Instructions for Form 1065, U.S. Return of Partnership Income Revision Date 01/14/2022

• Issuer: Treasury Department
• Section: Treasury Department

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2023

Instructions for Form 1065

U.S. Return of Partnership Income

Department of the Treasury

Internal Revenue Service

Section references are to the Internal Revenue Code unless

otherwise noted.

Contents Page

How To Get Forms and Publications ............. 3

General Instructions ......................... 3

Purpose of Form ......................... 3

Definitions ............................. 3

Who Must File .......................... 4

Termination of the Partnership ............... 5

Electronic Filing ......................... 5

When To File ........................... 6

Where To File .......................... 7

Who Must Sign ......................... 6

Penalties .............................. 7

Accounting Methods ..................... 7

Accounting Periods ...................... 8

Rounding Off to Whole Dollars .............. 9

Recordkeeping ......................... 9

Administrative Adjustment Request (AAR) ...... 9

Amended Return ........................ 9

Assembling the Return ................... 12

Entity Classification Election ............... 12

Elections Made by the Partnership .......... 12

Elections Made by Each Partner ............ 13

Partner’s Dealings With Partnership .......... 13

Contributions to the Partnership ............. 13

Dispositions of Contributed Property ......... 13

Recognition of Precontribution Gain on

Certain Partnership Distributions .......... 14

Unrealized Receivables and Inventory Items .... 14

At-Risk Limitations ...................... 14

Passive Activity Limitations ................ 14

Specific Instructions ........................ 19

Income .............................. 20

Deductions ........................... 21

Schedule B. Other Information .............. 26

Schedules K and K-1. Partners' Distributive

Share Items ......................... 31

Specific Instructions (Schedule K-1 Only) ...... 31

Part I. Information About the Partnership ....... 32

Part II. Information About the Partner ......... 32

Specific Instructions (Schedules K and K-1,

Part III, Except as Noted) ................ 35

Flowchart To Help Determine if Items Are

Qualified Business Income .............. 53

Analysis of Net Income (Loss) per Return ...... 58

Schedule L. Balance Sheets per Books ....... 58

Contents Page

Schedule M-1. Reconciliation of Income

(Loss) per Books With Analysis of Net

Income (Loss) per Return ............... 59

Schedule M-2. Analysis of Partners' Capital

Accounts ........................... 59

Codes for Principal Business Activity and Principal

Product or Service ...................... 63

Index ................................... 66

Future Developments

For the latest information about developments related to Form 1065

and its instructions, such as legislation enacted after they were

published, go to IRS.gov/Form1065.

What’s New

Electronically filed returns. Beginning January 1, 2024,

partnerships are required to file Form 1065 and related forms and

schedules electronically if they file 10 or more returns of any type

during the tax year, including information, income tax, employment

tax, and excise tax returns. Certain exceptions apply. See Electronic

Filing, later.

Qualified derivatives dealers (QDDs). Under the new qualified

intermediary agreement (QIA), if the partnership is, or has a branch

that is, a QDD, it must file Form 1065. See Qualified derivatives

dealers (QDDs), later, for more information.

Energy efficient commercial building deduction. Line 20 has

been changed from Other deductions to Energy efficient commercial

building deduction. See Line 20, later.

Elective payment election. Line 29 has been changed from

Amount owed to Elective payment election amount from Form 3800.

See Line 29, later.

Schedule B. Schedule B has multiple updates. First, question 10

was expanded and now includes 10d. See Questions 10a, 10b, 10c,

and 10d, later, for more information. Second, question 29 was

activated to request information on excise tax on repurchase of

corporate stock. See Question 29, later. Third, a new Question 30

was added to request information on digital assets. Fourth, the

previous question 30 has been renumbered to 31.

Schedule K-1 (Form 1065), item J. The checkbox under

Schedule K-1 (Form 1065), item J, was expanded to a box for sale

and a box for exchange. The instructions differentiate when each

should be checked; see Item J, for more information.

