Line 19 - Employee Benefit Programs

Enter the partnership's contributions to employee benefit programs not claimed elsewhere on the return (e.g., insurance, health, and welfare programs) that are not part of a pension, profit-sharing, etc., plan included on line 18.

Do not include amounts paid during the tax year for insurance that constitutes medical care for a partner, a partner's spouse, or a partner's dependents. Instead, include these amounts on line 10 as guaranteed payments and on Schedule K, lines 5 and 11. Also report these amounts on the Schedule K-1, lines 5 and 11. See General Instructions for Schedules K and K-1 on page 13 for the filing requirements for Schedule K-1.

Line 20 - Other Deductions

Attach your own schedule listing by type and amount all allowable deductions related to a trade or business activity only for which there is no separate line on Schedule B. Enter the total on this line. Examples of other deductions include:

• Amortization (except as noted below) - see the Instructions for Form 4562 for more information. Complete and attach Form 4562 if the partnership is claiming amortization of costs that began during the tax year.
• Insurance premiums.
• Legal and professional fees.
• Supplies used and consumed in the business.
• Utilities.
• Part of the cost of qualified clean-fuel vehicle property and qualified clean-fuel vehicle refueling property. For more details, see section 179A.

Also, see Special Rules below for limits on certain other deductions.

Do not deduct on line 20:

• Items that must be reported separately on Schedules K and K-1.
• Qualified expenditures to which an election under section 59(e) may apply. See the instructions on page 19 for lines 18a and 18b of Schedule K-1 for details on treatment of these items.
• Amortization of reforestation expenditures under section 194. The partnership can elect to amortize up to $10,000 of qualified reforestation expenditures paid or incurred during the tax year. However, the amortization is not deducted by the partnership but the amortizable basis is instead separately allocated among the partners. See the instructions on page 21 for Schedule K-1, line 25, item 21, and Pub. 535 for more details.
• Fines or penalties paid to a government for violating any law. Report these expenses on Schedule K, line 21.
• Expenses allocable to tax-exempt income. Report these expenses on Schedule K, line 21.
• Net operating losses. Only individuals and corporations may claim a net operating loss deduction.
• Amounts paid or incurred to participate or intervene in any political campaign on behalf of a candidate for public office, or to influence the general public regarding legislative matters, elections, or referendums. Report these expenses on Schedule K, line 21.
• Expenses paid or incurred to influence Federal or state legislation, or to influence the actions or positions of certain Federal executive branch officials. However, certain in-house lobbying expenditures that do not exceed $2,000 are deductible. See section 162(e) for more details.

Special Rules  

Commercial revitalization deduction.    If the partnership constructs, purchases, or substantially rehabilitates a qualified building in a renewal community it may qualify for a deduction of either (a) 50% of qualified capital expenditures in the year the building is placed in service or (b) amortization of 100% of the qualified capital expenditures over a 120-month period beginning with the month the building is placed in service. If you elect to amortize these expenditures, complete and attach Form 4562. To qualify, the building must be nonresidential (as defined in section 168(e)(2)) and placed in service by the partnership. The partnership must be the original user of the building unless it is substantially rehabilitated. The amount of the qualified expenditures cannot exceed the lesser of $10 million or the amount allocated to the building by the commercial revitalization agency of the state in which the building is located. Any remaining expenditures are depreciated over the regular depreciation recovery period. See Pub. 954, Tax Incentives for Empowerment Zones and Other Distressed Communities, and section 1400I for details.

Rental real estate.   Do not report this deduction on line 20 if the building is placed in service as rental real estate. A commercial revitalization deduction for rental real estate is not deducted by the partnership but is passed through to the partners on line 25 of Schedule K-1 (Form 8865).

Travel, meals, and entertainment.   Subject to limitations and restrictions discussed below, a partnership can deduct ordinary and necessary travel, meals, and entertainment expenses paid or incurred in its trade or business. Special rules apply to deductions for gifts, skybox rentals, luxury water travel, convention expenses, and entertainment tickets. See section 274 and Pub. 463 for more details.

Travel.   The partnership cannot deduct travel expenses of any individual accompanying a partner or partnership employee, including a spouse or dependent of the partner or employee, unless:

• That individual is an employee of the partnership, and
• His or her travel is for a bona fide business purpose and would otherwise be deductible by that individual.

