV) of any partnership interests received in exchange for services provided to the partnership, to the extent the FMV was included in your taxable income. Don’t include the FMV of services performed in exchange for guaranteed payments.

Line 3a. Enter the total ending liabilities from your Schedule K-1, item K1.

Line 3b. Enter the total beginning liabilities from your Schedule K-1, item K1.

Line 3c. Subtract line 3b from line 3a.

Line 3d. Enter the amount of partnership liabilities you assumed during the tax year. See Regulations section 1.752-1(d).

Line 3e. Add lines 3c and 3d. If the sum is negative, enter the amount on line 9a. If the sum is zero or positive, enter the amount on line 3e.

Line 4. Enter on lines 4a through 4n all separately figured and non-separately figured items of income from Schedule K-1. See below for special line item instructions.

Note: Enter only positive amounts from Schedule K-1 on line 4. Negative amounts (decreases to basis) are entered on lines 8 through 10.

Line 4d. Reduce interest income reported on this line by any amount included in interest income with respect to the credit to holders of clean renewable energy bonds.

Partner's Inst. for Sch. K-1 (Form 1065) (2025) 3

Line 4n. Enter the business interest expense (BIE) reported in box 20, code N, of Schedule K-1, or the amount by which BIE reduced positive ordinary income amounts in box 1, 2, or 3 of Schedule K-1, if less.

Line 4o. Enter the sum of the amounts on lines 4a through 4n.

Line 5. Enter any gain recognized on contributions of property during the year. For example, a contribution to a partnership which would be treated as an investment company if it were incorporated would be subject to gain and that gain increases basis. Don’t include gain from the transfer of liabilities.

Line 6. Enter the amount by which your cumulative depletion deduction (other than oil and gas depletion) exceeds your proportionate share of basis in the property subject to depletion.

Line 7. Add lines 1, 2, 3e, 4o, 5, and 6.

Section B—Decreases

Line 8a. Enter the cash and adjusted basis of marketable securities distributed to you by the partnership. Information concerning the basis of marketable securities is provided in statements attached to box 19, codes A and F, of Schedule K-1.

Line 8b. Enter the property distributed subject to recognition of precontribution gain under section 737 as reported in box 19, code B, of Schedule K-1. Don’t include the amount of property distributions included in your taxable income.

Line 8c. Enter the partnership’s adjusted basis in the property distributed or, if less, your remaining outside basis assigned to the property. See Pub. 541.

Line 8d. Add lines 8a, 8b, and 8c.

Line 9a. If the sum of lines 3c and 3d is negative, enter the amount here; otherwise, enter zero.

Line 9b. Enter the amount of your individual liabilities that the partnership assumed during the tax year.

Line 9c. Add lines 9a and 9b.

Line 10. Add lines 8d and 9c.

Line 11a. Add lines 7 and 10. If the amount is negative, enter zero on line 11a; otherwise, enter the positive amount on line 11b.

Line 11b. See the instructions for line 11a. The amount reported on this line represents a taxable gain on distributions in excess of basis. Report the gain on your tax return.

Part II—Allowable Loss and Deduction Items

A partner’s distributive share of partnership losses and deduction items in a given tax year is only allowed to the extent of the partner’s adjusted basis in their partnership interest following the adjustments described in Part I. When basis is insufficient, and there is more than one category of loss or deduction items (for example, short-term capital loss and long-term capital loss) that reduces basis, the amount of each category of loss or

deduction item that’s disallowed is determined on a pro rata basis.

A partner’s loss and deduction items in excess of basis are suspended and carried forward for use in the next tax year in which the partner has adjusted basis in their partnership interest available. For more information, see Regulations section 1.704-1(d).