Line 7 - Guaranteed Payments to Partners

Guaranteed payments to partners include:

• Payments for salaries, health insurance, and interest deducted by the partnership and reported on Form 1065-B, Part I, line 13; on a schedule attached to line 5, Part I; or on Form 8825; and
• Payments the partnership must capitalize. See the instructions for line 13 on page 14.

Report guaranteed payments to the partners receiving them in box 9 of Schedule K-1 using Code F.

Line 8 - Income From Discharge of Indebtedness

Income from the discharge of indebtedness is separately reported to each partner. In addition, the section 108 rules governing the income are the same as for other partnerships. Elections under section 108 are made by each partner separately.

Enter the income from discharge of indebtedness on line 8 of Schedule K and in box 9 of Schedule K-1 for each partner using Code G.

Line 9 - Tax-Exempt Interest Income

Enter on line 9 tax-exempt interest income, including any exempt-interest dividends received from a mutual fund or other regulated investment company. Individuals must report this amount on line 8b of Form 1040. The adjusted basis of the partner's interest is increased by the amount shown on this line under section 705(a)(1)(B). Report this amount to partners in box 9 of Schedule K-1 using Code H.

Line 10 - General Credits

The term general credits means any credit other than the low-income housing credit, the rehabilitation credit from rental real estate activities, the credit for producing fuel from a nonconventional source, and the foreign tax credit.

General credits are separately reported to partners as a single item. A partner's distributive share of general credits is taken into account as a current year general business credit. The tax liability limit for the general business credit is applied at the partner level.

Combine the following credits and report them under general credits on line 10.

• Credit for backup withholding on dividends, interest, and other types of income.
• Qualified electric vehicle credit (Form 8834).
• Unused credits from cooperatives.
• Investment credit (other than rehabilitation credits from rental real estate activities) (Form 3468).
• Work opportunity credit (Form 5884).
• Welfare-to-work credit (Form 8861).
• Credit for alcohol used as fuel (Form 6478).
• Credit for increasing research activities (Form 6765).
• Enhanced oil recovery credit (Form 8830).
• Disabled access credit (Form 8826).
• Renewable electricity production credit (Form 8835).
• Empowerment zone employment credit (Form 8844).
• Indian employment credit (Form 8845).
• Credit for employer social security and Medicare taxes paid on certain employee tips (Form 8846).
• Orphan drug credit (Form 8820).
• New markets credit (Form 8874).
• Credit for contributions to selected community development corporations (Form 8847).
• General credits from other electing large partnerships.

Exception: The refundable credit for Federal tax paid on fuels and the refund or credit for tax paid on undistributed capital gains of a regulated investment company or a real estate investment trust are allowed to the partnership. Thus, they are not separately reported to partners.

General credits are reported as a single figure on line 10 of Schedule K and are reported in box 7 of Schedule K-1 for limited partners. However, for general partners, credits allocable to passive loss limitation activities must be separately stated for each trade or business activity, rental real estate activity, and rental activity other than rental real estate. Provide this information to general partners in box 9 of Schedule K-1 using Codes A4, B4, and C4 so they can comply with section 469.

Lines 11 and 12

Section 42 provides a credit that may be claimed by owners of low-income residential rental buildings. If the partners are eligible to take the low-income housing credit, complete and attach Form 8586, Low-Income Housing Credit; Form 8609, Low-Income Housing Credit Allocation Certification; and Schedule A (Form 8609), Annual Statement, to Form 1065-B.

Report on line 11 the low-income housing credit for property placed in service after 1989.

Because the rehabilitation credit from rental real estate activities and low-income housing credit for property placed in service before 1990 that is attributable to additions to qualified basis of property are subject to the same passive activity rules, they are combined and reported on line 12. Complete and attach Form 8586 for the low-income housing credit. For the rehabilitation credit, complete the lines of Form 3468, Investment Credit, that apply to qualified rehabilitation expenditures for property related to rental real estate activities of the partnership. See Form 3468 for details on qualified rehabilitation expenditures. Attach Form 3468 to Form 1065-B.

Report amounts from line 11 in box 8 of Schedule K-1 for interests held as a limited partner. However, for interests held as a general partner, credits allocable to passive loss limitation activities must be separately stated for each rental real estate activity. Provide this information in box 9 of Schedule K-1 using Code B5 so general partners can comply with section 469.