Meals and entertainment.   Generally, the partnership can deduct only 50% of the amount otherwise allowable for meals and entertainment expenses. In addition (subject to exceptions under section 274(k)(2)):

• Meals must not be lavish or extravagant,
• A bona fide business discussion must occur during, immediately before, or immediately after the meal, and
• A partner or employee of the partnership must be present at the meal.

See section 274(n)(3) for a special rule that applies to expenses for meals consumed by individuals subject to the hours of service limits of the Department of Transportation.

Membership dues.   The partnership may deduct amounts paid or incurred for membership dues in civic or public service organizations, professional organizations (such as bar and medical associations), business leagues, trade associations, chambers of commerce, boards of trade, and real estate boards. However, no deduction is allowed if a principal purpose of the organization is to entertain, or provide entertainment facilities for, members or their guests. In addition, the partnership may not deduct membership dues in any club organized for business, pleasure, recreation, or other social purpose. This includes country clubs, golf and athletic clubs, airline and hotel clubs, and clubs operated to provide meals under conditions favorable to business discussion.

Entertainment facilities.   The partnership cannot deduct an expense paid or incurred for a facility (such as a yacht or hunting lodge) used for an activity usually considered entertainment, amusement, or recreation.

Note:   The partnership may be able to deduct otherwise nondeductible meals, travel, and entertainment expenses if the amounts are treated as compensation and reported on Form W-2 for an employee or on Form 1099-MISC for an independent contractor.

Schedule D - Capital Gains and Losses

Important:   If the foreign partnership filed Form 1065 or 1065-B, do not complete Schedule D on Form 8865. Instead, attach to Form 8865 a copy of the Schedule D from Form 1065 or 1065-B.

All Category 1 filers must complete Schedule D to report sales or exchanges of capital assets, capital gain distributions, and nonbusiness bad debts.

Purpose of Schedule

Do not report on Schedule D capital gains (losses) specially allocated to any partner. Use Schedule D (Form 8865) to report sales or exchanges of capital assets, capital gain distributions, and nonbusiness bad debts.

Enter capital gains (losses) specially allocated to the partnership as a partner in other partnerships and from estates and trusts on Schedule D, line 4 or 9, whichever applies. Enter capital gains (losses) of the partnership that are specially allocated to partners directly on line 4d, 4e(1), 4e(2), 4e(3), or 7 of Schedules K and K-1, whichever applies.

Note:   For more information, see Pub. 544, Sales and Other Dispositions of Assets.

What Are Capital Assets?

Each item of property the partnership held (whether or not connected with its trade or business) is a capital asset except:

• Stock in trade or other property included in inventory or held mainly for sale to customers.
• Accounts or notes receivable acquired in the ordinary course of the trade or business for services rendered or from the sale of stock in trade or other property held mainly for sale to customers.
• Depreciable or real property used in the trade or business, even if it is fully depreciated.
• Certain copyrights; literary, musical, or artistic compositions; letters or memoranda; or similar property. See section 1221(a)(3).
• U.S. Government publications, including the Congressional Record, that the partnership received from the Government, other than by purchase at the normal sales price, or that the partnership got from another taxpayer who had received it in a similar way, if the partnership's basis is determined by reference to the previous owner.
• Certain commodities derivative financial instruments held by a dealer. See section 1221(a)(6).
• Certain hedging transactions entered into in the normal course of the trade or business. See section 1221(a)(7).
• Supplies used in the trade or business.

