U. S. Business Income Tax Return

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2025

Partner’s Instructions for
Schedule K-3 (Form 1065)
Partner’s Share of Income, Deductions, Credits, etc.—International (For Partner’s
Use Only)
Section references are to the Internal Revenue Code unless
otherwise noted.

Future Developments
For the latest information about developments related to
Schedule K-3 (Form 1065) and its instructions, such as
legislation enacted after they were published, go to IRS.gov/
Form1065.

Schedule K-3, Part IV, Section 1. The One Big Beautiful Bill
Act (P.L. 119-21) amended section 250 in part by adding to the
list of gross income items that are excluded in determining
deduction eligible income (DEI). The added exclusion relates to
income and gain from the sale or other disposition of intangible
property (as defined in section 367(d)(4)), and any other
property of a type that is subject to depreciation, amortization, or
depletion by the seller. These amendments apply to sales or
other dispositions occurring after June 16, 2025.
Schedule K-3, Part X, Section 1. Lines 15 and 16 have been
revised to allow partnerships to specify other types of gain and
amounts. Lines 19 and 20 have been revised to allow
partnerships to specify other types of income and amounts.

General Instructions
The Partner’s Instructions for Schedule K-1 (Form 1065)
generally apply to Schedule K-3, including Inconsistent
Treatment of Items and Errors. These instructions provide
additional information specific to Schedule K-3 for tax years
beginning in 2025.

Purpose of Schedule K-3

Schedule K-3 (Form 1065) reports items of international tax
relevance from the operation of a partnership. You must include
this information on your tax or information returns, if applicable.
See separate parts for specific instructions. You only need to use
the schedules that are applicable to you. For example, in
general, if the partner receiving Schedule K-3 is a domestic
corporation, the partnership wouldn’t have completed and filed
Part X, Foreign Partner’s Character and Source of Income and
Deductions, because that part is inapplicable to domestic
corporation partners. If the partner receiving Schedule K-3 is
itself a partnership, it’ll use information from Schedule K-3 to
complete Schedules K-3 to report to its partners.
The proper treatment of certain items by the partner is
dependent on information that the partnership may not have;
thus, the partnership may have reported certain information on
Schedule K-3 based on assumptions that are incorrect. In such
cases, the partner must treat the items according to the partner’s
actual facts, and if appropriate file a Form 8082, Notice of
Inconsistent Treatment or Administrative Adjustment Request
(AAR), to identify and explain the inconsistency.
Oct 24, 2025

Example 1—Part IX required to determine base erosion
payments. Foreign corporation wholly owns DC, a domestic
corporation, and FC, a foreign corporation. DC satisfies the
gross receipts test; see Regulations section 1.59A-2(d). In Year
1, DC owns a 50% interest in domestic partnership USP. An
unrelated domestic corporation owns the remaining 50% interest
in USP. DC’s investment in USP doesn’t qualify for the small
partner exception defined in Regulations section 1.59A-7(d)(2).
In Year 1, USP pays FC $100 for services. The services aren’t
eligible for the services cost method exception; see Regulations
section 1.59A-3(b)(3)(i). DC’s distributive share of the $100
payment to FC is $50. For purposes of determining whether a
payment or accrual by a partnership is a base erosion payment,
any amount paid or accrued by USP is treated as paid or
accrued by each partner based on the partner’s distributive
share of the item of deduction with respect to that amount; see
Regulations section 1.59A-7(d)(2). Therefore, DC is treated as
having paid $50 to FC. DC must complete Form 8991, Tax on
Base Erosion Payments of Taxpayers With Substantial Gross
Receipts, to compute its base erosion minimum tax amount (if
any); therefore, DC receives Part IX of Schedule K-3 (Form
1065) from USP.

How To Use Schedule K-3
Reporting currency. All amounts are reported in U.S. dollars
except where otherwise specified.
References to other forms. References in these instructions to
Form 1040, U.S. Individual Income Tax Return, are intended, if
applicable, to include Form 1040-SR, U.S. Income Tax Return for
Seniors, as well as other tax returns for noncorporate partners
such as Form 1041, U.S. Income Tax Return for Estates and
Trusts. Similarly, references to Form 1120, U.S. Corporation

Instructions for Schedule K-3 (Form 1065) (2025) Catalog Number 74716D
Department of the Treasury Internal Revenue Service www.irs.gov

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What’s New

Domestic partnerships with no or limited foreign activity. A
partnership with no foreign source income, no assets generating
foreign source income, and no foreign taxes paid or accrued may
be reporting information to partners on Schedules K-3. For
example, if you claim a credit for foreign taxes paid and/or
accrued separately from your partnership interest, you may need
certain information from the partnership to complete Form 1116,
Foreign Tax Credit; or Form 1118, Foreign Tax
Credit—Corporations. Also, if you’re a domestic corporation, a
domestic partnership may be required to complete Part IX when
the partnership makes certain deductible payments to foreign
parties related to you. The information reported in Part IX will
assist you as a domestic corporation in determining the amount
of base erosion payments made through the partnership, and in
determining if you’re subject to the base erosion and anti-abuse
tax (BEAT). See also Part IV concerning foreign-derived
intangible income (FDII) for when a domestic partnership with
solely domestic activity may be reporting information to you, Part
XI for when a domestic or foreign publicly traded partnership
(PTP) as defined in section 7704(b) with no foreign activity may
be reporting information to you, and Part XII if you’re a partner in
a qualified derivatives dealer (QDD) partnership (as defined in
the Part XII instructions).

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Uses of the parts of Schedule K-3, in general. The following
are brief descriptions of each part of Schedule K-3. Detailed
information is provided later in the Specific Instructions.
Part I. Part I is used to determine any international tax items
not reported elsewhere on Schedule K-3 (Form 1065).
Part II. Part II is used to determine your distributive share of
partnership income and loss by source and separate category of
income for purposes of the foreign tax credit limitation. Partners
will use the information to claim and figure a foreign tax credit on
Form 1116 or 1118.
Part III. Part III is used to determine the allocation and
apportionment of research and experimental (R&E) expenses,
interest expense, and the FDII deduction for purposes of the
foreign tax credit limitation. Also use this part to determine your
distributive share of the partnership’s creditable foreign taxes
paid or accrued, and to determine income adjustments under
section 743(b) by source and separate category. Partners use
the information to figure and claim a foreign tax credit on Form
1116 or 1118.
Part IV. Part IV is used to determine your deduction with
respect to FDII. Partners use the information to claim and figure
a section 250 deduction with respect to FDII on Form 8993,
Section 250 Deduction for Foreign-Derived Intangible Income
(FDII) and Global Intangible Low-Taxed Income (GILTI).
Part V. Part V is used, along with other information known to
you, such as from Schedule P (Form 5471), Previously Taxed
Earnings and Profits of U.S. Shareholders of Certain Foreign
Corporations, to determine your share of distributions by foreign
corporations to the partnership that are attributable to previously
taxed earnings and profits (PTEP) in your annual PTEP accounts
with respect to the foreign corporations (which are excludable
from your gross income) or non-previously taxed earnings and
profits (E&P), and the amount of foreign currency gain or loss on
the PTEP that you’re required to recognize under section 986(c).
Use the information to figure and report the dividends and
foreign currency gain or loss on Forms 1040 and 1120.
Part VI. Part VI is used to determine your income inclusions
under sections 951(a) and 951A if you’re a U.S. shareholder of
any of the listed controlled foreign corporations (CFCs). Partners
use the information to complete Form 8992, U.S. Shareholder
Calculation of Global Intangible Low-Taxed Income, and Forms
1040 and 1120 with respect to subpart F income inclusions,
section 951(a)(1)(B) inclusions, and section 951A inclusions.
Part VII. Part VII is used to complete Form 8621, Return by a
Shareholder of a Passive Foreign Investment Company or
Qualified Electing Fund, and to provide information required to
determine your inclusion with respect to the passive foreign
investment company (PFIC).
Part VIII. Part VIII is used to determine your deemed paid
taxes on inclusions under section 951A, 951(a)(1), or 1293(f).
Domestic corporate partners and partners making a section 962
election use the information to figure a deemed paid foreign tax
credit on Form 1118.
Part IX. Part IX is used to figure the BEAT. Corporate partners
use the information to complete Form 8991.
Part X. Part X is used to provide information to a foreign
partner (or a pass-through entity partner with a foreign owner) to
determine its tax liability or reporting requirements with respect
to income effectively connected with a U.S. trade or business
(ECI) or with respect to fixed, determinable, annual, or periodical
(FDAP) income. Partners use the information to figure and report
any U.S. tax liability on Form 1040-NR, U.S. Nonresident Alien
Income Tax Return; Form 1120-F, U.S. Income Tax Return of a
Foreign Corporation; or other applicable forms.
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Part XI. Certain partners that have entered into section
871(m) transactions referencing units in the partnership will use
any information reported in this part to determine their U.S.
withholding tax and reporting obligations with respect to those
transactions under section 871(m) and related rules, including
for purposes of determining the amounts to report on Form 1042,
Annual Withholding Tax Return for U.S. Source Income of
Foreign Persons; and Form 1042-S, Foreign Person’s U.S.
Source Income Subject to Withholding.
Part XII. Partners of QDD partnerships may use this
information to determine their U.S. tax liability or U.S. withholding
tax obligations and to figure and report any U.S. tax liability on
Form 1042-S.
Part XIII. Use this information as follows.
• If you’re a nonresident alien individual, foreign trust, or
foreign estate, complete Schedule P (Form 1040-NR),
Foreign Partner’s Interests in Certain Partnerships
Transferred During Tax Year.
• If you’re a foreign corporation, complete Schedule P (Form
1120-F), List of Foreign Partner’s Interests in Partnerships,
Parts IV and V.
• If you’re a foreign partnership, complete Form 4797, Sales of
Business Property; and Form 8949, Sales and Other
Dispositions of Capital Assets, as needed.
• If this is an installment sale, see Form 6252, Installment Sale
Income.

