The partners are liable for tax on their shares of the partnership income, whether or not distributed, and must include their shares on their tax returns.

The partnership does not need IRS approval to use a substitute Schedule K-1 if it is an exact copy of the IRS schedule. The boxes must use the same numbers and titles and must be in the same order and format as on the comparable IRS Schedule K-1. The substitute schedule must include the OMB number. The partnership must provide each partner with the Partner's Instructions for Schedule K-1 (Form 1065-B) or other prepared specific instructions for each item reported on the partner's Schedule K-1.

The partnership must request IRS approval to use other substitute Schedules K-1. To request approval, write to Internal Revenue Service, Attention: Substitute Forms Program, SE:W:CAR:MP:T:T:SP, 1111 Constitution Avenue, NW, IR-6406, Washington, DC 20224.

Each partner's information must be on a separate sheet of paper. Therefore, separate all continuously printed substitutes before you file them with the IRS.

The partnership may be subject to a penalty if it files Schedules K-1 that do not conform to the specifications discussed in Pub. 1167, General Rules and Specifications for Substitute Forms and Schedules.

Generally, allocate shares of income, gain, loss, deduction, or credit among the partners according to the partnership agreement for sharing income or loss. However, partners can agree to allocate specific items in a ratio different from the ratio for sharing income or loss.

In determining the amounts required to be separately taken into account by a partner, those provisions of the large partnership rules governing computation of taxable income are applied separately with respect to that partner by taking into account that partner's distributive share of the partnership's items of income, gain, loss, deduction, or credit. This rule permits partnerships to make otherwise valid special allocations of partnership items to partners.

Report the specially allocated items in the appropriate box of the applicable partner's Schedule K-1 and the total on the appropriate line of Schedule K, instead of on Parts I or II of Form 1065-B or Schedules A or D. For example, specially allocated net capital gain from passive activities is entered in box 4a of Schedule K-1, and the total is entered on line 4a of Schedule K, along with any net capital gain from line 16 of Schedule D (Form 1065-B).

If a partner's interest changed during the year, see section 706(d) before determining each partner's distributive share of any item of income, gain, loss, deduction, etc. Income (loss) is allocated to a partner only for the part of the year in which that person is a member of the partnership. The partnership will either allocate on a daily basis or divide the partnership year into segments and allocate income, loss, or special items in each segment among the persons who were partners during that segment. Partnerships that report their income on the cash basis must allocate interest expense, taxes, and any payment for services or for the use of property on a daily basis if there is any change in any partner's interest during the year.

Special rules on the allocation of income, gain, loss, and deductions generally apply if a partner contributes property to the partnership and the FMV of that property at the time of contribution differs from the contributing partner's adjusted tax basis. Under these rules, the partnership must use a reasonable method of making allocations of income, gain, loss, and deductions from the property so that the contributing partner receives the tax burdens and benefits of any built-in gain or loss (for example, precontribution appreciation or diminution of value of the contributed property). See Regulations section 1.704-3 for details on how to make these allocations, including a description of specific allocation methods that are generally reasonable.

See Dispositions of Contributed Property on page 9 for special rules on the allocation of income, gain, loss, and deductions on the disposition of property contributed to the partnership by a partner.

If the partnership agreement does not provide for the partner's share of income, gain, loss, deduction, or credit, or if the allocation under the agreement does not have substantial economic effect, the partner's share is determined according to the partner's interest in the partnership. See Regulations section 1.704-1 for more information.

Generally, the ELP is required to prepare and give a Schedule K-1 to each person who was a partner in the partnership at any time during the year.

However, if a foreign partnership meets each of the following four requirements, it is not required to file or provide Schedule K-1 for foreign partners (unless the foreign partner is a pass-through entity through which a U.S. person holds an interest in the foreign partnership).

Generally, any person who holds an interest in a partnership as a nominee for another person must furnish to the partnership the name, address, etc., of the other person.

On each Schedule K-1, enter the names, addresses, and identifying numbers of the partner and partnership and the partner's distributive share of each item.

For an individual partner, enter the partner's social security number (SSN) or individual taxpayer identification number (ITIN). For all other partners, enter the partner's EIN. However, if a partner is an individual retirement arrangement (IRA), enter the identifying number of the custodian of the IRA. Do not enter the SSN of the person for whom the IRA is maintained.

Foreign partners without a U.S. taxpayer identifying number should be notified by the partnership of the necessity of obtaining one. Certain aliens who are not eligible to obtain an SSN can apply for an ITIN on Form W-7, Application for IRS Individual Taxpayer Identification Number.

