Section 1061 Reporting Instructions

The instructions for owner taxpayer filing requirements and pass-through entity filing and reporting requirements are in accordance with Regulations section 1.1061-6. For more information, see Treasury Decision 9945, 2021-5, I.R.B. 627, available at IRS.gov/irb/2021-5_IRB#TD-9945, for specific rules and definitions.

A pass-through entity is required to attach Worksheet A to the API holder’s Schedule K-1 for tax returns filed after December 31, 2021, in which a pass-through entity applies the final regulations under Treasury Decision 9945. A pass-through entity means a partnership, trust, estate, S corporation described in Regulations section 1.1061-3(b) (2)(i), or a passive foreign investment company (PFIC) described in Regulations section 1.1061-3(b)(2)(ii). The pass-through entity must provide the information in Worksheet A to each API holder, including owner taxpayer, as an attachment to the Schedule K-1 for the applicable form, noting the proper box and code. For the 2025 Form 1065, it’s box 20, code AM. For the 2025 Form 1120-S, U.S.

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Income Tax Return for an S Corporation, it’s box 17, code ZZ. For the 2025 Form 1041, U.S. Income Tax Return for Estates and Trusts, it’s box 14, code ZZ.

See Regulations section 1.1061-6(c) for the section 1061 reporting rules of a RIC and a REIT. In the case of RICs and REITs, the information will be furnished in connection with the Form 1099-DIV, Dividends and Distributions.

Regulations section 1.1061-6(d) permits a PFIC with respect to which the shareholder is an API holder who has a qualified electing fund election (as described in section 1295(a)) in effect for the tax year to provide additional information to the shareholder to determine the amount of the shareholder’s inclusion that would be included in the Section 1061 Worksheet A: API 1-Year Distributive Share Amount and API 3-Year Distributive Share Amount. If the PFIC furnishes this information to the shareholder, the shareholder must retain a copy of this information along with the other information required to be retained under Regulations section 1.1295-1(f)(2)(ii).

A pass-through entity that is not required to and does not choose to apply the final regulations to tax returns filed after December 31, 2021, for a tax year beginning before January 19, 2021, must attach a worksheet to the API holder’s Schedule K-1 that contains similar information as Worksheet A and must disclose whether the information was determined under the proposed regulations or an- other method.

Calculation and Reporting for the API 1-Year Distributive Share Amount and 3-Year Distributive Share Amount by a Pass-Through Entity

• Section 1061 Worksheet A .

An owner taxpayer is the person who is subject to federal income tax on the recharacterization amount and could be an individual, estate, or trust. An owner taxpayer uses information provided by all the pass-through entities in which it holds an API, directly or indirectly, to determine the amount that is recharacterized as short-term capital gain under sections 1061(a) and (d) for a tax year. For tax returns filed after December 31, 2021, in which an owner taxpayer applies the final regulations under Treasury Decision 9945, Worksheet B must be used to determine the amount of the owner taxpayer’s recharacterization amount. Worksheet B, along with Table 1 and Table 2, are to be attached to the owner taxpayer’s tax return.

An owner taxpayer that is not required to and does not choose to apply the final regulations to tax returns filed after December 21, 2021, for a tax year beginning before January 19, 2021, must attach worksheets to its return that contain similar information as Worksheet B, Table 1,

and Table 2 and must disclose whether the information was determined under proposed regulations or another method.

Calculation and Reporting of Recharacterization Amount by the Owner Taxpayer

• Section 1061 Worksheet B .

• Section 1061 Table 1: API 1-Year Disposition Amount .

• Section 1061 Table 2: API 3-Year Disposition Amount .

An owner taxpayer reports long- and short-term API gains and losses on Schedule D (Form 1040) or Schedule D (Form 1041) and on Form 8949, Sales and Other Dispositions of Capital Assets, as if section 1061 does not apply. In addition, if the owner taxpayer has a recharacterization amount as computed on line 7 of Worksheet B, and/or any amounts resulting from the application of section 1061(d) (transfer of an API to a related person) on line 8 of Worksheet B (see Regulations section 1.1061-5(c)), the owner taxpayer will increase the reported short-term capital gain by listing as a transaction identified as “Section 1061 Adjustment” on Form 8949, Part I, line 1, column (a), and entering the amount from line 9 of Worksheet B as proceeds (column (d) of Form 8949) and zero as basis (column (e) of Form 8949). The owner taxpayer will make corresponding entries on Form 8949, Part II, line 1, to reduce the reported long-term capital gain by listing as a transaction identified as “Section 1061 Adjustment” in column (a) of Form 8949 and entering zero as proceeds (column (d) of Form 8949) and the amount from line 9 of Worksheet B as basis (column (e) of Form 8949).