Specific Instructions
Schedule K-3 Identifying Information
Item E—Part applicability. The partnership answered “Yes” to
indicate the applicable parts of Schedule K-3. The partnership
answered “No” to indicate the inapplicable parts of
Schedule K-3.

Part I. Partner’s Share of
Partnership’s Other Current Year
International Information

This part reports your information for international tax items not
reported elsewhere on Schedule K-3.

Box 1. Gain on personal property sale. In general, income
from the sale of personal property is sourced according to the
residence of the seller; see section 865(a). If the partnership
sells nondepreciable personal property (other than inventory and
certain intangible property), you, the partner, are treated as the
seller. Therefore, you’ll need to determine the source of the gain
reported in column (f) of Part II, line 1. In general, if you’re a U.S.
citizen or resident alien individual, the gain is U.S. source.
However, as outlined in section 865(g), a U.S. citizen or resident
alien individual with a tax home as defined in section 911(d)(3) in
a foreign country is treated as a nonresident if an income tax of
at least 10% is imposed by and paid to a foreign country
regarding such sale; see section 865(g)(2). See also sections
865(e)(1) and 865(h) for other sourcing provisions for which the
information provided in box 1 may be helpful. See section 865 for
exceptions to the general sourcing rule.
If the partnership checked box 1 in Part I, use the information
attached to Schedule K-3 to determine if a foreign country
imposed a tax of at least 10% or more on the gain from each
sale. If so, and you have a tax home in a foreign country, such
gain is foreign source income and reported on Form 1116. For
more information, see the instructions for column (f) of Part II,
later.
Box 2. Foreign oil and gas taxes. A separate foreign tax credit
limitation is applied to foreign oil and gas taxes. See section
Partner's Instructions for Schedule K-3 (Form 1065) (2025)

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Income Tax Return, are intended, if applicable, to apply to other
forms in the 1120 series. References to forms which have been
replaced are intended, if applicable, to include the replacement
forms.

907(a) and Regulations section 1.907(a)-1 for details. If the
partnership had such taxes, it checked box 2 and attached a
partially completed Schedule I (Form 1118), Reduction of
Foreign Oil and Gas Taxes, to Schedule K-3. If you’re a
corporation, use the partially completed Schedule I to complete
your Schedule I (Form 1118). If you’re an individual, estate, or
trust, see Form 1116, Part III, line 12, and the associated
instructions for the applicable reduction for individuals.

example, by way of a subpart F or GILTI inclusion with respect to
related income.

Box 3. Splitter arrangements. Foreign income taxes with
respect to a foreign tax credit splitting event are suspended until
the related income is taken into account by the taxpayer; see
section 909. There is a foreign tax credit splitting event with
respect to foreign income taxes of a payor if in connection with a
splitter arrangement, as defined in Regulations section
1.909-2(b), the income was, is, or will be taken into account by a
covered person; see Regulations section 1.909-2(a). A covered
person, as defined in Regulations section 1.909-1(a)(4),
includes, for example, any entity in which the payor holds,
directly or indirectly, at least a 10% ownership interest
(determined by vote or value). A payor, as defined in Regulations
section 1.909-1(a)(3), includes, for example, a person that takes
foreign income taxes paid or accrued by a partnership into
account pursuant to section 702(a)(6).
If the partnership checked box 3 in Part I, it attached a
statement that separately identifies any arrangement, along with
your share of the taxes paid or accrued in connection with the
arrangement in which the partnership participates that would
qualify as a splitter arrangement under section 909. The box
should be checked only if the partnership knows or has reason
to know an entity that took into account related income from the
arrangement is a covered person with respect to one or more
partners. For example, you’re a payor of a foreign income tax if
you take into account the foreign income taxes paid or accrued
by the partnership under section 702(a)(6). If the partnership
wholly owns a reverse hybrid (as defined in Regulations section
1.909-2(b)(1)(iv)) and you own 10% or more (determined by vote
or value) of the interest in the partnership, the reverse hybrid is a
covered person with respect to you. You can’t credit the foreign
income taxes paid or accrued by the partnership with respect to
the reverse hybrid until you or the partnership takes into account
the related income of the reverse hybrid. Until then, the taxes are
suspended. The partnership reported your share of the
potentially suspended taxes as a result of the application of
section 909 on Part III, Section 4, line 2E. If you’re a corporation,
complete Form 1118, Schedule G, line E, for taxes suspended
under section 909. If you’re an individual, estate, or trust, include
on Form 1116, Part III, line 12, taxes suspended under section
909. If you’re required to complete Form 5471, Information
Return of U.S. Persons With Respect to Certain Foreign
Corporations, for a CFC, include in column (d) of Schedule E
(Form 5471), Schedule E-1, line 3b, taxes suspended under
section 909.
If the partnership checked box 3, and the statement indicates
that the partnership took into account the related income from
the splitter arrangement, the taxes are partially or fully
unsuspended depending on the amount of related income taken
into account. Even though the taxes are unsuspended, in certain
cases you might not be eligible to claim a credit for those taxes,
for example, when the related income is taken into account as
part of a dividend for which you’re eligible for a section 245A
deduction. To the extent you’re eligible to claim a credit for
unsuspended taxes, these amounts may be claimed on Form
1116 or 1118, as applicable. If you’re required to complete Form
5471, for a CFC, report the unsuspended taxes in column (d) of
Schedule E (Form 5471), Schedule E-1, line 3a.
In some cases, you may take into account related income
directly that allows you to partially or fully unsuspend taxes, for

Box 4. Foreign tax translation. If the partnership checked
box 4, it’ll attach a statement described in the instructions for
Part III, Section 4.

Partner's Instructions for Schedule K-3 (Form 1065) (2025)

Caution: There might be a splitter arrangement with respect to
the partner even if the partnership didn’t identify one, given that
the partnership didn’t have the information available to the
partner. Therefore, you must identify such arrangement even if
box 3 isn’t checked.

Box 5. High-taxed income. If the partnership checked box 5,
you must determine if the passive income reported to you by the
partnership is treated as income in another separate category.
The partnership should have attached Worksheets 1 and/or 2,
from the Partnership Instructions for Schedules K-2 and K-3
(Form 1065). Under section 904(d)(2)(B)(iii), income received or
accrued by a U.S. person that would otherwise be passive
income isn’t treated as passive income if the income is
determined to be high-taxed income. You must group your
distributive shares of passive income from a partnership
according to the rules in Regulations section 1.904-4(c)(3).
However, under Regulations 1.904-4(c)(5)(ii), the portion, if any,
of the distributive share of income attributable to income earned
by a domestic partnership through a foreign qualified business
unit (QBU) is separately grouped under the rules of Regulations
section 1.904-4(c)(4).
Use Schedule K-3 and your taxes on your other passive
income (that is, passive income that isn’t attributable to your
distributive share of the partnership’s income as reported on
Schedule K-3) to determine if you need to assign passive
income and the associated taxes to another separate category
of income. You must allocate and apportion your expenses to
this passive income to determine if the income is treated as
income in another separate category. This includes both your
distributive share of partnership expenses and expense incurred
by you directly. If you’re a corporation, see the Instructions for
Form 1118 for how to report your income and taxes reclassified
under the high-taxed income rule. If you’re an individual, estate,
or trust, see the Instructions for Form 1116 for how to report your
income and taxes reclassified under the high-taxed income rule.
Box 6. Section 267A disallowed deduction. If the partnership
checked box 6 in Part I and attached a statement titled “Section
267A Disallowed Deduction,” prepare your tax return by taking
into account that you aren’t allowed a deduction for any of the
amounts listed in that statement. Thus, for example, don’t claim
as a deduction any amount reported on Schedule K-3, Part II,
Section 2, lines 41 through 43, or Part X, Section 2, line 9, to the
extent listed in the statement as an amount for which a deduction
is disallowed under section 267A. In addition, you may be
required to report the amount of your disallowed deductions
under section 267A. See, for example, Form 1120, Schedule K,
question 21; and Form 1120-F, U.S. Income Tax Return of a
Foreign Corporation, Additional Information, item EE.
Caution: Box 6 and the accompanying statement describe only
interest or royalty paid or accrued by the partnership for which
the partnership knows, or has reason to know, that you’re
disallowed a deduction under section 267A. In certain cases, the
partnership may not know, or have reason to know, that you’re
disallowed a deduction for interest or royalty paid or accrued by
the partnership. See the instructions for Form 1065, Schedule B,
question 22, for additional information.
For your share of any interest or royalty paid or accrued by the
partnership, you must apply section 267A and determine
whether a deduction is disallowed, regardless of whether box 6
is checked or whether the amount is listed on the accompanying
statement.
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Boxes 8 and 9. Form 5471 information and other forms. If
applicable, the partnership will attach the relevant portions of
Form 5471; Form 5713, International Boycott Report; and other
relevant international tax forms. If the partnership has filed Form
8990, Limitation on Business Interest Expense Under Section
163(j), the partnership will also provide on Schedule K-1 the
information needed to complete Form 8990, Schedule A, for
foreign partners which are required to report their distributive
shares of excess business interest expense, excess taxable
income, and excess business interest income, if any, that are
attributable to ECI.
Box 9 will be checked if the partnership attached Form 8858,
Form 8621, or both to its Form 1065. If you need information
from these forms, request it from the partnership.

