IRS Instruction 1065 (Schedule K-1)

IRS Instruction 1065 (Schedule K-1) – If you’re a partner in a partnership, LLC taxed as a partnership, or similar entity, you’ll likely receive a Schedule K-1 (Form 1065). This form reports your distributive share of the partnership’s income, losses, deductions, credits, and other items. The official Partner’s Instructions for Schedule K-1 (Form 1065)—available as a free PDF from the IRS—helps you correctly report these amounts on your individual tax return (Form 1040 or 1040-SR).

This comprehensive, SEO-optimized guide for tax year 2025 breaks down the form, key boxes, reporting rules, limitations, recent changes from legislation like the One Big Beautiful Bill Act (P.L. 119-21), and practical tips. Always consult a tax professional or the latest IRS instructions, as this is for informational purposes only. Download the official instructions here: https://www.irs.gov/pub/irs-pdf/i1065sk1.pdf.

What Is Schedule K-1 (Form 1065) and Who Receives It?

Partnerships (including multi-member LLCs) file Form 1065 and issue a Schedule K-1 to each partner. The K-1 shows your share of:

  • Income and losses
  • Deductions
  • Credits
  • Distributions
  • Other items (e.g., Section 199A information for the qualified business income deduction)

You do not file the K-1 with your return unless required (e.g., certain backup withholding or elections). Keep it for your records and use the information to complete your Form 1040. Partnerships must generally furnish K-1s by the Form 1065 due date (March 15, 2026, for calendar-year partnerships, or the 15th day of the third month after the tax year ends).

Partners include general partners, limited partners, and members of LLCs classified as partnerships. Nominees and certain estates/trusts also follow special rules.

Key Changes for Tax Year 2025

The 2025 instructions reflect updates from recent legislation and clarifications:

  • Box 13, Code X — Expanded under P.L. 119-21 to include qualified sound recording production expenses (in addition to film, television, and theatrical productions) under Section 181.
  • Box 19 (Distributions) — Updated coding for separate categories of distributions (e.g., cash/marketable securities, property, deemed distributions). Partnerships now provide more detailed breakdowns.
  • Box 20, Code ZZ — New for gains from the sale or exchange of qualified farmland property to qualified farmers. For tax years beginning after July 4, 2025, eligible partners can elect under new Section 1062 to pay the tax in four equal annual installments.
  • Form 7217 — Required for partners receiving property distributions (subject to Section 732) starting in 2024. File a separate form for each distribution date (exceptions for money or marketable securities).
  • Other updates include clarifications on capital account reporting (tax basis method) and various credits/deductions.

Check IRS.gov/Form1065 for future developments.

Structure of Schedule K-1: Parts I, II, and III

Part I: Information About the Partnership
Includes the partnership’s EIN, name, address, filing location, and whether it’s a publicly traded partnership (PTP).

Part II: Information About the Partner
Your identifying information, partner type (general/limited), profit/loss/capital sharing percentages, and capital account analysis (now primarily on tax basis). Box L shows beginning and ending capital accounts.

Part III: Partner’s Share of Current Year Income, Deductions, Credits, and Other Items
The core section with Boxes 1–21 (plus 22–23 for activity grouping). Amounts are your share before personal limitations.

Box-by-Box Guide to Key Items on Schedule K-1 (Form 1065)

Here are the most common and important boxes (codes are listed in the official instructions at the end of the PDF):