Schedule K-1 (Form 1065), items K2 and K3. Item K was

expanded to include an additional checkbox and each item given a

separate number. The instructions were separated to identify

information pertaining to each item and new instructions are

provided for the new item K3 checkbox to indicate whether the listed

liabilities are subject to guarantees or other payment obligations. For

more information, see Item K1, Item K2, and Item K3, later.

Schedule K, line 11. Line 11, Other income (loss) (code I),

previously included a number of bulleted items. These items have

been assigned individual codes for Schedule K, line 11, and box 11

of Schedule K-1. See Line 11. Other Income (Loss), later, for the

expanded list of codes.

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Schedule K, line 13. There are two major changes to line 13. First,

line 13a, Contributions, has been split into Line 13a. Cash

Contributions and Line 13b. Noncash Contributions. The

subsequent lines have been renumbered accordingly. Second, the

2022 line 13d, Other deductions (code W), included a number of

bulleted items. These items have been assigned individual codes for

Schedule K, line 13, and box 13 of Schedule K-1. See Line 13e.

Other Deductions, later, for the expanded list of codes.

Schedule K, line 15. Line 15f, Other credits (code P), previously

included a number of bulleted items. These items have been

assigned individual codes for Schedule K, line 15, and box 15 of

Schedule K-1. See Line 15f. Other Credits, later, for the expanded

list of codes and new energy credits.

Schedule K, line 20. Line 20c, Other information (code AH),

previously included a number of bulleted items. These items have

been assigned individual codes for Schedule K, line 20, and box 20

of Schedule K-1. See Line 20c. Other Items and Amounts, later, for

the expanded list of codes.

Schedule K, line 20c, code P. Instructions have been updated for

section 453A information required to be provided to partners.

Schedule K, line 20c, code X. Line 20c, code X, was previously

Reserved and has been activated to report payment obligations

including guarantees and deficit restoration obligations (DROs). See

line 20c, code X, later.

Reminders

Changes from the Inflation Reduction Act of 2022 (IRA 2022)

and the CHIPS Act of 2022 (CHIPS 2022). The following are

changes from the IRA 2022 (P.L. 117-169) and the CHIPS 2022 (P.L.

117-167).

•Advanced manufacturing investment credit for qualified

investment in an advanced manufacturing facility placed in service

after 2022. See section 48D and Form 3468 and its instructions for

more information.

•Increase in energy credit for solar and wind facilities placed in

service in connection with low-income communities, effective

January 1, 2023. See section 48(e) and Form 3468 and its

instructions for more information.

•Extension of incentives for biodiesel, renewable diesel, alternative

fuels, and sustainable aviation fuels for productions after 2021. See

Form 8864, Biodiesel, Renewable Diesel, or Sustainable Aviation

Fuels Credit, and its instructions. See sections 40A, 40B, 6426, and

6427.

•Credit for clean hydrogen produced after 2022. See section 45V

and Form 7210 and its instructions for more information.

•Credit for clean vehicles placed in service after 2022. See section

30D and Form 8936, Clean Vehicle Credit, and its instructions for

more information.

•Credit for qualified commercial clean vehicles for vehicles

acquired after 2022. See section 45W and Form 8936 and its

instructions for more information.

•Advanced manufacturing production credit for certain

components produced and sold after 2022. See Form 7207,

Advanced Manufacturing Production Credit, and its instructions. See

section 45X.

•Credit against payroll taxes for small businesses for increase in

research for tax years beginning after 2022. See section 41(h) and

Form 6765, Credit for Increasing Research Activities, and its

instructions for more information.

Schedule M-1. Reconciliation of Income (Loss) per Books With

Analysis of Net Income (Loss) per Return. The title of the

Schedule M-1 was changed to Reconciliation of Income (Loss) per

Books With Analysis of Net Income (Loss) per Return. There weren't

any changes to the Schedule M-1 line items. The change clarified

that Schedule M-1, line 9, isn't the taxable income of the partnership.

Instead, Schedule M-1, line 9, agrees with the Analysis of Net

Income (Loss) per Return, line 1. The Analysis of Net Income (Loss)

per Return, line 1, is a summary of various items reported on the

Schedule K and is used for reconciliation purposes.