For limited partners, report any low-income housing and rehabilitation credits from rental real estate activities reported on line 12 as a single rehabilitation credit in box 9 of Schedule K-1 using Code I. However, for general partners, credits allocable to passive loss limitation activities must be separately stated for each rental real estate activity. For general partners, combine low-income housing and rehabilitation credits reported on line 12 as a single rehabilitation credit and allocate it to partnership activities as explained above. Report this information in box 9 of Schedule K-1 using Code B6 so general partners can comply with section 469.

Note: Any rehabilitation credits from an activity other than a rental real estate activity are included in general credits reported on line 10 of Schedule K.

Line 13

The nonconventional source fuel credit is figured at the partnership level and then is apportioned to the partners based on their distributive shares of partnership income attributable to sales of qualified fuels. Attach a separate schedule to the return to show the computation of the credit. See section 29 for more information. For interests held as a limited partner, report each partner's share of the credit in box 9 of Schedule K-1 using Code J. However, for interests held as a general partner, credits allocable to passive loss limitation activities must be separately stated for each trade or business activity. Provide this information for general partners in box 9 of Schedule K-1 using Code A5 so they can comply with section 469.

Line 14 - Net Earnings From Self-Employment

General partners. General partners' net earnings (loss) from self-employment do not include:

• Dividends on any shares of stock and interest on any bonds, debentures, notes, etc., unless the dividend or interest income is received in the course of a trade or business, such as a dealer in stocks or securities or interest on notes or accounts receivable.
• Rentals from real estate, except rentals of real estate held for sale to customers in the course of a trade or business as a real estate dealer or payments for rooms or space when significant services are provided.
• Royalty income, except royalty income received in the course of a trade or business.

See the instructions for Schedule SE (Form 1040), Self-Employment Tax, for more information.

Limited partners. Generally, a limited partner's share of partnership income (loss) is not included in net earnings (loss) from self-employment. Limited partners treat as self-employment earnings only guaranteed payments for services they actually rendered to, or on behalf of, the partnership to the extent that those payments are payment for those services.

Schedule K. Enter on line 14a the amount from line 5 of the worksheet on page 27. On line 14b enter the amount of gross nonfarm income from self-employment.

Note: For purposes of self-employment tax, no income from an electing large partnership is treated as fishing or farming income.

Schedules K-1. Do not complete box 9 for any partner that is an estate, trust, corporation, exempt organization, or individual retirement arrangement (IRA).

Using Code K1, enter in box 9 of Schedule K-1 each individual general partner's share of the amount shown on line 5 of the worksheet on page 27 and each individual limited partner's share of the amount shown on line 4c of the worksheet. Enter the partner's share of gross nonfarm income in box 9 using Code K2. Worksheet for Figuring Net Earnings

Worksheet Instructions

Line 1b. Include on line 1b any part of the net income (loss) from rental real estate activities from Schedule K, line 1b(2) that is from:

1. Rentals of real estate held for sale to customers in the course of a trade or business as a real estate dealer, or
2. Rentals for which services were rendered to the occupants (other than services usually or customarily rendered for the rental of space for occupancy only). The supplying of maid service is such a service; but the furnishing of heat and light, the cleaning of public entrances, exits, stairways and lobbies, trash collection, etc., are not considered services rendered to the occupants.

Line 4a. Include in the amount on line 4a any guaranteed payments to partners reported on Schedule K, line 7, and derived from a trade or business as defined in section 1402(c). Also include other ordinary income and expense items reported on Schedules K and K-1 that are used to figure self-employment earnings under section 1402.

Line 15 - Foreign Tax Credit Information

Lines 15a through 15h must be completed if the partnership has foreign income, deductions, or losses or has paid or accrued foreign taxes. See Pub. 514, Foreign Tax Credit for Individuals, for more information.

Line 15a - Name of Foreign Country or U.S. Possession

Enter the name of the foreign country or U.S. possession from which the partnership had income or to which the partnership paid or accrued taxes. If the partnership had income from, or paid or accrued taxes to, more than one foreign country or U.S. possession, enter See attached and attach a schedule for each country for lines 15a through 15h.

Using Code L1, enter this information in box 9 of Schedule K-1 or on an attached schedule.

Line 15b - Gross Income From All Sources

Enter the partnership's gross income from all sources (both U.S. and foreign source).

Using Code L2, enter this information in box 9 of Schedule K-1 or on an attached schedule.

