IRS Form 1040-NR (Schedule P)

IRS Form 1040-NR (Schedule P) – In the complex world of U.S. taxation for nonresidents, IRS Form 1040-NR Schedule P plays a crucial role for those involved in partnerships with U.S. connections. This schedule helps foreign individuals, trusts, and estates report and calculate gains or losses from transferring interests in certain partnerships. Whether you’re a nonresident alien navigating U.S. tax obligations or a tax professional assisting international clients, understanding Schedule P is essential to ensure compliance and avoid penalties. This article breaks down the form’s purpose, filing requirements, and completion process using the latest IRS guidelines for tax year 2025.

What Is IRS Form 1040-NR Schedule P?

IRS Form 1040-NR Schedule P, officially titled “Foreign Partner’s Interests in Certain Partnerships Transferred During Tax Year,” is a supplemental schedule attached to Form 1040-NR, the U.S. Nonresident Alien Income Tax Return. It is designed to report transfers of partnership interests by nonresident aliens, foreign trusts, or foreign estates. The form focuses on partnerships that are either directly or indirectly engaged in a U.S. trade or business or hold U.S. real property interests, as defined under sections 864(c)(8) and 897(g) of the Internal Revenue Code.

Introduced to address gains or losses from such transfers, Schedule P ensures that foreign partners properly recognize and report income that may be effectively connected with U.S. activities. Transfers include sales, exchanges, dispositions, or distributions occurring on or after November 27, 2017. Failure to report these can lead to underreported income and potential audits.

For tax year 2025, the form is available on the IRS website, and its instructions are integrated into the broader guidance for Form 1040-NR. It’s particularly relevant for foreign investors in U.S.-based partnerships, such as real estate ventures or businesses operating in the U.S.

Who Needs to File Schedule P (Form 1040-NR)?

Not every nonresident needs to file Schedule P. You must complete and attach it to your Form 1040-NR if you are a nonresident alien, foreign trust, or foreign estate (referred to as the “transferor”) and you transferred an interest in a qualifying partnership during the tax year. Qualifying partnerships include:

  • Domestic or foreign limited liability partnerships (LLPs), limited liability companies (LLCs), or publicly traded partnerships treated as partnerships under section 7704(c)(1).
  • Entities engaged in a U.S. trade or business or holding U.S. real property interests.

Exceptions apply if no transfer occurred, or if a U.S. income tax treaty limits the gain to assets outside a U.S. permanent establishment. In such cases, you may need to file Form 8833 to disclose treaty positions or a protective return under Regulations section 1.874-1(b)(6). Disregarded entities are excluded from this definition.

If you’re e-filing, tax software will typically prompt you if Schedule P is required based on your inputs.

Key Components of Schedule P: Structure and Reporting

Schedule P is divided into two main parts to capture transfer details and perform calculations. You can report up to four transfers on one form; for more, attach additional sheets.

Part I: Information on Transferred Partnership Interests

This section requires detailed information about each transfer:

  • Partnership name, address, and Employer Identification Number (EIN).
  • Percentage of ownership or number of units transferred.
  • Date of acquisition and date of transfer.

Gather this from your records or partnership statements. If the partnership is foreign, ensure it meets the U.S. connection criteria.

Part II: Gain or Loss Computation

This is the core of the form, where you calculate the gain or loss. Use data from Schedule K-3 (Form 1065), Part XIII, and Schedule K-1 (Form 1065), box 20 (codes AC, AD, AB). If you haven’t received Schedule K-3, contact the partnership immediately.

Here’s a step-by-step overview of the key lines:

  • Line 1: Amount Realized – Sum of cash received, fair market value (FMV) of property received, liabilities assumed by the transferee, and any reduction in your share of partnership liabilities (for distributions).
  • Line 2: Outside Basis – Your adjusted basis in the transferred interest under section 705.
  • Line 3: Preliminary Gain/Loss – Subtract Line 2 from Line 1.
  • Lines 4-8: Ordinary Gain/Loss Portion – Allocate based on the partnership’s deemed sale of U.S. trade or business assets. Report the recognized ordinary amount on Form 4797, Part II, line 10.
  • Lines 5-9: Capital Gain/Loss Portion – The remaining amount after ordinary allocation. Report on Form 8949; for long-term, continue to lines 10-17.
  • Lines 10-17: Long-Term Capital Adjustments – Account for collectibles gain (section 1(h)(5)) and unrecaptured section 1250 gain (section 1(h)(6)) using codes from Schedule K-1 and K-3.
  • Line 18: U.S. Real Property Gain/Loss – If the partnership’s only deemed sale assets are U.S. real property interests under section 897(c)(1), report directly on Form 8949, 4797, or Schedule D.

Special considerations:

  • No net capital loss carryover is allowed.
  • Losses exceeding gains are not recognized.
  • For installment sales, use Form 6252.
  • Treaty protections may limit recognition—disclose via Form 8833.

Report the effectively connected portions on Form 1040-NR, and attach supporting forms like 8949 or 4797.

How to Calculate Gain or Loss on Partnership Interest Transfers?

The calculation treats the transfer as a deemed sale of partnership assets, ensuring foreign partners pay tax on U.S.-sourced gains.

  1. Determine Amount Realized (Line 1): Include all consideration received, valued at FMV.
  2. Calculate Adjusted Basis (Line 2): Start with your original cost, adjusted for contributions, distributions, and other basis-affecting items.
  3. Compute Preliminary Gain/Loss (Line 3): Simple subtraction.
  4. Allocate to Ordinary and Capital (Lines 4-9): Use partnership-provided data to split; ordinary goes to Form 4797, capital to Form 8949/Schedule D.
  5. Adjust for Special Gains (Lines 10-17): Apply rates for collectibles (up to 28%) or section 1250 (up to 25%).
  6. Handle Real Property (Line 18): Direct reporting if applicable.

Gains may be subject to withholding under section 1446, which can be credited on your Form 1040-NR. Consult a tax advisor for complex scenarios, as miscalculations can result in over- or underpayment.

Filing Tips and Common Mistakes to Avoid

  • Attach to Form 1040-NR: Place it with your return; e-file if possible for faster processing.
  • Recordkeeping: Keep copies of Schedule K-1, K-3, and basis calculations.
  • Deadlines: File by April 15, 2026, for tax year 2025, or request an extension with Form 4868.
  • Common Errors: Failing to request Schedule K-3, ignoring treaty benefits, or misallocating ordinary vs. capital gains.

If you’re unsure, use IRS resources or professional help. The form and instructions are available for download at IRS.gov.

Conclusion

IRS Form 1040-NR Schedule P ensures foreign partners comply with U.S. tax rules on partnership transfers, preventing untaxed gains from U.S. activities. By accurately reporting and calculating gains or losses, you can minimize tax liabilities and avoid IRS scrutiny. Always refer to the latest IRS instructions for updates, and consider consulting a tax expert familiar with international taxation. For the official PDF, visit https://www.irs.gov/pub/irs-pdf/f1040nrp.pdf. Stay informed to make your tax filing seamless.