and trusts, or domestic corporation may claim a credit for taxes
paid or accrued, and in some cases deemed paid, to foreign
countries or U.S. territories. In general, foreign corporations and
nonresident alien individuals may claim a credit for taxes paid or
accrued to foreign countries or U.S. territories with respect to
ECI. The amount of foreign tax credit in a tax year is generally
limited to the lesser of the foreign income taxes paid or accrued
or the U.S. tax on foreign source income. The limitation is figured
by separate categories of foreign source income, including
foreign branch category, passive category, and general category.
See the instructions for Forms 1116 and 1118, as well as Pub.
514, Foreign Tax Credit for Individuals, for a summary of the
rules for determining the sources and separate categories of
income.

Box 10. Partner loan transactions. If this box is checked, the
partnership identified upstream or downstream partnership loan
transactions. See Regulations sections 1.861-9(e)(8) and (9) for
purposes of determining special rules regarding interest
expense allocation and apportionment if you have such loan
transactions with the partnership.

Note: If you’re a partnership that is a partner in a partnership,
the information that you receive on your Schedule K-3, Parts II
and III, will need to be included on the Schedules K-3, Parts II
and III, that you provide to your partners.

Box 11. Dual consolidated loss. If the partnership checked
box 11 and you’re a domestic corporation (other than a regulated
investment company (RIC), a real estate investment trust (REIT),
or an S corporation), the dual consolidated loss (DCL) rules
pursuant to Regulations sections 1.1503(d)-1 through -8 may
apply to your share of certain partnership items. In order to
comply with the DCL rules, take into account the information
provided in the attachment to this schedule (for example, your
share of the income or DCL attributable to the partnership’s
foreign branch or interest in a hybrid entity).
Box 12. Form 8865 information. If the partnership transferred
property to a foreign partnership that would subject one or more
of its domestic partners to reporting under section 6038B and
Regulations section 1.6038B-2(a)(2) but didn’t file Schedule O
(Form 8865), Transfer of Property to a Foreign Partnership,
containing all the information required under Regulations section
1.6038B-2, with respect to the transfer, the partnership must
provide the necessary information for each partner to fulfill its
reporting requirements under Regulations section 1.6038B-2.
The partnership should have attached the relevant information to
Schedule K-3, as applicable to the partner.
Box 13. Other international items. If the partnership has
transactions, income, deductions, payments, or anything else
that implicates the international tax provisions of the Code and
such items aren’t otherwise reported on this part or other parts of
Schedule K-3, the partnership reported that information on a
statement and checked box 13.
If you’re a CFC partner (or in the case of a pass-through entity
partner, you have a CFC partner), the partnership attached
information to Schedule K-3 so that the U.S. shareholder may
complete Form 5471. For example, if you’re a CFC partner in the
partnership, the U.S. shareholder of the CFC will need to report
the information reported on your Schedule K-3, Parts II and III,
on Form 5471, in particular, Schedule E (Form 5471). If you’re a
controlled foreign partnership (CFP) partner (or in the case of a
pass-through entity partner, you have a CFP partner), the
partnership attached information to Schedule K-3 so that the
U.S. partner in the CFP may complete Form 8865.

Parts II and III

Schedule K-3, Parts II and III, report information you use to figure
the foreign tax credit. In general, a U.S. individual, U.S. citizen or
U.S. resident individual beneficiary of certain domestic estates
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Example 2—domestic filing exception met; issuance of
Schedule K-3 not required. A married couple, U.S. citizens,
each own a 50% interest in USP, a domestic partnership. USP
invests in a RIC. USP receives a Form 1099 from the RIC
reporting $100 of creditable foreign taxes paid or accrued on
passive category foreign source income. USP doesn’t have any
foreign activity aside from that of the RIC. USP notifies the
couple on an attachment to the Schedule K-1 that they won’t
receive Schedule K-3 unless they request it. The married couple
don’t request Schedule K-3 from USP for tax year 2025.
Because USP qualified for the domestic filing exception, USP
didn’t complete Schedule K-3 for the couple.
Reasons to request Schedule K-3 from domestic partnerships with limited or no foreign activity. Section 904
generally limits the foreign tax credit to the lesser of the foreign
taxes paid or accrued or the portion of U.S. tax liability
attributable to foreign source taxable income. Foreign source
taxable income is foreign source gross income less allocable
expenses. In general, the partnership completed Schedule K-3,
Parts II and III, because the partnership’s gross income, gross
receipts, expenses, assets, and foreign income taxes paid or
accrued may affect the foreign tax credit available to the partner.
The source of certain gross income is determined by the partner.
Partner's Instructions for Schedule K-3 (Form 1065) (2025)

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Caution: There might be a partner loan transaction even if the
partnership didn’t identify one, given that the partnership didn’t
have the information available to the partner.

Partnership with U.S. partners and limited or no foreign activity. In many instances, a partnership with no foreign partners,
no foreign source income, no assets generating foreign source
income, and no foreign income taxes paid or accrued may have
reported information on Schedule K-3. For example, if you claim
the foreign tax credit, you generally need certain information
from the partnership in Schedule K-3, Parts II and III, to complete
Form 1116 or 1118. This information should have been reported
in prior years, including before the Tax Cuts and Jobs Act of
2017, with the Schedules K and K-1, and is information you need
to compute the foreign tax credit limitation, which determines the
amount of foreign tax credit available to you.
Exceptions. You may not have received Schedule K-3 if the
partnership was eligible for an exception. See Domestic Filing
Exception in the Partnership Instructions for Schedules K-2 and
K-3 (Form 1065). Also, if you (or, if you’re a pass-through entity,
your direct or indirect partner) are eligible to claim a foreign tax
credit, you aren’t required to receive Schedule K-3, Parts II and
III, if you or your partners aren’t required to complete Form 1116.
This could be the case, for example, because you (or, if you’re a
pass-through entity, your direct or indirect partners) qualify for an
exception to filing Form 1116. See section 904(j) and Form 1116
exemption exception in the Partnership Instructions for
Schedules K-2 and K-3 (Form 1065). However, see reasons
below for requesting the Schedule K-3 when you’re required to
file Form 1116.

In addition, some expenses of the partnership are allocated and
apportioned by the partner. Because the income source and
expense allocation are determined by the partner in certain
cases, it’s not possible for the partner to assume that all income
of the partnership is U.S. source and all expenses of the
partnership reduce U.S. source income. Also, the allocation and
apportionment of certain partner expenses take into account
distributive shares of assets and income of the partnership that
aren’t otherwise reported on Schedule K-1. For example, under
section 865(i)(5), for sourcing purposes, personal property sold
by the partnership is treated as sold by the partners. Generally,
income from the sale of certain nondepreciable personal
property (excluding inventory and certain other property) is
sourced according to the residence of the seller. In cases in
which the partner is a pass-through entity, the partnership might
not know the ultimate residence of the first non-pass-through
partner. The distributive share of the partnership’s gain on the
sale of personal property isn’t separately stated on
Schedule K-1, but is reported in Schedule K-3, Part II.
As another example, the partner’s R&E expenses (which
include the distributive share of the partnership’s R&E expenses)
are allocated and apportioned by the partner; see Regulations
section 1.861-17(f). R&E expenses are allocated and
apportioned based on the gross receipts by Standard Industrial
Classification (SIC) code. The distributive share of the R&E
expenses by SIC code isn’t separately stated on Schedule K-1,
but is reported in Schedule K-3, Part II. The partner needs
Schedule K-3, Part III, Section 1, for the partner’s share of the
partnership’s gross receipts by SIC code for purposes of
allocating and apportioning R&E expenses.
In some cases, the partner will be able to use the information
reported in Parts II and III to increase the foreign tax credit
limitation, and the amount of available foreign tax credit to the
partner. For example, Schedule K-3, Part III, Section 2, provides
the partner with the tax book value of the assets of the
partnership. In general, a partner apportions interest expense to
reduce U.S. source gross income or foreign source gross income
based on the tax book value of its assets, including its
distributive share of the partnership’s interest expense and
assets; see section 864(e)(2) and Regulations section
1.861-9(e). Taking into account the assets of a domestic
partnership generating solely U.S. source income would result in
more expense allocated to U.S. source gross income and less
expense allocated to reduce foreign source gross income.
Additional foreign source income increases the partner’s foreign
tax credit limitation, and the ability of the partner to claim foreign
tax credits. The regulations provide exceptions to asset method
apportionment for certain less-than-10% limited partners, and
these instructions take this into account such that the
partnership isn’t required to provide these partners with certain
portions of Schedule K-3. Schedule K-1 doesn’t separately state
the distributive share of the partnership’s total interest expense,
or the tax book value of the assets, whereas the Schedule K-3
contains this information. See Regulations section 1.861-9(e).
See Lines 39 and 40 and Lines 41 through 43 under Part II; and
Section 2 under Part III, later, for further guidance.