Line 15c - Gross Income Sourced at Partner Level

Enter the total gross income of the partnership that is required to be sourced at the partner level. This includes income from the sale of most personal property other than inventory, depreciable property, and certain intangible property. See Pub. 514 and section 865 for details. Attach a schedule showing the following information:

• The amount of this gross income (without regard to its source) in each category identified in the instructions for line 15d, including each of the listed categories.
• Specifically identify gains on the sale of personal property other than inventory, depreciable property, and certain intangible property on which a foreign tax of 10% or more was paid or accrued. Also list losses on the sale of such property if the foreign country would have imposed a 10% or higher tax had the sale resulted in a gain. See Sales or Exchanges of Certain Personal Property in Pub. 514 and section 865.
• Specify the net foreign source capital gain or loss within each separate limitation category shown below in the instructions for line 15d(2). Also, in the case of noncorporate partners, separately identify the net foreign source gain or loss within each separate limitation category that is 28% rate gain or loss, unrecaptured section 1250 gain, and qualified 5-year gain.

Using Code L3, enter this information in box 9 of Schedule K-1 or on an attached schedule.

Line 15d - Foreign Gross Income Sourced at Partnership Level

Separately report gross income from sources outside the United States by category of income as follows. For partnership and corporate partners only, attach a schedule identifying the total amount of foreign gross income in each category of income attributable to foreign branches. See Pub. 514 for information on the categories of income.

Line 15d(1). Passive foreign source income.

Using Code L4(a), enter this information in box 9 of Schedule K-1 or on an attached schedule.

Line 15d(2). Attach a schedule showing the amount of foreign source income included in each of the following listed categories of income:

• Financial services income;
• High withholding tax interest;
• Shipping income;
• Dividends from each noncontrolled section 902 corporation;
• Dividends from a DISC, a former DISC, an IC-DISC, or a former IC-DISC;
• Distributions from a foreign sales corporation (FSC) or a former FSC;
• Section 901(j) income; and
• Certain income re-sourced by treaty.

Using Code L4(b), enter this information in box 9 of Schedule K-1 or on an attached schedule.

Line 15d(3). General limitation foreign source income (all other foreign source income).

Using Code L4(c), enter this information in box 9 of Schedule K-1 or on an attached schedule.

Line 15e - Deductions Allocated and Apportioned at Partner Level

Enter on line 15e(1) the partnership's total interest expense (including interest equivalents under Temporary Regulations section 1.861-9T(b)). Do not include interest directly allocable under Temporary Regulations section 1.861-10T to income from a specific property. This type of interest is allocated and apportioned at the partnership level and is included on lines 15f(1) through (3).

Using Code L5, enter the total interest expense in box 9 of Schedule K-1 or on an attached schedule.

On line 15e(2), enter the total of all other deductions or losses that are required to be allocated at the partner level. For example, include on line 15e(2) research and experimental expenditures (see Regulations section 1.861-17(f)). Using Code L6, enter this information in box 9 of Schedule K-1 or on an attached schedule.

Line 15f - Deductions Allocated and Apportioned at Partnership Level to Foreign Source Income

Separately report partnership deductions that are apportioned at the partnership level to (1) passive foreign source income, (2) each of the listed foreign categories of income, and (3) general limitation foreign source income (see the instructions for line 15d). See Pub. 514 for more information.

For partnership and corporate partners only, attach a schedule identifying the total amount of deductions apportioned to each category of income shown in the instructions for line 15d that are attributable to foreign branches.

Using Code L7(a) for passive foreign source income, Code L7(b) for each listed foreign category of income, and Code L7(c) for the general limitation foreign source income, enter this information in box 9 of Schedule K-1 or on an attached schedule.

Line 15g - Total Foreign Taxes

Enter in U.S. dollars the total foreign taxes (described in section 901 or section 903) that were paid or accrued by the partnership (according to its method of accounting for such taxes). Translate these amounts into U.S. dollars by using the applicable exchange rate (see Pub. 514).

Attach a schedule reporting the following information:

1. The total amount of foreign taxes (including foreign taxes on income sourced at the partner level) relating to each category of income (see instructions for line 15d).
2. The dates on which the taxes were paid or accrued, the exchange rates used, and the amounts in both foreign currency and U.S. dollars, for:
   • Taxes withheld at source on interest.
   • Taxes withheld at source on dividends.
   • Taxes withheld at source on rents and royalties.
   • Other foreign taxes paid or accrued.