Domestic partnerships treated as aggregates for purposes of

sections 951, 951A, and 956(a). Final regulations announced in

T.D. 9960 treat domestic partnerships as aggregates of their

partners for purposes of sections 951, 951A, and 956(a), and any

provision that specifically applies by reference to any of those

sections, for tax years of foreign corporations beginning on or after

January 25, 2022, and for tax years of U.S. persons in which or with

which such tax years of foreign corporations end. Domestic

partnerships may apply the final regulations to tax years of foreign

corporations beginning after December 31, 2017, and to tax years of

the domestic partnership in which or with which such tax years of the

foreign corporations end, provided certain consistency requirements

are met.

IRA partner disclosure. For IRA partners, the partnership reports

the employer identification number (EIN) of the IRA's custodian in

item E on the partner's Schedule K-1 (Form 1065). If the partnership

reports unrelated business taxable income (UBTI) to an IRA partner

on line 20, code V, the partnership must report the IRA's EIN on

line 20, code AR. See Items E and F and IRA disclosure (code AR),

later.

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How To Get Tax Help

If you have questions about a tax issue; need help preparing your tax

return; or want to download free publications, forms, or instructions,

go to IRS.gov to find resources that can help you right away.

Online tax information in other languages. You can find

information on IRS.gov/MyLanguage if English isn’t your native

language.

Free Over-the-Phone Interpreter (OPI) Service. The IRS is

committed to serving our multilingual customers by offering OPI

services. The OPI Service is a federally funded program and is

available at Taxpayer Assistance Centers (TACs), other IRS offices,

and every VITA/TCE return site. The OPI Service is accessible in

more than 350 languages.

Accessibility Helpline available for taxpayers with disabilities.

Taxpayers who need information about accessibility services can

call 833-690-0598. The Accessibility Helpline can answer questions

related to current and future accessibility products and services

available in alternative media formats (for example, braille, large

print, audio, etc.). The Accessibility Helpline doesn't have access to

your IRS account. For help with tax law, refunds, or account-related

issues, go to IRS.gov/LetUsHelp.

The Taxpayer Advocate Service (TAS) Is Here To

Help You

What Is TAS?

TAS is an independent organization within the IRS that helps

taxpayers and protects taxpayer rights. Their job is to ensure that

every taxpayer is treated fairly and that you know and understand

your rights under the Taxpayer Bill of Rights.

How Can You Learn About Your Taxpayer Rights?

The Taxpayer Bill of Rights describes 10 basic rights that all

taxpayers have when dealing with the IRS. Go to

TaxpayerAdvocate.IRS.gov to help you understand what these rights

mean to you and how they apply. These are your rights. Know them.

Use them.

2Instructions for Form 1065 (2023)

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What Can TAS Do for You?

TAS can help you resolve problems that you can’t resolve with the

IRS. And their service is free. If you qualify for their assistance, you

will be assigned to one advocate who will work with you throughout

the process and will do everything possible to resolve your issue.

TAS can help you if:

•Your problem is causing financial difficulty for you, your family, or

your business;

•You face (or your business is facing) an immediate threat of

adverse action; or

•You’ve tried repeatedly to contact the IRS but no one has

responded, or the IRS hasn’t responded by the date promised.

How Can You Reach TAS?

TAS has offices in every state, the District of Columbia, and Puerto

Rico. Your local advocate's number is in your local directory and at

TaxpayerAdvocate.IRS.gov/Contact-Us. You can also call them at

877-777-4778.

How Else Does TAS Help Taxpayers?

TAS works to resolve large-scale problems that affect many

taxpayers. If you know of one of these broad issues, report it to them

at IRS.gov/SAMS.

TAS for Tax Professionals

TAS can provide a variety of information for tax professionals,

including tax law updates and guidance, TAS programs, and ways to

let TAS know about systemic problems you’ve seen in your practice.