If a husband and wife each had an interest in the partnership, prepare a separate Schedule K-1 for each of them. If a husband and wife held an interest together, prepare one Schedule K-1 if the two of them are considered to be one partner.

Use the codes listed on page 31 for box 9 of Schedule K-1 to report various items. If more space is needed, include the information in an attachment to box 9.

Enter each partner's share of:

“Nonrecourse liabilities” are those liabilities of the partnership for which no partner bears the economic risk of loss. The extent to which a partner bears the economic risk of loss is determined under the rules of Regulations section 1.752-2. Do not include partnership-level qualified nonrecourse financing (defined below) on the line for nonrecourse liabilities.

If the partner terminated his or her interest in the partnership during the year, enter the share that existed immediately before the total disposition. In all other cases, enter it as of the end of the year.

If the ELP is engaged in two or more different types of at-risk activities, or a combination of at-risk activities and any other activity, attach a statement showing the partner's share of nonrecourse liabilities, partnership-level qualified nonrecourse financing, and other liabilities for each activity. See Pub. 925, Passive Activity and At-Risk Rules, to determine if the partnership is engaged in more than one at-risk activity.

The at-risk rules of section 465 generally apply to any activity carried on by the partnership as a trade or business or for the production of income. These rules generally limit the amount of loss and other deductions a partner can claim from any partnership activity to the amount for which that partner is considered at risk. However, for partners who acquired their partnership interests before 1987, the at-risk rules do not apply to losses from an activity of holding real property the partnership placed in service before 1987. The activity of holding mineral property does not qualify for this exception. Identify on an attachment to Schedule K-1 the amount of any losses that are not subject to the at-risk rules.

If the ELP is engaged in an activity subject to the limitations of section 465(c)(1) (such as films or videotapes, leasing section 1245 property, farming, or oil and gas property), give each partner his or her share of the total pre-1976 losses from that activity for which there existed a corresponding amount of nonrecourse liability at the end of each year in which the losses occurred. See Form 6198, At-Risk Limitations, and related instructions for more information.

Qualified nonrecourse financing secured by real property used in an activity of holding real property that is subject to the at-risk rules is treated as an amount at risk. “Qualified nonrecourse financing” generally includes financing for which no one is personally liable for repayment that is borrowed for use in an activity of holding real property and that is loaned or guaranteed by a federal, state, or local government or that is borrowed from a “qualified” person. Qualified persons include any person actively and regularly engaged in the business of lending money, such as a bank or savings and loan association. Qualified persons generally do not include related parties (unless the nonrecourse financing is commercially reasonable and on substantially the same terms as loans involving unrelated persons), the seller of the property, or a person who receives a fee for the partnership's investment in the real property. See section 465 for more information on qualified nonrecourse financing.

The partner as well as the partnership must meet the qualified nonrecourse rules. Therefore, the partnership must enter on an attached statement any other information the partner needs to determine if the qualified nonrecourse rules are also met at the partner level.

If the ELP is a registration-required tax shelter or has invested in a registration-required tax shelter, it must enter the tax shelter registration number on Schedule K-1. Also, a partnership that has invested in a registration-required tax shelter must furnish a copy of its Form 8271 to its partners. See Form 8271 for more details.

Enter the amount from Form 1065-B, page 1, line 25, on Schedule K, line 1a. Enter the income or (loss) without reference to (a) the basis of the partners' interests in the partnership, (b) the partners' at-risk limitations, or (c) the passive activity limitations. These limitations, if applicable, are determined at the partner level.

Allocate the income (loss) from passive loss limitation activities (line 1a of Schedule K) to interests held as a general partner as follows.

Step 1. Allocate the amount reported on line 1a to the following categories.

Step 2. Report on lines 1b(1), 1b(2), and 1b(3) of Schedule K that portion of each amount from Step 1 that will be allocated to interests held as a general partner (the combined distributive shares and any separate allocations for all general partner interests).

General partners in an ELP must separately account for any items attributable to passive loss limitation activities to the extent necessary to comply with the passive activity rules.

Because general partners must comply with the passive activity rules, report the information on lines 1b(1), 1b(2), and 1b(3) of Schedule K separately for each activity of the partnership using Codes A1, B1, and C1 in box 9 of Schedule K-1. The remaining amount on line 1d of Schedule K is reported in box 1 of Schedule K-1 for limited partners (including interests held as a limited partner by general partners).

On Schedule K, line 2, enter the amount from Form 1065-B, Part II, line 13. Report amounts for both general and limited partners in box 2 of Schedule K-1.