Using Code L8(a) for total foreign taxes paid, and Code L8(b) for total foreign taxes accrued, enter this information in box 9 of Schedule K-1 or on an attached schedule.

Line 15h - Reduction in Taxes Available for Credit

Attach a schedule showing the total reductions in taxes available for credit.

Separately show the reductions for:

• Taxes on foreign mineral income (section 901(e)).
• Taxes on foreign oil and gas extraction income (section 907(a)).
• Taxes attributable to boycott operations (section 908).
• Failure to timely file (or furnish all of the information required on) Forms 5471 and 8865.
• Any other items (specify).

Using Code L9 for reduction in taxes available for credit, enter this information in box 9 of Schedule K-1 or on an attached schedule.

Line 16

For line 16, attach a schedule listing other items and amounts required to be reported separately to partners. Enter each partner's share in box 9 or on an attached schedule to Schedule K-1. Examples of items to report include the following:

• Any information a partnership must separately report to its disqualified partners regarding its oil and gas activities. See Partnerships Holding Oil and Gas Properties on page 11 for more information. Enter this information as Code M in box 9 of Schedule K-1 or on an attached schedule.
• Other tax-exempt income. On the schedule for line 16, enter all income of the partnership exempt from tax other than tax-exempt interest income (e.g., life insurance proceeds). The adjusted basis of the partner's interest is increased by the amount shown on this line under section 705(a)(1)(B). Enter this amount as Code N1 in box 9 of Schedule K-1.
• Nondeductible expenses. Enter nondeductible expenses paid or incurred by the partnership. Do not include capital expenditures or items the deduction for which is deferred to a later tax year. The adjusted basis of the partner's interest is decreased by the amount shown on this line under section 705(a)(2)(B). Enter this amount as Code N2 in box 9 of Schedule K-1.
• Unrelated business taxable income. Any information a partner that is a tax-exempt organization may need to figure that partner's share of unrelated business taxable income under section 512(a)(1) (but excluding any modifications required by paragraphs (8) through (15) of section 512(b)). Partners are required to notify the partnership of their tax-exempt status. See Form 990-T, Exempt Organization Business Income Tax Return, for more information. Enter this amount as Code N3 in box 9 of Schedule K-1.
• Amounts paid during the tax year for health insurance coverage for a partner (including that partner's spouse and dependents). For 2001, a partner may be allowed to deduct up to 60% of such amounts on Form 1040, line 28. Enter this amount as Code N4 in box 9 of Schedule K-1.
• Distributions of money (cash and marketable securities). Enter the total distributions to each partner of cash and marketable securities that are treated as money under section 731(c)(1). Generally, marketable securities are valued at FMV on the date of distribution. However, the value of marketable securities does not include the distributee partner's share of the gain on the securities distributed to that partner. See section 731(c)(3)(B) for details. If this amount includes marketable securities treated as money, state separately on an attachment (a) the partnership's adjusted basis of those securities immediately before the distribution and (b) the FMV of those securities on the date of distribution (excluding the distributee partner's share of the gain on the securities distributed to that partner). Enter this information as Code N5 in box 9 of Schedule K-1 or on an attached schedule.
• Distributions of property other than money. Enter the total distributions of property other than money. In computing the amount of the distribution, use the adjusted basis of the property to the partnership immediately before the distribution. On an attachment also include the adjusted basis and FMV of each property distributed. Enter this information as Code N6 in box 9 of Schedule K-1 or on an attached schedule.
• Gain from the sale or exchange of qualified small business stock (as defined in the instructions for Schedule D) that is eligible for the 50% section 1202 exclusion. The section 1202 exclusion applies only to qualified small business stock issued after August 10, 1993, and held by the partnership for more than 5 years. Corporate partners are not eligible for the section 1202 exclusion. Additional limitations apply at the partner level. Report each partner's share of section 1202 gain with Code N7 in box 9 of Schedule K-1. Each partner will determine if he or she qualifies for the section 1202 exclusion. Report with Code N7 on an attachment to Schedule K-1 for each sale or exchange the name of the corporation that issued the stock, the partner's share of the partnership's adjusted basis and sales price of the stock, and the dates the stock was bought and sold.
• Gain eligible for section 1045 rollover (replacement stock purchased by the partnership). Include only gain from the sale or exchange of qualified small business stock (as defined in the instructions for Schedule D) that was deferred by the partnership under section 1045 and reported on Schedule D. See the instructions for Schedule D for more details. Corporate partners are not eligible for the section 1045 rollover. Additional limitations apply at the partner level. Report each partner's share of the gain eligible for section 1045 rollover with Code N8 in box 9 of Schedule K-1. Each partner will determine if he or she qualifies for the rollover. Report with Code N8 on an attachment to Schedule K-1 for each sale or exchange the name of the corporation that issued the stock, the partner's share of the partnership's adjusted basis and sales price of the stock, and the dates the stock was bought and sold.
• Gain eligible for section 1045 rollover (replacement stock not purchased by the partnership). Include only gain from the sale or exchange of qualified small business stock (as defined in the instructions for Schedule D) the partnership held for more than 6 months but that was not deferred by the partnership under section 1045. See the instructions for Schedule D for more details. A partner (other than a corporation) may be eligible to defer his or her distributive share of this gain under section 1045 if he or she purchases other qualified small business stock during the 60-day period that began on the date the stock was sold by the partnership. Additional limitations apply at the partner level. Report with Code N9 on an attachment to Schedule K-1 for each sale or exchange the name of the corporation that issued the stock, the partner's share of the partnership's adjusted basis and sales price of the stock, and the dates the stock was bought and sold.
• Unrecaptured section 1250 gain. Use the worksheet on page 30 to figure the unrecaptured section 1250 gain.
• Any information needed by a partner to figure the interest due under section 1260(b). If any portion of a constructive ownership transaction was open in any prior year, each partner's tax liability must be increased by the partner's pro rata share of interest due on any deferral of gain recognition. See section 1260(b) for details, including how to figure the interest.
• Extraterritorial income exclusion. See the instructions on page 12 for information that is required to be reported in box 9.
• Any other information a partner may need to file his or her return that is not shown elsewhere on Schedule K-1. Enter this information on an attachment to Schedule K-1.