Items for Special Treatment

• Use Form 4797, Sales of Business Property, to report
  1. sales or exchanges of property used in a trade or business,
  2. sales or exchanges of depreciable or amortizable property,
  3. sales or other dispositions of securities or commodities held in connection with a trading business, if the partnership made a mark-to-market election (see section 475 and its regulations for details),
  4. involuntary conversions (other than from casualties or thefts), and
  5. the disposition of noncapital assets (other than inventory or property held primarily for sale to customers in the ordinary course of a trade or business.
• Use Form 4684, Casualties and Thefts, to report involuntary conversions of property due to a casualty or theft.
• Gains and losses from section 1256 contracts and straddles are reported on Form 6781, Gains and Losses From Section 1256 Contracts and Straddles.
• An exchange of business or investment property for property of a like kind is reported on Form 8824, Like-Kind Exchanges.
• Transactions by a securities dealer. See section 1236.
• Bonds and other debt instruments. See Pub. 550, Investment Income and Expenses.
• Certain real estate subdivided for sale that may be considered a capital asset. See section 1237.
• Gain on the sale of depreciable property to a more than 50%-owned entity, or to a trust in which the partnership is a beneficiary, is treated as ordinary gain.
• Liquidating distributions from a corporation. See Pub. 550 for details.
• Gain on the sale or exchange of stock in certain foreign corporations. See section 1248.
• Gain or loss on options to buy or sell, including closing transactions. See Pub. 550 for details.
• Gain or loss from a short sale of property. See Pub. 550 for details.
• Transfer of property to a political organization if the fair market value of the property exceeds the partnership's adjusted basis in such property. See section 84.
• Any loss on the disposition of converted wetland or highly erodible cropland that is first used for farming after March, 1986, is reported as a long-term capital loss on Schedule D, but any gain on such a disposition is reported as ordinary income on Form 4797. See section 1257 for details.
• Transfer of partnership assets and liabilities to a newly formed corporation in exchange for all of its stock. See Rev. Rul. 84-111, 1984-2 C.B. 88.
• Disposition of foreign investment in a U.S. real property interest. See section 897.
• Any loss from a sale or exchange of property between the partnership and certain related persons is not allowed, except for distributions in a complete liquidation of a corporation. See section 267 and 707(b) for details.
• Any loss from securities that are capital assets that become worthless during the year is treated as a loss from the sale or exchange of a capital asset on the last day of the tax year.
• Gain from the sale or exchange of stock in a collapsible corporation is not a capital gain. See section 341.
• Nonrecognition of gain on sale of stock to an employee stock ownership plan (ESOP) or an eligible cooperative. See section 1042 and Temporary Regulations section 1.1042-1T for rules under which the partnership may elect not to recognize gain from the sale of certain stock to an ESOP or an eligible cooperative.
• A nonbusiness bad debt must be treated as a short-term capital loss and can be deducted only in the year the debt becomes totally worthless. For each bad debt, enter the name of the debtor and schedule attached in column (a) of line 1 and the amount of the bad debt as a loss in column (f). Also attach a statement of facts to support each bad debt deduction.
• Any loss from a wash sale of stock or securities (including contracts or options to acquire or sell stock or securities) cannot be deducted unless the partnership is a dealer in stock or securities and the loss was sustained in a transaction made in the ordinary course of the partnership's trade or business. A wash sale occurs if the partnership acquires (by purchase or exchange), or has a contract or option to acquire, substantially identical stock or securities within 30 days before or after the date of the sale or exchange. See section 1091 for more information.
• If the partnership sold property at a gain and it will receive a payment in a tax year after the year of sale, it generally must report the sale on the installment method unless it includes the full amount of the gain in its income in the year of sale. However, the installment method may not be used to report sales of stock or securities traded on an established securities market. Use Form 6252, Installment Sale Income, to report the sale on the installment method. Also use Form 6252 to report any payment received during the tax year from a sale made in an earlier year that was reported on the installment method.
• A sale or other disposition of an interest in a partnership owning unrealized receivables or inventory items may result in a ordinary gain or loss. See Pub. 541, Partnerships, for more details.
• Certain constructive ownership transactions. Gain in excess of the gain that would have been recognized if the partnership had held a financial asset directly during the term of a derivative contract must be treated as ordinary income. See section 1260 for details.

Special Rules for Traders in Securities

Traders in securities are engaged in the business of buying and selling securities for their own account. To be engaged in business as a trader in securities:

• The partnership must seek to profit from daily market movements in the prices of securities and not from dividends, interest, or capital appreciation.
• The partnership's trading activity must be substantial.
• The partnership must carry on the activity with continuity and regularity.

The following facts and circumstances should be considered in determining if a partnership's activity is a business:

• Typical holding periods for securities bought and sold.
• The frequency and dollar amount of the partnership's trades during the year.
• The extent to which the partners pursue the activity to produce income for a livelihood.
• The amount of time devoted to the activity.