How To Get Forms and Publications

Internet. You can access the IRS website at IRS.gov 24 hours a

day, 7 days a week to:

•E-file your return—find out about commercial tax preparation and

e-file services available free to eligible taxpayers;

•Download forms, including talking tax forms, instructions, and

publications;

•Use the online Internal Revenue Code, regulations, or other

official guidance;

•Get information on starting and operating a small business;

•Order IRS products online;

•Research your tax questions online;

•Search publications online by topic or keyword;

•View Internal Revenue Bulletins (IRBs) published in the last few

years; and

•Sign up to receive local and national tax news by email.

Tax forms and publications. The partnership can download or

print all of the forms and publications it may need on IRS.gov/

FormsPubs. Otherwise, the partnership can go to IRS.gov/

OrderForms to place an order and have forms mailed to the

partnership. The IRS will process your order for forms and

publications as soon as possible.

General Instructions

Purpose of Form

Form 1065 is an information return used to report the income, gains,

losses, deductions, credits, and other information from the operation

of a partnership. Generally, a partnership doesn't pay tax on its

income but passes through any profits or losses to its partners.

Partners must include partnership items on their tax or information

returns.

Definitions

Centralized Partnership Audit Regime

The Bipartisan Budget Act of 2015 (BBA) created a new centralized

partnership audit regime effective for partnership tax years

beginning after 2017. The new audit regime replaces the

consolidated audit proceedings under the Tax Equity and Fiscal

Responsibility Act (TEFRA). The new audit regime applies to all

partnerships unless the partnership is an eligible partnership and

elects out by making a valid election using Schedule B-2 (Form

1065).

Electing out of the centralized partnership audit regime. See

Electing Out of the Centralized Partnership Audit Regime, later.

Adjustment year. An adjustment year is a tax year in which:

•In the case of an adjustment pursuant to the decision of a court in

a proceeding brought under section 6234, such decision becomes

final;

•In the case of an administrative adjustment request (AAR) under

section 6227, such AAR is filed; or

•In any other case, a notice of final partnership adjustment is

mailed under section 6231 or, if the partnership waives the

restrictions under section 6232(b) (regarding limitations on

assessments), the waiver is executed by the IRS.

Reviewed year. A reviewed year is a partnership’s tax year to which

a partnership adjustment relates.

Partnership

A partnership is the relationship between two or more persons who

join to carry on a trade or business, with each person contributing

money, property, labor, or skill and each expecting to share in the

profits and losses of the business whether or not a formal

partnership agreement is made.

The term “partnership” includes a limited partnership, syndicate,

group, pool, joint venture, or other unincorporated organization,

through or by which any business, financial operation, or venture is

carried on, that isn't, within the meaning of regulations under section

7701, a corporation, trust, estate, or sole proprietorship.

A joint undertaking merely to share expenses isn't a partnership.

Mere co-ownership of property that is maintained and leased or

rented isn't a partnership. However, if the co-owners provide

services to the tenants, a partnership exists.

Business owned and operated by spouses. Generally, if you and

your spouse jointly own and operate an unincorporated business

and share in the profits and losses, you're partners in a partnership

and you must file Form 1065.

Exception—qualified joint venture (QJV). If you and your

spouse materially participate as the only members of a jointly owned

and operated business, and you file a joint return for the tax year,

you can make an election to be treated as a QJV instead of a

partnership. By making the election, you won't be required to file

Form 1065 for any year the election is in effect and will instead report

the income and deductions directly on your joint return.

A QJV conducts a trade or business where the only members of

the joint venture are a married couple who file a joint return, both

spouses materially participate in the trade or business (because

mere joint ownership of property isn’t enough), both spouses elect

not to be treated as a partnership, and the business is co-owned by

both spouses and isn't held in the name of a state law entity such as

a partnership or limited liability company (LLC).

To make this election, you must divide all items of income, gain,

loss, deduction, and credit between you and your spouse in

accordance with your respective interests in the venture. Each of you

must file a separate Schedule C (Form 1040), Profit or Loss From

Business; or Schedule F (Form 1040), Profit or Loss From Farming.

On each line of your separate Schedule C or F (Form 1040), you

must enter your share of the applicable income, deduction, or loss.

Each of you must also file a separate Schedule SE (Form 1040),

Self-Employment Tax, to pay self-employment tax, as applicable.

Instructions for Form 1065 (2023) 3