Instructions for the Unrecaptured Section 1250 Gain Worksheet

Lines 1 Through 3. If the partnership had more than one property described on line 1, complete lines 1 through 3 for each property on a separate worksheet. Enter the total of the line 3 amounts for all properties on line 3 and go to line 4. Unrecaptured Section 1250 Worksheet

Line 4. The total unrecaptured section 1250 gain for an installment sale of property held more than 1 year is figured for the year of sale in a manner similar to that used to figure line 3 of the worksheet. However, the unrecaptured section 1250 gain must be allocated to the installment payments received from the sale. To do so, the partnership generally must treat the gain allocable to each installment payment as unrecaptured section 1250 gain until all such gain has been used in full. Figure the unrecaptured section 1250 gain for installment payments received during the tax year as the smaller of (a) the amount from line 26 or line 37 of Form 6252 (whichever applies) or (b) the total unrecaptured section 1250 gain for the sale reduced by all gain reported in prior years (excluding section 1250 ordinary income recapture). However, if the partnership chose not to treat all of the gain from payments received after May 6, 1997, and before August 24, 1999, as unrecaptured section 1250 gain, use only the amount the partnership chose to treat as unrecaptured section 1250 gain for those payments to reduce the total unrecaptured section 1250 gain remaining to be reported for the sale.

Box 9 Codes(Schedule K-1)

The following codes should be used to describe the information located in box 9.