  • Box 1: Ordinary Business Income (Loss) → Your share of trade or business income. Report on Schedule E (Form 1040), Part II. Subject to passive activity rules unless you materially participate.
  • Box 2: Net Rental Real Estate Income (Loss) → Generally passive; report on Schedule E.
  • Box 3: Other Net Rental Income (Loss) → Report on Schedule E.
  • Box 4: Guaranteed Payments → Often reported on Schedule E; may be subject to self-employment tax.
  • Boxes 5–7: Interest, Dividends, Royalties → Report on Schedule B or E as appropriate.
  • Boxes 8–10: Capital Gains/Losses and Section 1231 → Schedule D and Form 4797.
  • Box 11: Other Income (Loss) → Uses codes (e.g., Code A: Portfolio income; Code E: Cancellation of debt; Code ZZ: Other).
  • Box 12: Section 179 Deduction → Report on Form 4562; subject to limitations.
  • Box 13: Other Deductions → Many codes, including charitable contributions (Codes A–G with different AGI limits), investment interest (H), medical insurance (M), and Code X (qualified production expenses).
  • Box 14: Self-Employment Earnings → Use for Schedule SE (self-employment tax).
  • Box 15: Credits → Numerous codes for credits like low-income housing, research, clean energy/vehicle credits, etc. Many flow to Form 3800.
  • Box 19: Distributions → Cash, property, or deemed distributions. Reduce your basis; excess may trigger gain. Use updated codes and file Form 7217 for property distributions.
  • Box 20: Other Information → Critical codes include Code Z (Section 199A/QBI information), Code N (business interest expense), Code ZZ (new farmland gain election), and others for basis adjustments, recapture, net investment income, etc.
  • Box 21: Foreign Taxes → Use with Schedule K-3 for foreign tax credits.

For the complete list of codes, refer to the “List of Codes” section in the IRS instructions.

Critical Limitations on Losses, Deductions, and Credits

You cannot always deduct the full amount shown on your K-1. Apply these in order:

  1. Basis Limitations (Section 704(d)) — Losses limited to your adjusted basis in the partnership (contributions + income + liabilities – distributions – prior losses). Use the IRS basis worksheet in the instructions.
  2. At-Risk Limitations (Section 465) — Further limited to amounts you have “at risk” (e.g., cash, recourse debt). Use Form 6198.
  3. Passive Activity Limitations (Section 469) — Passive losses (e.g., rentals or limited partner interests) generally offset only passive income. Use Form 8582. Real estate professionals may qualify for exceptions; PTPs are tracked separately.
  4. Excess Business Loss Limitation (Section 461(l)) — Additional limit reported via Form 461.

Suspended losses carry forward. Track your basis annually to avoid errors.

How to Report Schedule K-1 on Your 2025 Form 1040?

  • Ordinary income/loss (Box 1) → Schedule E, Part II.
  • Rental income → Schedule E.
  • Capital gains → Schedule D / Form 4797.
  • Interest/dividends → Schedule B.
  • Self-employment → Schedule SE.
  • Section 199A (QBI) Deduction → Use information from Box 20, Code Z on Form 8995 (simplified) or Form 8995-A. Up to 20% deduction on qualified business income, subject to wage and property limits (thresholds adjusted annually).
  • Credits → Form 3800 or specific credit forms.
  • Distributions → Adjust basis; report gain if they exceed basis.

Tax software often imports K-1 data, but verify accuracy.

Qualified Business Income (QBI) Deduction and Other Special Topics

Box 20, Code Z provides details for the Section 199A deduction, including QBI, W-2 wages, UBIA of qualified property, and REIT/PTP components. This deduction can significantly reduce taxable income for eligible partners.

Other topics covered in the instructions:

  • International transactions (Box 16 triggers Schedule K-3).
  • Alternative Minimum Tax (AMT) items (Box 17).
  • Net Investment Income Tax (Box 20, Code Y).
  • Section 1061 (3-year holding period for certain carried interests).

Common Mistakes and Pro Tips

  • Not applying limitations correctly — Always calculate basis, at-risk, and passive rules in order.
  • Ignoring distributions — They reduce basis and can trigger taxable gain.
  • Failing to file Form 7217 for property distributions.
  • Inconsistent treatment — File Form 8082 if you disagree with the partnership’s reporting (under BBA rules).
  • Recordkeeping — Maintain detailed basis schedules every year.
  • Amendments — If the partnership issues a corrected K-1, amend your return if needed.

Review your K-1 promptly and contact the partnership for corrections.

Final Thoughts and Resources

Understanding your Schedule K-1 (Form 1065) is essential for accurate tax filing and avoiding penalties or audits. The 2025 instructions incorporate important updates from recent tax law changes, so use the latest version.

Official Resources:

This guide is based on the official 2025 IRS Partner’s Instructions for Schedule K-1 (Form 1065) and related publications as of early 2026. Tax laws can change—verify with the IRS for your specific situation. Proper handling of your K-1 can optimize your tax outcome and ensure compliance.