Enter the qualified dividends from other activities from Form 1065-B, Part II, line 2b. Report amounts for both general and limited partners in box 3 of Schedule K-1.

Enter the net capital gain or (loss) from passive loss limitation activities from Schedule D (Form 1065-B), line 16. Report the amount allocated to interests held as a limited partner in box 4a of Schedule K-1.

Because general partners must comply with the passive activity rules, report the line 4a amount allocated to interests held as a general partner separately for each activity using Codes A2, B2, and C2, in box 9 of Schedule K-1.

Enter the net capital gain (loss) from other activities from Schedule D (Form 1065-B), line 18. Report this amount to all partners in box 4b of Schedule K-1.

For an ELP, the alternative minimum tax (AMT) adjustments and preferences are combined at the partnership level. The partnership computes net AMT adjustments separately for passive loss limitation activities and other activities.

In determining a partner's alternative minimum taxable income, a partner's distributive share of any net AMT adjustment is taken into account instead of making separate AMT adjustments for different partnership items. The net AMT adjustment is determined by using the adjustments and preferences applicable to individuals for partners other than corporations, and by using the adjustments and preferences applicable to corporations for corporate partners. See Form 6251, Alternative Minimum Tax—Individuals, and Form 4626, Alternative Minimum Tax—Corporations, to figure the partnership's AMT adjustments and preferences.

The net passive AMT adjustment is reported on line 5 of Schedule K and in box 5 of Schedule K-1 for interests held as a limited partner. Because general partners must comply with the passive activity rules, report the amounts allocated to interests held as a general partner separately for each activity in box 9 using Codes A5, B7, and C5.

The net other AMT adjustment is reported on line 6 of Schedule K and in box 6 of Schedule K-1 for all partners.

Guaranteed payments to partners include:

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

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.

Enter 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.

The term “general credits” means any credit, other than the low-income housing credit, the rehabilitation credit from rental real estate activities, 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.

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.

Section 42 provides a credit that can be claimed by owners of low-income residential rental buildings. To qualify for this credit, the partnership must file Form 8609, Low-Income Housing Credit Allocation and Certification, separately with the IRS. Do not attach Form 8609 to Form 1065-B. Complete and attach Form 8609-A, Annual Statement for Low-Income Housing Credit, and Form 8586, Low-Income Housing Credit, to Form 1065-B.

Report this credit on line 11.

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.

Report the rehabilitation credit from rental real estate activities on line 12. Complete the lines on Form 3468, Investment Credit, that apply to the rehabilitation credit and attach it to Form 1065-B. The ELP may qualify for an increased rehabilitation credit under section 1400N(h) for expenditures paid or incurred during the period beginning on August 28, 2005, and ending on December 31, 2008, for property located in the Gulf Opportunity Zone for Hurricane Katrina. See the instructions for Form 3468 and Pub. 4492 for details.

For limited partners, report the rehabilitation credit from rental real estate activities reported on line 12 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, report the rehabilitation credit reported on line 12 in box 9 of Schedule K-1 using Code B6 so general partners can comply with section 469.

Lines 14a through 14h 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.

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.

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.

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.

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. If the partnership files Schedule M-3, the amount on line 1 must equal the amount in column (d) of line 26, Part II of Schedule M-3.

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

For partnerships required to file Schedule M-3, the amounts reported on Schedule L must be the same as the amounts from financial statements used to complete Schedule M-3.

Include on this line:

Total assets must be determined without offset by liabilities and may not be reported as a negative amount. Total assets at the beginning of the tax year (column b) must equal total assets at close of the prior tax year. A partnership that is a partner in a tiered partnership must show as an asset on the partner's Schedule L the partner's share of the tiered partnership's assets.

Nonrecourse loans are those liabilities of the partnership for which no partner bears the economic risk of loss. If the partnership's nonrecourse liabilities include its share of the liabilities of another partnership, the partnership's share of those liabilities must be reflected on line 18.

A partnership that is a partner in a tiered partnership must include as a liability on line 20 the partner's share of the tiered partnership's liabilities to the extent they are recourse liabilities to the partner.

Report on this line income included on Schedule K, lines 1c, 1d, 2, 3, 4a, 4b, and 8 not recorded on the partnership's books this year. Describe each such item of income. Attach a statement if necessary.

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

Include on this line the following.

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

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

Enter on line 3 the net income (loss) shown on the partnership books from Schedule M-1, line 1 (or Schedule M-3, Part I, line 11).