• Code A1 - General partner's taxable income (loss) from trade or business activities.
• Code A2 - General partner's net capital gain (loss) from trade or business activities.
• Code A3 - General partner's 28% rate gain (loss) from trade or business activities.
• Code A4 - General partner's general credits from trade or business activities.
• Code A5 - General partner's nonconventional source fuel credit from trade or business activities.
• Code A6 - General partner's alternative minimum tax adjustment from trade or business activities.
• Code B1 - General partner's taxable income (loss) from rental real estate activities.
• Code B2 - General partner's net capital gain (loss) from rental real estate activities.
• Code B3 - General partner's 28% rate gain (loss) from rental real estate activities.
• Code B4 - General partner's general credits from rental real estate activities.
• Code B5 - General partner's low-income housing credit (for property placed in service after 1989) from rental real estate activities.
• Code B6 - General partner's rehabilitation credit from rental real estate activities.
• Code B7 - General partner's alternative minimum tax adjustment from rental real estate activities.
• Code C1 - General partner's taxable income (loss) from other rental activities.
• Code C2 - General partner's net capital gain (loss) from other rental activities.
• Code C3 - General partner's 28% rate gain (loss) from other rental activities.
• Code C4 - General partner's general credits from other rental activities.
• Code C5 - General partner's alternative minimum tax adjustment from other rental activities.
• Code D - 28% rate gain (loss) from passive activities.
• Code E - 28% rate gain (loss) from other activities.
• Code F - Guaranteed payments.
• Code G - Income from discharge of indebtedness.
• Code H - Tax-exempt interest income.
• Code I - Rehabilitation credit from rental real estate activities.
• Code J - Nonconventional source fuel credit.
• Code K1 - Net earnings (loss) from self-employment.
• Code K2 - Gross nonfarm income.
• Code L1 - Name of foreign country or U.S. possession.
• Code L2 - Gross income from all sources.
• Code L3 - Gross income sourced at partner level.
• Code L4(a) - Passive foreign source income.
• Code L4(b) - Listed foreign categories of income.
• Code L4(c) - General limitation foreign source income.
• Code L5 - Interest expense allocated and apportioned at the partner level.
• Code L6 - Other expenses allocated and apportioned at the partner level.
• Code L7(a) - Deductions allocated and apportioned at partnership level to passive foreign source income.
• Code L7(b) - Deductions allocated and apportioned at partnership level to listed foreign categories of income.
• Code L7(c) - Deductions allocated and apportioned at partnership level to general limitation foreign source income.
• Code L8(a) - Total foreign taxes paid.
• Code L8(b) - Total foreign taxes accrued.
• Code L9 - Reduction in taxes available for credit.
• Code M - Oil and gas activities.
• Code N1 - Other tax-exempt income.
• Code N2 - Nondeductible expenses.
• Code N3 - Unrelated business taxable income.
• Code N4 - Health insurance.
• Code N5 - Distributions of money (cash and marketable securities).
• Code N6 - Distributions of property other than money.
• Code N7 - Gain eligible for section 1202 exclusion.
• Code N8 - Gain eligible for section 1045 rollover-stock replaced.
• Code N9 - Gain eligible for section 1045 rollover-stock not replaced.
• Code O - Unrecaptured section 1250 gain.
• Code P1 - Foreign trading gross receipts.
• Code P2 - Extraterritorial income exclusion.
• Code Q - Qualified 5-year gain.

Analysis of Net Income (Loss)

For each type of partner shown, enter the portion of the amount shown on line 1 that was allocated to that type of partner. Report all amounts for limited liability company members on the line for limited partners. The sum of the amounts shown on line 2 must equal the amount shown on line 1. In addition, the amount on line 1 must equal the amount on line 9, Schedule M-1.

In classifying partners who are individuals as active or passive, the partnership should apply the rules below. In applying these rules, a partnership should classify each partner to the best of its knowledge and belief. It is assumed that in most cases the level of a particular partner's participation in an activity will be apparent:

1. If the partnership's principal activity is a trade or business, classify a general partner as active if the partner materially participated in all partnership trade or business activities; otherwise, classify a general partner as passive.
2. If the partnership's principal activity consists of a working interest in an oil or gas well, classify a general partner as active.
3. If the partnership's principal activity is a rental real estate activity, classify a general partner as active if the partner actively participated in all of the partnership's rental real estate activities; otherwise, classify a general partner as passive.
4. Classify as passive all partners in a partnership whose principal activity is a rental activity other than a rental real estate activity.
5. If the partnership's principal activity is a portfolio activity, classify all partners as active.
6. Classify as passive all limited partners and LLC members in a partnership whose principal activity is a trade or business or rental activity.
7. If the partnership cannot make a reasonable determination whether a partner's participation in a trade or business activity is material or whether a partner's participation in a rental real estate activity is active, classify the partner as passive.

Schedule L - Balance Sheet per Books

The balance sheets should agree with the partnership's books and records. Attach a statement explaining any differences.

Partnerships reporting to the Interstate Commerce Commission (ICC) or to any national, state, municipal, or other public officer may send copies of their balance sheets prescribed by the ICC or national, state, or municipal authorities, as of the beginning and end of the tax year, instead of completing Schedule L. However, statements filed under this procedure must contain sufficient information to enable the IRS to reconstruct a balance sheet similar to that contained on Form 1065-B without contacting the partnership during processing.

All amounts on the balance sheet should be reported in U.S. dollars. If the partnership's books and records are kept in a foreign currency, the balance sheet should be translated in accordance with U.S. generally accepted accounting principles (GAAP).

