Key takeaways
- Item L is the partnership's tax-basis capital account, and it leaves out the partner's share of partnership liabilities.
- Box 1 is the partner's share of ordinary business income, while box 4a is a guaranteed payment that can be paid in a loss year.
- A partner's loss is limited by basis first, then at-risk, then passive activity, then excess business loss.
- For tax year 2026, Form 1065 and the partner statements are due March 15, 2027, and a Form 7004 extension adds six months to file.
How the schedule is laid out
Part I identifies the partnership and Part II identifies the partner. Item E takes the partner's SSN or ITIN if the partner is an individual, and an EIN for every other partner. When the partner is a disregarded entity, the partnership checks the DE box in Item H2 and enters the TIN of the beneficial owner in Item E. Get that classification in writing before anything is keyed.
Item J shows the profit, loss and capital percentages, and the instructions say these generally follow the partnership agreement. A negative or zero capital account appears as zero on the Capital line, so a negative balance never shows up as a percentage.
Item K1 splits the partner's share of liabilities into nonrecourse, qualified nonrecourse financing and recourse amounts. For the at-risk computation the partner uses only the qualified nonrecourse financing and recourse amounts.
Item L is not the partner's basis
Item L reports the beginning and ending capital account on the tax-basis method. It includes contributions, the partner's share of current-year net income or loss as computed for tax purposes, and withdrawals and distributions.
The instructions say the ending Item L balance may not equal the adjusted tax basis in the partner's interest. Adjusted basis includes the partner's share of partnership liabilities, and the tax-basis capital account does not. In a hypothetical case, an ending Item L of 80,000 and a liability share of 50,000 would put outside basis near 130,000 before other adjustments.
Decision rule: when a partner's loss is larger than the Item L capital, do not stop at Item L. Build adjusted basis on the Worksheet for Adjusting the Basis of a Partner's Interest in the Partnership, starting from the beginning basis on line 1 and adding the liability changes on lines 3a through 3e.
Tie the capital rollforward before the statement goes out. Opening Item L plus contributions, plus net income or loss for tax purposes, minus distributions should equal ending Item L. A difference means one line is wrong.
Box 1 and box 4 are different kinds of income
Box 1 is the partner's share of the partnership's ordinary income or loss from trade or business activities. Box 4a is a guaranteed payment for services, box 4b is a guaranteed payment for capital, such as the use of capital, and box 4c is the total of the two.
The defining difference is that guaranteed payments are determined without regard to the partnership's income. A partner can receive a box 4a payment in a year when box 1 shows a loss. Box 4a generally is not passive income and goes to column (k) of Schedule E (Form 1040), line 28. Box 1 goes to column (i) or (k) when the partner materially participated in the activity.
Worked example with hypothetical figures: a general partner receives a 60,000 guaranteed payment for services in box 4a and a 27,000 share of ordinary income in box 1. The 60,000 goes to column (k) with no passive test. The 27,000 follows the material participation test. Keyed on the box 1 line, the 60,000 would be tested for participation and could be treated as passive.
The order in which losses are limited
The instructions list the limits in this order: basis, at-risk, passive activity, then excess business loss. Apply each limit to what the prior one allowed, and carry each disallowed amount forward separately, because a loss that fails the basis test never reaches the at-risk test.
Basis. A partner may claim a loss only to the extent it does not exceed adjusted basis at the end of the partnership's tax year. Losses not allowed are suspended and carried forward. The instructions say the partner is responsible for tracking outside basis, and the Item L capital account cannot be used to figure it.
At risk. Section 465 limits losses to what the partner could actually lose. Complete Form 6198, At-Risk Limitations. Box 22 of Schedule K-1, Part III, is checked when the partnership attaches a statement, and the partner needs that statement for each activity.
Passive activity. Section 469 limits losses and credits for individuals, estates, trusts and closely held C corporations. Individuals use Form 8582 to figure allowable passive losses. Suspended passive losses are released when the partner disposes of the entire interest in a fully taxable transaction.
Excess business loss. The instructions point to Form 461, Limitation on Business Losses, for the rule under section 461(l).
Decision rules when basis limits the loss
Rule 1: if the K-1 loss is larger than the partner's adjusted basis at year end, deduct only the basis amount and carry the rest forward. Hypothetical figures: year-end basis is 10,000 and box 1 shows a loss of 14,000. Basis allows 10,000 and 4,000 carries forward, to be tested against basis again next year.
Rule 2: if basis is enough but the partner is not at risk for the full loss, Form 6198 controls. Hypothetical figures: basis is 10,000, the box 1 loss is 6,000, and the at-risk amount is 3,500. Form 6198 allows 3,500, and the 2,500 difference carries forward under the at-risk rules.
Rule 3: if the partner did not materially participate and has no passive income, the loss goes to Form 8582 and stays suspended. Ask the client for passive income sources or a disposition plan before the return is final.
Failure mode: the box 1 figure is compared with Item L and the preparer stops there. Item L can understate outside basis, as shown above, and a box 1 loss can exceed basis even when Item L looks large. Fix: run the basis worksheet, then the at-risk, passive and excess business loss tests in order, and keep the worksheets with the K-1 in the file.
When the K-1 is due and how the extension works
For a calendar-year partnership, Form 1065 is due March 15. For tax year 2026, that is March 15, 2027. If the date falls on a Saturday, Sunday or legal holiday, a return filed on the next business day is timely. The 2025 instructions give March 16, 2026 as the timely date for the 2025 partnership year, because the 15th fell on a weekend.
Section 6031(b) ties the partner statement to the return. Each partnership must furnish each partner a copy on or before the day the return for that year was required to be filed. The statute does not mention an extension, so plan the K-1 for March 15, 2027, and treat any later date as something the partnership confirms in writing.
Form 7004 gives an automatic six-month extension of time to file, and the Form 1065 instructions say to file it by the regular due date. A partner waiting on an extended return should get the partnership's written estimate of that partner's items, marked as an estimate.
Electronic filing applies to the K-1 too. The 2025 instructions state that partnerships with more than 100 partners must file Form 1065, Schedules K-1 and related forms electronically.
Penalties to price into the timeline
Under section 6698(a), a late partnership return carries a penalty for each month, or part of a month, that the failure continues, and the statute caps that period at 12 months. Under section 6698(b)(2), the amount is multiplied by the number of persons who were partners at any time during the taxable year.
Rev. Proc. 2025-32, section 4.55, sets the dollar amount used in section 6698(b)(1) at $260 for any return required to be filed in 2027. That is the return for tax year 2026. The amount for the 2025 return is not restated here.
Hypothetical example: a partnership with five partners files its tax year 2026 return three months late, in 2027. Five partners times three months is 15 partner-months, and at 260 per partner-month the penalty is 3,900. Confirm the partner count and months late before quoting a figure.