and, therefore, the domestic filing exception doesn’t apply to
USP with respect to Kirby. USP provides Parts II and III of
Schedule K-3 to Kirby. Kirby’s share of the tax book value of
USP’s assets is $50,000, which is reported in column (a) of
Schedule K-3, Part III, Section 2. Not including its distributive
share of the assets of USP, the tax book value of Kirby’s assets is
$50,000. Of Kirby’s assets, $10,000 generates passive category
foreign source income and $40,000 generates U.S. source
income. Kirby has passive category foreign source taxable
income before interest expense of $8,000 and Kirby’s U.S. tax
rate is 25%. Kirby’s interest expense and USP’s assets are
characterized in the same category under sections 163 and 469
for purposes of Temporary Regulations section 1.861-9T(d).
Kirby uses the tax book value (as opposed to the alternative tax
book value) to allocate and apportion interest expense.
Kirby’s interest expense is apportioned between U.S. source
and foreign source income ratably based on the tax book value
of Kirby’s U.S. source and foreign source assets. Without taking
into account the distributive share of USP’s assets, the amount
of Kirby’s interest expense that would reduce foreign source
gross income is $1,000 ($5,000 x $10,000/$50,000). Therefore,
Kirby’s foreign source taxable income would be $7,000 ($8,000 −
$1,000). At a 25% U.S. tax rate, Kirby may only use $1,750 (25%
(0.25) x $7,000) of the $2,000 of foreign income taxes. See
section 904.
Taking into account the distributive share of USP’s assets, the
amount of Kirby’s interest expense that reduces passive
category foreign source gross income is $500 ($5,000 x
$10,000/$100,000). Therefore, Kirby’s passive category foreign
source taxable income would be $7,500 ($8,000 − $500). At a
25% U.S. tax rate, Kirby may use $1,875 (25% (0.25) x $7,500)
of the $2,000 of foreign income taxes—an additional foreign tax
credit amount of $125 after taking into account Kirby’s share of
the tax book value of the partnership assets.
Darby doesn’t request a Schedule K-3 from USP for tax year
2025. Under the domestic filing exception, USP didn’t complete
Schedule K-3 for Darby.

Example 3—Parts II and III required for partnership with
no foreign activity. U.S. citizens Kirby and Darby own equal
interests in USP, a domestic partnership. USP has no foreign
activity. In Year 1, Kirby pays $2,000 of foreign income taxes on
passive category income other than capital gains. Such taxes
are reported to Kirby on a payee statement. Kirby has interest
expense of $5,000, and USP doesn’t have interest expense.
None of Kirby’s interest expense is directly allocable to Kirby’s
gross income. Kirby doesn’t have an overall domestic loss in tax
year 2025.
Because Kirby must complete Form 1116 to claim a foreign
tax credit, Kirby requests a Schedule K-3 by the 1-month date

Example 4—Part II, not Part III, required for partnership
with no foreign activity. The facts are the same as in
Example 3, except that Kirby has $5,000 of expenses described
in Regulations section 1.861-8(e)(9), and Kirby and USP have
no other expenses. Further, Kirby’s share of USP’s gross income
is $50,000. Not including its distributive share of the income of
USP, Kirby’s gross income is $50,000. Of Kirby’s gross income,
$5,000 is foreign source gross income and $45,000 is U.S.
source gross income. USP doesn’t have any gross income the
source of which is determined by the partner.
Kirby’s expenses must be ratably apportioned based on
Kirby’s gross income (including its distributive share of the
income of USP); see Regulations section 1.861-8(c)(3).
Therefore, USP provided Schedule K-3, Part II, to Kirby. Before
taking into account the distributive share of USP’s gross income,
the amount of Kirby’s expenses described in Regulations section
1.861-8(e)(9) that reduce foreign source gross income is $500
($5,000 x $5,000/$50,000). Therefore, Kirby’s foreign source
taxable income would be $4,500 ($5,000 − $500). At a 25% U.S.
tax rate, Kirby may only use $1,125 (25% (0.25) x $4,500) of the
$2,000 of foreign income taxes. See section 904.
Taking into account the distributive share of USP’s gross
income, the amount of Kirby’s expenses described in
Regulations section 1.861-8(e)(9) that reduce foreign source
gross income is $250 ($5,000 x $5,000/$100,000). Therefore,
Kirby’s foreign source taxable income would be $4,750 ($5,000 −
$250). At a 25% U.S. tax rate, Kirby may use $1,187.50 (25%
(0.25) x $4,750) of the $2,000 of foreign income taxes—an
additional foreign tax credit amount of $62.50 after taking into
account Kirby’s distributive share of the gross income of USP.

Partner's Instructions for Schedule K-3 (Form 1065) (2025)

5

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TREASURY/IRS AND OMB USE ONLY DRAFT
Because Kirby and USP don’t have R&E expenses or interest
expense, and because USP didn’t pay or accrue any foreign
income taxes, USP didn’t provide Schedule K-3, Part III, to Kirby.
Note: A partner may need the distributive share of the
partnership’s gross income for purposes of allocating and
apportioning expenses other than those described in
Regulations section 1.861-8(e)(9) and should request this
information from the partnership if it’s needed and if it hasn’t
been provided.

Part II. Foreign Tax Credit Limitation

Columns (b) through (e). Foreign source. Add the amounts
reported in these columns to your other income in these
separate categories and report the total amounts on the
applicable Form 1116, Part I; or Form 1118, Schedule A.
Exception. If you’re a limited partner, you hold less than 10%
of the value of the partnership, and you didn’t hold your interest
in the ordinary course of the partner’s active trade or business,
then any amounts reported on Schedule K-3 in the following
locations should generally be reported as passive category
income.
• Part II, Section 1, columns (b), (d), and (e).
• Part III, Section 1, columns (b), (d), and (e).
• Part III, Section 3, columns (c) and (d).
• Part III, Section 5, columns (b), (c), (e), and (f).
Deductions reported in columns (b), (d), and (e) of Part II,
Section 2, should generally be reported as reducing passive
category income. Similarly, any foreign income taxes paid or
accrued on foreign source income in columns (b), (c), (e), and (f)
of Part III, Section 4, should generally be assigned to passive
category income; see Regulations section 1.904-4(n)(1)(ii). If
you’re a limited partner that owns less than 10% of a capital and
profits interest in the partnership, Part III, Section 2, wasn’t
completed by the partnership; see Regulations section
1.861-9(e)(4). See section 904(d)(2)(B)(iii)(II) and Regulations
section 1.904-4(c) for an exception to passive category if income
is subject to a high rate of foreign tax.
Column (f). Sourced by partner. You must determine the
source and separate category of the income reported in this
column. The income in this column will generally be with respect
to sale of personal property other than inventory, depreciable
property, and certain intangible property and will generally be
sourced under section 865. This column might also include
foreign currency gain on a section 988 transaction. If you’re a
U.S. citizen or resident, sales and gains reported in this column
will generally be U.S. source income and not reported on Form
1116 or 1118 unless you elect to re-source such income under
an applicable income tax treaty. There are certain exceptions, for
example, a U.S. citizen or resident with a tax home (as defined in
section 911(d)(3)) in another country is treated as a nonresident
if an income tax of at least 10% is imposed by and paid to a
foreign country regarding such sale. See the instructions for
box 1 of Part I, earlier. Also, the source of foreign currency gain
or loss on section 988 transactions may be determined by
reference to the residence of the QBU on whose books the
asset, liability, or item of income or expense is properly reflected.
See the Instructions for Form 1118 and Pub. 514 for additional
details.

6

Form 1118, Schedule A, requires a corporation to separately
report certain types of gross income by source and separate
category. Schedule K-3, Part II, lines 1 through 23, generally
follow the separately reported types of gross income on Form
1118, Schedule A. Individuals must follow the same sourcing
rules, but Form 1116 only requires reporting of total gross
income from foreign sources by separate category. Therefore,
those required to file Form 1116 would report the amount from
Schedule K-3, Part II, Section 1, line 24, taking into account
section 904(b)(2) and PTEP adjustments, by country on their
Form 1116, Part I, line 1a. Because all gross income is reported
on one line on Form 1116, the remaining instructions generally
refer only to Form 1118 reporting.