Exception. If the partnership or any qualified business unit of the partnership uses the United States dollar approximate separate transactions method, Schedule L should reflect the tax balance sheet prepared and translated into U.S. dollars according to Regulations section 1.985-3(d), and not a U.S. GAAP balance sheet.

Line 5 - Tax-Exempt Securities

Include on this line:

1. State and local government obligations, the interest on which is excludable from gross income under section 103(a) and
2. Stock in a mutual fund or other regulated investment company that distributed exempt-interest dividends during the tax year of the partnership.

Line 18 - All Nonrecourse Loans

Nonrecourse loans are those liabilities of the partnership for which no partner bears the economic risk of loss.

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

Line 3 - Guaranteed Payments

Include on this line guaranteed payments shown on Schedule K, line 7.

Line 4b - Travel and Entertainment

Include on this line:

• Meal and entertainment expenses not deductible under section 274(n).
• Expenses for the use of an entertainment facility.
• The part of business gifts over $25.
• Expenses of an individual allocable to conventions on cruise ships over $2,000.
• Employee achievement awards over $400.
• The part of the cost of entertainment tickets that exceeds face value (also subject to 50% limit).
• The part of the cost of skyboxes that exceeds the face value of nonluxury box seat tickets.
• The part of the cost of luxury water travel expenses not deductible under section 274(m).
• Expenses for travel as a form of education.
• Nondeductible club dues.
• Other travel and entertainment expenses not allowed as a deduction.

Schedule M-2 - Analysis of Partners' Capital Accounts

Show what caused the changes during the tax year in the partners' capital accounts as reflected on the partnership's books and records.

The partnership may, but is not required to, use the rules in Regulations section 1.704-1(b)(2)(iv) to determine the partners' capital accounts in Schedule M-2. If the beginning and ending capital accounts reported under these rules differ from the amounts reported on Schedule L, attach a statement reconciling any differences.

Line 2 - Capital Contributed During Year

Include on line 2 the amount of money and property contributed by each partner to the partnership as reflected on the partnership's books and records.

Line 3 - Net Income (Loss) per Books

Enter on line 3 the net income (loss) shown on the partnership books from Schedule M-1, line 1.

Line 6 - Distributions

Line 6a - Cash. Enter on line 6a the amount of money distributed to each partner by the partnership.

Line 6b - Property. Enter on line 6b the amount of property distributed to each partner by the partnership as reflected on the partnership's books and records. Include withdrawals from inventory for the personal use of a partner. Paperwork Reduction Act Notice

Paperwork Reduction Act Notice.

We ask for the information on this form to carry out the Internal Revenue laws of the United States. You are required to give us the information. We need it to ensure that you are complying with these laws and to allow us to figure and collect the right amount of tax. You are not required to provide the information requested on a form that is subject to the Paperwork Reduction Act unless the form displays a valid OMB control number. Book or records relating to a form or its instructions must be retained as long as their contents may become material in the administration of any Internal Revenue law. Generally, tax returns and return information are confidential, as required by section 6103. The time needed to complete and file this form and related schedules will vary depending on individual circumstances. The estimated average times are:

Form	Recordkeeping	Learning about the law or the form	Preparing the form	Copying, assembling, and sending the form to the IRS
Form 1065-B	50 hr., 22 min	21 hr., 1 min	22 hr., 6 min	2 hr., 40 min
Schedule D (Form 1065-B)	13 hr., 9 min	2 hr., 40 min	3 hr., 1 min
Schedule K-1 (Form 1065-B)	10 hr., 10 min	7 hr., 49 min	11 hr., 56 min
Schedule L (Form 1065-B)	15 hr., 46 min	12 min	27 min
Schedule M-1 (Form 1065-B)	3 hr., 21 min	12 min	15 min
Schedule M-2 (Form 1065-B)	2 hr., 52 min	6 min	9 min

If you have comments concerning the accuracy of these time estimates or suggestions for making these forms simpler, we would be happy to hear from you. You can write to the Tax Forms Committee, Western Area Distribution Center, Rancho Cordova, CA 95743-0001. Do not send the tax form to this address. Instead, see Where To File on page 3.

Codes for Principal Business Activity and Principal Product or Service

Page 2 of Codes for Principal Business Activity and Principal Product or Service

Page 3 of Codes for Principal Business Activity and Principal Product or Service

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