Like an investor, a trader must report each sale of securities (taking into account commissions and any other costs of acquiring or disposing of the securities) on Schedule D or on an attached statement containing all the same information for each sale in a similar format. However, if a trader used the mark-to-market accounting method (see section 475 and its regulations for details), each transaction is reported in Part II of Form 4797 instead of Schedule D. Regardless of whether a trader reports its gains and losses on Schedule D or Form 4797, the gain or loss from the disposition of securities is not taken into account when figuring net earnings from self-employment on Schedules K and K-1. See section 1402(i) for an exception that applies to section 1256 contracts.

The limitation on investment interest expense that applies to investors does not apply to interest paid or incurred in a trading business. A trader reports interest expense and other expenses (excluding commissions and other costs of acquiring or disposing of securities) from a trading business on Schedule B of Form 8865.

A trader also may hold securities for investment. The rules for investors generally will apply to those securities. Allocate interest and other expenses between the partnership's trading business and its investment securities. Investment interest expense is reported on line 14a of Schedules K and K-1.

Constructive Sale Treatment for Certain Appreciated Positions

Generally, a partnership would recognize gain (but not loss) on the date it enters into a constructive sale of any appreciated position in stock, a partnership interest, or certain debt instruments as if the position were disposed of at fair market value on that date.

A partnership is treated as making a constructive sale of an appreciated position when it (or a related person, in some cases) does one of the following:

• Enters into a short sale of the same or substantially identical property (that is, a short sale against the box).
• Enters into an offsetting notional principal contract relating to the same or substantially identical property.
• Enters into a futures or forward contract to deliver the same or substantially identical property.
• Acquires the same or substantially identical property (if the appreciated position is a short sale, offsetting notional principal contract or a futures or forward contract).

Exception.    Generally, constructive sale treatment does not apply if:

• The partnership closed the transaction before the end of the 30th day after the end of the year in which it was entered into,
• The partnership held the appreciated position to which the transaction relates throughout the 60-day period starting on the date the transaction was closed, and
• At no time during the 60-day period was the partnership's risk of loss reduced by holding certain other positions.

For details and other exceptions to these rules, see Pub. 550.

Rollover of Gain From Qualified Stock

Separately state on Form 8865, Schedule K, line 7 (and not on Schedule D) any gain that would qualify for the section 1045 rollover at the partner level instead of the partnership level (because a partner was entitled to purchase replacement stock) and any gain on qualified stock that could qualify for the 50% exclusion under section 1202.

To be qualified small business stock, the stock must meet all of the following tests:

• It must be stock in a C corporation (that is, not S corporation stock).
• It must have been originally issued after August 10, 1993.
• As of the date the stock was issued, the corporation was a qualified small business. A qualified small business is a domestic C corporation with total gross assets of $50 million or less
  1. at all times after August 9, 1993, and before the stock was issued, and
  2. immediately after the stock was issued.
  Gross assets include those of any predecessor of the corporation. All corporations that are members of the same parent-subsidiary controlled group are treated as one corporation.
• The partnership must have acquired the stock at its original issue (either directly or through an underwriter), either in exchange for money or other property or as pay for services (other than as an underwriter) to the corporation. In certain cases, the partnership may meet the test if it acquired the stock from another person who met this test (such as by gift or at death) or through a conversion or exchange of qualified business stock by the holder.
• During substantially all of the time the partnership held the stock:
  1. The corporation was a C corporation,
  2. At least 80% of the value of the corporation's assets was used in the active conduct of one or more qualified businesses (defined below), and
  3. The corporation was not a foreign corporation, domestic international sales corporation (DISC), former DISC, interest charge domestic international sales corporation (IC-DISC), former IC-DISC, corporation that has made (or that has a subsidiary that has made) a section 936 election, regulated investment company (RIC), real estate investment trust (REIT), real estate mortgage investment conduit (REMIC), financial asset securitization investment trust (FASIT), or cooperative.

Note:   A specialized small business investment company (SSBIC) is treated as having met test 2 above.

A qualified business is any business other than the following:

• One involving services performed in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, or brokerage services.
• One whose principal asset is the reputation or skill of one or more employees.
• Any banking, insurance, financing, leasing, investing, or similar business.
• Any farming business (including the raising or harvesting of trees).
• Any business involving the production of products for which percentage depletion can be claimed.
• Any business of operating a hotel, motel, restaurant, or similar business.

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