Country code. Lines 1 through 24 require the partnership to
report for each gross income item, on a separate line (A, B, or
C), the two-letter code from the list at IRS.gov/CountryCodes for
the foreign country or U.S. territory within which the gross
income is sourced. If a type of income is sourced from more than
three countries, a statement is attached to expand
Schedule K-3, Part II, for that type of income to report the
additional countries.
Note: Schedule K-3 reports gross income by country or U.S.
territory because such information is requested on Forms 1116
and 1118. Income and taxes are reported by country on Forms
1116 and 1118 so that the IRS may, for example, initially
evaluate whether taxpayers are claiming credits for compulsory
payments to foreign governments.
If applicable, the partnership entered in column (f) the foreign
country to which the partnership paid tax of at least 10% of the
gain. See sections 865(e) and 865(g).
Each gross income item (for example, sales vs. interest
income) may have different countries listed on A, B, C, etc.,
given that the partnership might not have sales income and
interest income, for example, from the same country. Line 24
should add each country’s total income reported on Part II,
regardless of which line such income is reported, whether A, B,
C, etc.
Note: For column (f) of Part II, if the partnership entered the
code XX, it was because it couldn’t determine the country or
U.S. territory from which the gross income is sourced because
the source is determined by your residence, or for pass-through
entities, the residence of the first non-pass-through partner.
Exceptions. The instructions for Forms 1116 and 1118
specify exceptions from the requirement to report gross income
by foreign country or U.S. territory with respect to RICs and
section 863(b). See the instructions for Forms 1116 and 1118 for
these exceptions that apply.
Line 1. Sales. If you file Form 1118, add the amount reported
on this line to your other sales and report the total in column 7 of
Form 1118, Schedule A, by separate category. See Column (f).
Sourced by partner, earlier, for more information.
Line 2. Gross income from performance of services. If you
file Form 1118, add the amount reported on this line to your other
gross income from performance of services and report the total
in column 8 of Form 1118, Schedule A, by separate category.
Lines 3, 4, and 10. Rental income, royalties, and license
fees. If you file Form 1118, add the amount reported on these
lines to your other rental income, royalties, and license fees and
report the total in column 6 of Form 1118, Schedule A, by
separate category.
Line 5. Guaranteed payments. If you file Form 1118, add the
amount reported on this line to your other guaranteed payments
Partner's Instructions for Schedule K-3 (Form 1065) (2025)

DRAFT

DRAFT

Column (a). U.S. source. Don’t report amounts in this column
on Form 1116 or 1118 unless you elect to re-source such
income under an applicable U.S. income tax treaty. See sections
904(d)(6) and 865(h). See the instructions for Forms 1116 and
1118 for income re-sourced by treaty reported as a separate
category of income.

Section 1—Gross Income (Lines 1 Through 24)

TREASURY/IRS AND OMB USE ONLY DRAFT
and report the total in column 11 of Form 1118, Schedule A, by
separate category.

2. Report the total in column 9 of Form 1118, Schedule A, by
separate category.

Line 6. Interest income. If you file Form 1118, add the amount
reported on this line to your other interest income and report the
total in column 5 of Form 1118, Schedule A, by separate
category.

3. Identify the type of gain as section 986(c) gain in column 10
of Form 1118, Schedule A.

Lines 11 through 15 and 27 through 30. Capital gains and
losses. Section 904(b)(2)(B) contains rules regarding
adjustments to account for capital gain rate differentials (as
defined in section 904(b)(3)(D)) for any tax year. These rules
apply to individuals and may require adjustments to the amounts
on lines 11 through 15, which in turn affect the total amount on
line 24. See the Instructions for Form 1116 for additional
information. If you file Form 1116, report Schedule K-3, Part II,
lines 27 through 30, on Form 1116, Part I, line 5, by separate
category.
If you file Form 1118, add the amounts reported on
Schedule K-3, Part II, lines 11 through 15, to other gross income
you report in column 11 of Form 1118, Schedule A, by separate
category. Add the amounts reported on Schedule K-3, Part II,
lines 27 through 30, to other amounts you report in column 13(j)
of Form 1118, Schedule A; column (e) of Form 1118,
Schedule H, Part II; or column (e) of Form 1118, Schedule H,
Part III, as applicable, by separate category.
Line 12. Net long-term capital gain. Line 12 doesn’t include
gains reported on lines 13, 14, and/or 15.
Line 14. Unrecaptured section 1250 gain. If gain is both
unrecaptured section 1250 gain and net section 1231 gain, the
gain is reported on line 14 and not on line 15. The partnership
included an attachment indicating the amount of unrecaptured
section 1250 gain that is also net section 1231 gain.
Line 28. Net long-term capital loss. Line 28 doesn’t include
losses reported on line 29.
Lines 16 and 46. Section 986(c) gain and loss. These lines
report the partnership’s share of a lower-tier pass-through
entity’s section 986(c) gain or loss, and the amount of section
986(c) gain or loss on distributions of PTEP sourced from the
partnership’s annual PTEP accounts. You’ll need to determine
your foreign currency gain or loss under section 986(c) with
respect to distributed PTEP sourced from annual PTEP accounts
that you have with respect to a foreign corporation, using
Schedule K-3, Part V.
The amount of foreign currency gain and loss that you report
on Form 1118 and other forms, for example, Form 1040 or 1120,
will include your share of the partnership’s foreign currency gain
or loss under section 986(c) and your own foreign currency gain
or loss under section 986(c). If you file Form 1118, complete the
following.
1. Add the amount from Schedule K-3, Part II, line 16, to your
other section 986(c) gain.

Partner's Instructions for Schedule K-3 (Form 1065) (2025)

5. Enter the total, as applicable, by separate category, in:
• Form 1118, Schedule A, column 13(h);
• Form 1118, Schedule H, Part II, column (e); or
• Form 1118, Schedule H, Part III, column (e).
If you entered an amount in column 13(h) of Form 1118,
Schedule A, enter the type of loss as section 986(c) loss in
column 13(i) of Form 1118, Schedule A.
Lines 17 and 47. Section 987 gain and loss. If you file Form
1118, complete the following.
1. Add the amount from Schedule K-3, Part II, line 17, to your
other section 987 gain.
2. Enter the total in column 9 of Form 1118, Schedule A, by
separate category.
3. Identify the type of gain as section 987 gain in column 10 of
Form 1118, Schedule A.
4. Add the amount from Schedule K-3, Part II, line 47, to your
other section 987 loss.

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Lines 7 and 8. Ordinary dividends and qualified dividends.
Some of the amounts reported on these lines may be attributable
to PTEP in annual PTEP accounts that you have with respect to
a foreign corporation and are therefore excludable from your
gross income. If you file Form 1116, don’t include the amount
attributable to PTEP in your annual accounts on Part I, line 1a.
If you file Form 1118, add the amount reported on these lines,
less the amount attributable to PTEP in your annual PTEP
accounts, to your other dividends and report the total in column 4
of Form 1118, Schedule A, by separate category.
See the Instructions for Form 1116 for additional information
on the rules regarding capital gain rate differentials (as defined in
section 904(b)(3)(D)) for qualified dividends.

4. Add the amount from Schedule K-3, Part II, line 46, to your
other section 986(c) losses.

5. Enter the total, as applicable, by separate category, in:
• Form 1118, Schedule A, column 13(h);
• Form 1118, Schedule H, Part II, column (e); or
• Form 1118, Schedule H, Part III, column (e).
If you entered an amount in column 13(h) of Form 1118,
Schedule A, enter the type of loss as section 987 loss in column
13(i) of Form 1118, Schedule A.
Lines 18 and 48. Section 988 gain and loss. The source of
foreign currency gain or loss on section 988 transactions is
generally determined by reference to the residence of the
taxpayer or QBU on whose books the asset, liability, or item of
income or expense is properly reflected. If the source of the
foreign currency gain or loss is determined by reference to the
residence of the taxpayer, the foreign currency gain and loss will
be reported in column (f). For example, if you’re a U.S. resident,
such gain or loss is U.S. source and wouldn’t be reported on
Form 1116 or 1118. If you file Form 1118, complete the
following.
1. Add the amount from Schedule K-3, Part II, line 18, to your
other section 988 gain.
2. Enter the total in column 9 of Form 1118, Schedule A, by
separate category.
3. Identify the type of gain as section 988 gain in column 10 of
Form 1118, Schedule A. See the instructions for column (f).
4. Add the amount from Schedule K-3, Part II, line 48, to your
other section 988 loss.
5. Enter the total, as applicable, by separate category, in:
• Form 1118, Schedule A, column 13(h);
• Form 1118, Schedule H, Part II, column (e); or
• Form 1118, Schedule H, Part III, column (e).
If you entered an amount in column 13(h) of Form 1118,
Schedule A, enter the type of loss as section 988 loss in column
13(i) of Form 1118, Schedule A.
Line 20. Other income. If you file Form 1118, add the amount
reported on this line to your other income and report the total in
column 11 of Form 1118, Schedule A, by separate category.
7