Pending further guidance, if the owner taxpayer sells an API and recognizes collectibles gain or loss or unrecaptured section 1250 gain, or if a pass-through entity reports that collectibles gain or loss or unrecaptured section 1250 gain is treated as API gain or loss, the owner taxpayer must use a reasonable method to compute the amount of the inclusion of collectibles gain and/or unrecaptured section 1250 gain in the recharacterization amount that is calculated in Worksheet B. If the owner taxpayer has received an API 1-year distributive share amount and an API 3-year distributive share amount that includes collectibles gain or loss and/or unrecaptured section 1250 gain from a pass-through entity, the owner taxpayer should include those amounts on lines 1 and 4, respectively, of

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Worksheet B. If the owner taxpayer has received an API 1-year distributive share amount and an API 3-year distributive share amount that includes collectibles gain or loss and/or unrecaptured section 1250 gain from a pass-through entity, the owner taxpayer should include those amounts on lines 1 and 4, respectively, of Work- sheet B.

On line 10 of Worksheet B, the owner taxpayer must report the total amount of collectibles gains for the tax year that the owner taxpayer has with respect to any interest in a pass-through entity (pass-through interests) that it owns. It must also report the amount of collectibles gain that is recharacterized as short-term capital gain under section 1061 and the amount of collectibles gain that is not recharacterized and that is included in the 28% Rate Gain Worksheet (see line 18 of Schedule D (Form 1040) or line 18c of Schedule D (Form 1041)). Collectibles gain or loss that is API gain or loss and is included in the calculation of the recharacterization amount but not recharacterized must be included in the 28% Rate Gain Worksheet. Collectibles gain or loss with respect to a pass-through interest that is treated as capital interest gain or loss must also be included in the 28% Rate Gain Worksheet.

Similarly, on line 11 of Worksheet B, the owner taxpayer must report the total amount of unrecaptured section 1250 gain for the tax year that the owner taxpayer has with respect to any pass-through interests that it owns. It must also report the amount of unrecaptured section 1250 gain that is recharacterized as short-term capital gain under section 1061 and the amount of unrecaptured section 1250 gain that is not recharacterized and that is included in the Unrecaptured Section 1250 Gain Worksheet (see line 19 of Schedule D (Form 1040) or line 18b of Schedule D (Form 1041)). Unrecaptured section 1250 gain or loss that is API gain or loss and is included in the calculation of the recharacterization amount but not recharacterized must be included in the Unrecaptured Section 1250 Gain Worksheet. Unrecaptured section 1250 gain or loss with respect to a pass-through interest that is treated as capital interest gain or loss must also be included in the Unrecaptured Section 1250 Gain Worksheet.

Reporting example for Worksheets A and B. Owner Taxpayer M, an individual, holds an API in XYZ Partnership and receives a Schedule K-1 with Worksheet A at- tached from XYZ Partnership for the tax year 2024 that contains a long-term capital gain of $55,000 in box 9a of the Schedule K-1. Taxpayer M did not dispose of an API in 2024. The following is a summary of Worksheet A that XYZ Partnership attached to Taxpayer M’s Schedule K-1: line 4 has an API 1-year distributive share amount of $55,000 and line 7 has an API 3-year distributive share amount of $20,000.

Taxpayer M reports a $55,000 long-term capital gain from XYZ Partnership on Schedule D (Form 1040), line 12. Taxpayer M chose to follow the final regulations under Treasury Decision 9945 in preparation of their 2024 tax return and prepares and attaches Worksheet B to their Form 1040. Worksheet B has a 1-year gain amount on line 3 of $55,000, a 3-year gain amount of $20,000 on line 6, a recharacterization amount on line 7 of $35,000,

and a section 1061 adjustment on line 9 of $35,000. In addition to reporting the long-term capital gain of $55,000 on Schedule D (Form 1040), line 12, Taxpayer M reports on Form 8949, Part I, line 1, a short-term capital gain of $35,000, and on Part II, line 1, a long-term capital loss of ($35,000). Both Form 8949 items are described in column (a) as “Section 1061 Adjustment.”