TREASURY/IRS AND OMB USE ONLY DRAFT
Line 24. Total gross income. If you file Form 1116, add the
amounts from lines A, B, and C (and additional lines, if
applicable) to your other foreign source gross income from those
countries, and enter the totals on Form 1116, Part I, line 1a,
taking into account any section 904(b) adjustments for capital
gains, as described earlier, for Schedule K-3, Part II, lines 11
through 15, or PTEP adjustments, as described earlier, for
Schedule K-3, Part II, lines 7 and 8, and line 16.
If you file Form 1118, add the amounts from lines A, B, and C
(and additional lines, if applicable) to your other foreign source
gross income from those countries, and enter the totals in
column 11 of Form 1118, Schedule A, taking into account any
PTEP adjustments, as described earlier, for Schedule K-3, Part
II, lines 7 and 8, and line 16.
Form 1118, Schedule A, requires a corporation to separately
report certain types of deductions and losses by source and
separate category. Separate reporting is required because each
type of deduction may be allocated and apportioned according
to a different methodology; see Regulations sections 1.861-8
through -20. For purposes of allocating and apportioning
expenses, in general, a partner adds the distributive share of the
partnership’s deductions with other deductions incurred directly
by the partner or through other pass-through entities including
partnerships, S corporations, and trusts (see Regulations
section 1.904-5(a)(4)(iv) for a definition of pass-through entity);
see Regulations section 1.861-8(e)(15). Schedule K-3, Part II,
lines 25 through 53, generally follow the separately reported
types of deductions and losses on Form 1118, Schedule A.
Individuals must generally follow the same expense allocation
and apportionment rules, but Form 1116 only requires separate
reporting of certain deductions. See Form 1116, Part I, lines 2
through 5.

Line 25. Expenses allocable to sales income. If you file Form
1118, add the amount reported on this line to your other
expenses allocable to sales income and report the total in
column 13(f) of Form 1118, Schedule A, by separate category.
Line 26. Expenses allocable to gross income from performance of services. If you file Form 1118, add the amount
reported on this line to your other expenses allocable to gross
income from performance of services and report the total in
column 13(g) of Form 1118, Schedule A, by separate category.
Lines 31, 37, 44, and 45. Other deductions. If you file Form
1118, add the amounts reported on these lines to your other
deductions and report the total in column 13(j) of Form 1118,
Schedule A; column (e) of Form 1118, Schedule H, Part II; or
column (e) of Form 1118, Schedule H, Part III, as applicable, by
separate category.
Line 32. Research & experimental (R&E) expenses. Add the
R&E expenses reported in column (f) to your other R&E
expenses. After determining the portion of such expenses that
are allocable to U.S. source income or foreign source income
because they are performed predominantly in a particular
geographic area, if you file Form 1118, report the remaining R&E
expenses in Form 1118, Schedule H, Part I. See Regulations
section 1.861-17(f).
Lines 33 and 35. Allocable rental, royalty, and licensing expenses—depreciation, depletion, and amortization. If you
file Form 1118, add the amounts reported on these lines to your
other allocable rental, royalty, and licensing expenses
(depreciation, depletion, and amortization) and report the total in
column 13(d) of Form 1118, Schedule A, by separate category.
Lines 34 and 36. Allocable rental, royalty, and licensing expenses—other than depreciation, depletion, and amortization. If you file Form 1118, add the amounts reported on these
8

Caution: If box 6 of Part I is checked, royalty expenses may
include amounts for which you aren’t allowed a deduction under
section 267A. See the statement for box 6 of Part I attached to
Schedule K-3.
Line 38. Charitable contributions. Charitable contribution
deductions shouldn’t be reported on Form 1116 or 1118
because such deductions are allocable to U.S. source income.
Lines 39 and 40. Interest expense specifically allocable under Regulations section 1.861-10(e) and Temporary Regulations section 1.861-10T. If you file Form 1118, add the
amounts reported on these lines to your other interest expense
specifically allocable under Regulations section 1.861-10(e) and
Temporary Regulations section 1.861-10T and report the total in
column (b) of Form 1118, Schedule H, Part II, lines 1b and c.
Lines 41 through 43. Other interest expense. If you file Form
1118, add the sum of the interest expense included on these
lines to your other interest expense and report the total in column
(b) of Form 1118, Schedule H, Part II, line 2.
If you file Form 1116, allocate and apportion the sum of the
interest expense included on these lines and report the allocated
and apportioned amounts on the applicable separate category
Form 1116, Part I, line 4b. Interest expense incurred by certain
individuals, estates, and trusts is allocated and apportioned
based on the categories of interest expense in sections 163 and
469, adjusted for any interest expense directly allocated under
Temporary Regulations section 1.861-10T. See Regulations
section 1.861-9(e)(3) and Temporary Regulations sections
1.861-9T(d)(1) and (3).
Exception. If you’re a limited partner, and your ownership,
together with ownership by persons that bear a relationship to
the partner described in section 267(b) or section 707, of the
capital and profits interest of the partnership is less than 10%,
your distributive share of the partnership’s interest expense
generally reduces passive category foreign source gross
income. See Regulations sections 1.861-9(e)(4)(i) and
1.904-4(n)(1)(ii) for further guidance. If you file Form 1118, report
interest expense from such limited partners on the passive
category column 13(j) of Form 1118, Schedule A, unless the
high-taxed income exception of section 904(d)(2)(B)(iii)(II) is
applicable. If you file Form 1116, report such interest expense on
the passive category Form 1116, Part I, line 4b, unless the
high-taxed income exception of section 904(d)(2)(B)(iii)(II) is
applicable. However, if your partnership interest is held in the
ordinary course of your active trade or business, your share of
the partnership’s interest expense is apportioned in accordance
with your share of gross foreign source income in each separate
category and gross U.S. source income from the partnership.
Report the interest expense on the appropriate Form 1116 or
1118, as applicable.
Exception. See Regulations sections 1.861-9(e)(8) and (9)
for special rules concerning downstream and upstream
partnership loans that require a matching of related interest
income to interest expense allocations.
Caution: If box 6 of Part I is checked, interest expense may
include amounts for which you aren’t allowed a deduction under
section 267A. See the statement for box 6 of Part I attached to
Schedule K-3.
Exception. See Temporary Regulations section 1.861-9T(d)
(1) for an exception to the apportionment of interest expense
when an individual’s foreign source income (including income
excluded under section 911) doesn’t exceed $5,000. Such
Partner's Instructions for Schedule K-3 (Form 1065) (2025)

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Section 2—Deductions (Lines 25 Through 54)

lines to your other allocable rental, royalty, and licensing
expenses (other than depreciation, depletion, and amortization)
and report the total in column 13(e) of Form 1118, Schedule A,
as applicable, by separate category.

TREASURY/IRS AND OMB USE ONLY DRAFT
interest expense may be allocated entirely to U.S. source
income.
Line 45. Foreign taxes not creditable but deductible. See
the instructions for Forms 1116 and 1118 for examples of foreign
taxes not creditable but deductible.
Note: Foreign taxes that are creditable (even if a partner
chooses to deduct such taxes) aren’t reported as expenses on
Part II. Don’t claim a foreign tax credit on Form 1116 or 1118 for
amounts reported on line 45. However, you may claim a
deduction for such taxes on the applicable form, including Forms
1040 and 1120.
Creditable foreign taxes are reported on Part III, Section 4.
Line 49. Other allocable deductions. If you file Form 1118,
add the amounts reported on this line to your other allocable
deductions and enter the total in column 13(j) of Form 1118,
Schedule A, by separate category.

Part III. Other Information for
Preparation of Form 1116 or 1118
Section 1—R&E Expenses Apportionment
Factors

This section reports the information that you need to allocate and
apportion your R&E expenses for foreign tax credit limitation
purposes. R&E expenses are allocated and apportioned by the
partner; see Regulations section 1.861-17(f)(1). Individual,
estate, and trust partners will use this Section 1 to determine the
R&E expenses reported on Form 1116, Part I. See the
Instructions for Form 1116. Because Form 1116 doesn’t include
detailed entries for R&E expenses, the line instructions below
only refer to Form 1118. Corporate partners will use this Section
1 to determine the R&E expenses reported on Form 1118,
Schedule H, Part I.
Line 1. Gross receipts by SIC code. Add the amounts
reported on line 1 by SIC code to your other gross receipts and
report on Form 1118, Schedule H, Part I.
Line 2. Exclusive apportionment with respect to total R&E
expenses entered on Part II, line 32. Add the amounts
reported on line 2 to the partner’s other R&E expenses related to
activity performed in the United States and the amount of R&E
expenses related to activity performed outside the United States
by SIC code. See the Instructions for Form 1118 to determine
the exclusive apportionment of the R&E expenses.

Section 2—Interest Expense Apportionment
Factors

This section includes the information that you need to allocate
and apportion your interest expense for foreign tax credit
limitation purposes. This part is relevant for all partners with
interest expense (including the share of the partnership’s interest
expense) except certain limited partners with less than a 10%
partnership interest; see Regulations section 1.861-9(e)(4)(i).
Individual, estate, and trust partners will use this Section 2 to
determine the interest expense reported on Form 1116, Part I,
line 4b. See the Instructions for Form 1116. Because the interest
expense is reported on one line on Form 1116, the instructions
below don’t refer to Form 1116.

Partner's Instructions for Schedule K-3 (Form 1065) (2025)

Stewardship expenses. In the case of the partner’s
stewardship expenses incurred to oversee the partnership, the
partnership’s value is determined and characterized under the
asset method in Regulations section 1.861-9 (taking into
account any adjustments under sections 734(b) and 743(b)); see
Regulations section 1.861-8(e)(4)(ii)(C). Therefore, these Part III,
Section 2, instructions generally apply to the partner’s
stewardship expenses.
Line 3. Assets attracting directly allocable interest expense
under Regulations section 1.861-10(e). If you file Form 1118,
add the amount reported on this line to your other assets
attracting directly allocable interest expense under Regulations
section 1.861-10(e) and report the total in column (a) of Form
1118, Schedule H, Part II, line 1b.
Line 4. Other assets attracting directly allocable interest
expense under Temporary Regulations section 1.861-10T.
If you file Form 1118, add the amount reported on this line to
your other assets attracting directly allocable interest expense
under Temporary Regulations section 1.861-10T and report the
total in column (a) of Form 1118, Schedule H, Part II, line 1c.
Line 5. Assets excluded from apportionment formula. If you
file Form 1118, add the amount reported on this line to your other
assets excluded from apportionment formulas and report the
total in column (a) of Form 1118, Schedule H, Part II, line 1d.
Line 6. Total assets used for apportionment. If you file Form
1118, add the amount reported on this line to your other assets
used for apportionment and report the total in column (a) of Form
1118, Schedule H, Part II, lines 2 and 3, as applicable.
Line 6a is the sum of lines 1 and 2 less the sum of lines 3, 4,
and 5. 6a is divided into the types of assets on lines 6b, 6c, and
6d if you’re a partner that is an individual, estate, or trust, or if
you’re a pass-through entity partner that may have an individual,
estate, or trust as a partner.
Example 5—Parts II and III: asset method apportionment
of interest expense. Kendall, a U.S. citizen, owns a 10%
interest in USP, a domestic partnership. USP is engaged in the
active conduct of a U.S. trade or business. USP’s business
generates only domestic source income. USP separately has an
investment portfolio consisting of several less-than-10% stock
investments. USP has a bank loan. The proceeds of the bank
loan were divided equally between the business and the
investment portfolio. Kendall’s only business assets and
investment assets are its distributive share of those owned by
USP. Kendall’s only interest expense is that from its distributive
share of the USP loan.
Kendall’s share of the interest expense for USP’s business is
$2,000 and is apportioned on the basis of business assets.
Because all business income is domestic source, the business
assets are deemed domestic assets and reported in column (a)
of Schedule K-3, Part III, Section 2, line 6b. Kendall’s $2,000
share of the interest expense is reported in column (f) of
Schedule K-3, Part II, line 41, and is apportioned to U.S. source
gross income by the partner; therefore, it doesn’t need to be
reported on Form 1116.
The interest expense for Kendall’s share of USP’s
investments is $2,000 and is reported in column (f) of
Schedule K-3, Part II, line 42. The investment interest must be
apportioned on the basis of investment assets. Kendall’s
distributive share of the adjusted basis in USP’s stock is $8,000
with respect to the stock generating domestic source income
and $12,000 with respect to the stock generating foreign source
passive income. These amounts are reported in columns (a) and
(c) of Schedule K-3, Part III, Section 2, line 6c, respectively. $800
9

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Line 50. Other apportioned share of deductions. If you file
Form 1118, add the amounts reported on this line to your other
apportioned share of deductions and report the total in column
(e) of Form 1118, Schedule H, Part II; or column (e) of Form
1118, Schedule H, Part III, by separate category.

Corporate partners will use this Section 2 to determine the
interest expense reported on Form 1118, Schedule H, Part II.
The particular line reporting on Form 1118 is specified below.

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Lines 7 and 8. Basis in stock of 10%-owned noncontrolled
foreign corporations and of CFCs. The amounts reported on
lines 7 and 8 are subsets of the amounts reported on line 6
representing the value of stock held by the partnership in certain
foreign corporations. In determining its foreign tax credit
limitation, a corporate partner should disregard interest expense
that is properly allocable to stock of a 10%-owned foreign
corporation that has been characterized as a section 245A
asset. See section 904(b)(4) and Regulations section
1.904(b)-3(a)(1)(ii).
The amount of properly allocable deductions is determined by
treating the section 245A subgroup for each separate category
as a statutory grouping for purposes of allocating and
apportioning interest deductions on the basis of assets. Assets
in a section 245A subgroup only include stock of a specified
10%-owned foreign corporation that has been characterized as a
section 245A asset. The stock is characterized as a section
245A asset to the extent it generates income that would
generate a dividends received deduction under section 245A if
distributed. This doesn’t include income that is included as
GILTI, subpart F income, or a section 956 inclusion or income
described in section 245(a)(5) (which gives rise to a dividends
received deduction under section 245 instead of section 245A).
In the case of a specified 10%-owned foreign corporation that
isn’t a CFC, if you’re eligible for the section 245A deduction for
distributions received from that corporation, all of the value of its
stock is generally in a section 245A subgroup because the stock
generally generates dividends eligible for the section 245A
deduction (and can’t generate an inclusion under section 951(a)
(1) or 951A(a)). See Regulations section 1.904(b)-3(c)(2).
The amount reported on line 7 is the value of stock of the
partnership-owned specified 10%-owned foreign corporation
that isn’t a CFC. Use the information provided in the attachment
to line 7 to determine if such amount should be reported on Form
1118, Schedule H, Part II, lines 3a through 3f, as (a) section
245A dividend, or (b) other.
If the specified 10%-owned foreign corporation is a CFC, you
must subdivide a portion of the value of stock in each separate
category and in the residual grouping for U.S. source income
between a section 245A and non-section 245A subgroup under
the rules described in Regulations section 1.861-13(a)(5).
The amount reported on line 8 is the value of the stock in
partnership-owned CFCs. Use the information provided in the
attachment to line 8 to determine if such amount should be
reported on Form 1118, Schedule H, Part II, lines 3a through 3f,
as (a) section 245A dividend, or (b) other.

Section 3—Foreign-Derived Intangible Income
(FDII) Deduction Apportionment Factors

Section 3 reports the information necessary for you to assign the
FDII deduction to a source and separate category such that it
may be reported on Form 1118, Schedule A; or Form 1116, Part
I.

Section 4—Foreign Taxes

Section 4 reports your share of the foreign income taxes paid or
accrued by the partnership by separate category and source.
Line 1. Direct (section 901 or 903) foreign taxes. Report the
taxes on line 1 in the applicable portions of Form 1116, Part II,
and Form 1118, Schedule B, Part I, for the applicable separate
category of income. To complete those parts, refer to the
10

statement attached to Schedule K-3, referred to earlier in the
instructions for box 4 of Part I with the following information.
• The dates on which the taxes were paid or accrued.
• The exchange rates used.
• The amounts in both foreign currency and U.S. dollars. See
section 986(a).
The partner takes its distributive share of the partnership’s
foreign income taxes into account in the partner’s tax year with or
within which the partnership’s tax year ends regardless of
whether the partner or partnership takes foreign income taxes
into account on the cash or accrual basis.
Line 2. Reduction of taxes (total). Report the total reduction
of taxes for each separate category of income from this line on
Form 1116, Part III, line 12; and Form 1118, Schedule B, Part II,
line 3.
Line 3. Foreign tax redeterminations. Report the
redetermined foreign income taxes from this line on Schedule L
(Form 1118), Foreign Tax Redeterminations; and Schedule C
(Form 1116), Foreign Tax Redeterminations, as applicable. In
addition, the partner should file an amended return, if required,
to report the foreign tax redetermination and change in U.S. tax
liability. See the instructions for Form 1116 or 1118 and
Regulations sections 1.905-3 through -5 for additional
information.
Note: If you’re an accrual method taxpayer, generally you may
not claim a credit for additional taxes reported on Schedule K-3,
Part III, Section 4, line 3, by the partnership unless those taxes
have been paid. See section 905(c)(2) and Regulations section
1.905-3(a).
Use the information in the attachment provided by the
partnership to complete Schedule L (Form 1118) and/or
Schedule C (Form 1116), as applicable.
If the partnership checked the “Contested tax” box and
reported information about a contested foreign income tax on
line 3, the partnership has remitted a contested foreign income
tax liability to a foreign country. Under Regulations section
1.905-1(f)(2), you as the partner may elect to claim a provisional
foreign tax credit for your distributive share of such contested
foreign income tax liability. To make the election to claim the
provisional foreign tax credit, file Form 7204, Consent To Extend
the Time To Assess Tax Related to Contested Foreign Income
Taxes—Provisional Foreign Tax Credit Agreement. See the
instructions for Form 1116 or 1118, and the Instructions for Form
7204 for additional information.

Section 5—Other Tax Information

Section 5 reports the section 743(b) income adjustments
allocated to you by source, separate category, and class of gross
income. The section 743(b) income adjustments should be
included as relevant in other parts of Schedule K-3. For example,
the section 743(b) income adjustments should be reflected as
part of the total depreciation reported on Part II, Section 2.
Therefore, you don’t need to adjust other reported amounts for
the section 743(b) income adjustments.
No credit is allowed for taxes paid or accrued to a country
described in section 901(j). However, a deduction is generally
allowed with respect to a tax described in section 901(j).

Part IV. Information on Partner’s
Section 250 Deduction With Respect
to Foreign-Derived Intangible Income
(FDII)
A domestic corporate partner should use this Part to calculate
the partner’s FDII on Form 8993.

Partner's Instructions for Schedule K-3 (Form 1065) (2025)

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(($8,000/$20,000) x $2,000) is apportioned to domestic source
income and $1,200 (($12,000/$20,000) x $2,000) is apportioned
to foreign source passive income. The amount apportioned to
foreign source passive income is reported on the passive
category Form 1116, line 4b.

TREASURY/IRS AND OMB USE ONLY DRAFT
Section 1—Information To Determine Deduction
Eligible Income (DEI) and Qualified Business
Asset Investment (QBAI) on Form 8993

Note: For purposes of lines 3a and 3b, sale or other disposition
includes a deemed sale or other deemed disposition or a
transaction subject to section 367(d). Sale or other disposition
doesn’t include any lease or license.
Use information on Schedule K-3, Part IV, Section 1, lines 2a
through 2c, and in Section 3 to determine the expenses properly
allocable to DEI on Form 8993, Part I, line 5.
Example 6—partner’s reporting of DEI and QBAI. DC is a
domestic corporation that owns a 50% interest in a domestic
partnership, USP. USP manufactures and sells Product A and
provides services solely to U.S. persons. The services give rise
to domestic oil and gas extraction income (DOGEI) for purposes
of section 250(b)(3)(A)(i)(V). USP has $200 in gross receipts
from sales of Product A, $100 in cost of goods sold, and $50 in
properly allocated and apportioned deductions (none of which
are interest or R&E expenses). USP reports these amounts on
Schedule K-2, Part IV, Section 1, lines 2a through 2c,
respectively, and 50% of these amounts on the same section
and lines of the Schedule K-3 that USP issues to DC, because
this information is necessary for DC to compute its DEI. The net
amount increases DC’s DEI, which increases its deemed
intangible income (DII) and in turn increases its section 250
deduction for FDII. DC uses these amounts to calculate its gross
DEI on Form 8993, Part I, line 4.
USP has $100 in gross receipts from services, $50 in cost of
services, and $25 in properly allocated and apportioned
deductions (none of which are interest or R&E expenses).
Because the performance of these services results in DOGEI, it
doesn’t give rise to DEI, but rather 50% of the net amount of $25
($100 – ($50 + $25) = $25) is reported on Schedule K-3, Part IV,
Section 1, line 6, so that DC can treat this amount as an
exclusion from its DEI. DC’s DEI is determined without this
amount by subtracting the amount from DEI on Form 8993, Part
I, line 2e.
USP owns two properties, Asset C which has an adjusted
basis of $1,000, and Asset D which has an adjusted basis of
$1,200. Asset C is used in the production of Product A and Asset
D is used in providing the DOGEI services. Because sales of
Product A give rise to DEI, 50% or $500 of the partnership’s
adjusted basis in Asset C ($1,000) is reported to DC on
Schedule K-3, Part IV, Section 1, line 8. This increases DC’s
QBAI, and thereby increases DC’s deemed tangible income
return (DTIR). The increase to DTIR decreases DC’s DII which in
Partner's Instructions for Schedule K-3 (Form 1065) (2025)

Note: Some of the amounts reported on these lines related to
distributions by foreign corporations may be attributable to PTEP
in annual PTEP accounts that a partner has with respect to a
foreign corporation and are therefore excludable from the
partner’s gross income. See sections 959(a) and (d).
Line 8. Partnership QBAI. A partner must include the amount
reported to it on this line, in calculating the QBAI used to
determine its DTIR on Form 8993, Part I, line 7b. However, for
certain items determined by the partner that affect the amount of
a partner’s adjusted bases included in its share of partnership
specified tangible property, the partner must use and the
partnership must provide information that separately
distinguishes between the amount of the adjusted bases in a
partnership’s tangible property that the domestic corporation
would include in its adjusted bases in the partnership specified
tangible property and the amount of the adjusted bases in the
partnership’s tangible property that the domestic corporation
would not include in its adjusted bases in the partnership
specified tangible property; see Regulations section
1.250(b)-2(g).

Section 2—Information To Determine
Foreign-Derived Deduction Eligible Income
(FDDEI) on Form 8993
Line 9. Gross receipts. A partner must include the amounts
reported to it on this line, on Form 8993, Part II, line 9b. However,
the partner must only include the portion of the amounts from
columns (a) through (c) of Schedule K-3, Part IV, Section 2,
line 9, that are attributable to its gross DEI on Form 8993, Part I,
line 4.
Note: Don’t include any income and gain from the sale or other
disposition (including pursuant to the deemed sale or other
deemed disposition or a transaction subject to section 367(d)) of
intangible property (as defined in section 367(d)(4)), and any
other property of a type that is subject to depreciation,
amortization, or depletion by the seller, occurring after June 16,
2025 (see the instructions for line 3a and line 3b, earlier).
Line 10. COGS. A partner must include the amounts reported
to it on this line, on Form 8993, Part II, line 10b. However, the
partner must only include the portion of the amount on columns
(a) through (c) of Schedule K-3, Part IV, Section 2, line 10, that is
attributable to its gross DEI on Form 8993, Part I, line 4.
Line 11. Allocable deductions. A partner must include the
amounts reported to it on this line, on Form 8993, Part II, line 13.
Line 12. Other apportioned deductions. A partner must
include the amounts reported to it on this line, on Form 8993,
Part II, line 17. However, the partner must only include the
portion of the amount on Schedule K-3, Part IV, Section 2,
line 12, that is attributable to its gross DEI on Form 8993, Part I,
line 4.

Section 3—Other Information for Preparation of
Form 8993
Interest Expense and Interest Expense
Apportionment Factors
This section reports the information that you need to allocate and
apportion your interest expense for FDII purposes.
Lines 13A and 13B. Include these amounts on Form 8993, Part
I, line 5, and/or Part II, line 14.
11

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Lines 1 through 7. A partner must include the amount reported
to it on line 1 in calculating the gross income on Form 8993,
line 1. The partner must also include any amounts that it
identifies from Schedule K-3, lines 3 through 7, that aren’t
attributable to its DEI on Form 8993, Part I, lines 2a through 2h.
Line 3a. Income and gain from the sale or other
disposition of intangible property under section 250(b)(3)
(A)(i)(VII)(aa). The partnership has provided on this line the net
amount of income and gain from the sale or other disposition of
intangible property (as defined in section 367(d)(4)) before
interest and R&E deductions, occurring after June 16, 2025,
subject to exceptions as provided by the Secretary.
Line 3b. Income and gain from the sale or other
disposition of certain other property under section 250(b)
(3)(A)(i)(VII)(bb). The partnership has provided on this line the
net amount of income and gain from the sale or other disposition
of any other property of a type that is subject to depreciation,
amortization, or depletion by the seller before interest and R&E
deductions, occurring after June 16, 2025, subject to exceptions
as provided by the Secretary.

turn decreases its section 250 deduction for FDII. DC uses the
amount to determine its DTIR from partnerships on Form 8993,
Part I, line 7b.

TREASURY/IRS AND OMB USE ONLY DRAFT
Line 13C. Other interest expense. Add the interest expense
to your other interest expense.
Exception. Certain corporate partners with a less-than-10%
interest in a partnership shall directly allocate their distributive
shares of the partnership’s interest expense to its distributive
share of partnership gross income; see Regulations section
1.861-9(e)(4). After apportionment, if necessary, include the
appropriate amount of interest expense on Form 8993, Part I,
line 5, and/or Part II, line 14.
Line 14. Interest expense apportionment factors. Corporate
partners will use this section to determine the interest expense
reported on Form 8993, Part I, line 5; and Part II, line 14.

R&E Expenses and R&E Expenses Apportionment
Factors
This section reports the information that you need to allocate and
apportion your R&E expenses for FDII purposes. R&E expenses
are allocated and apportioned by the partner. See Regulations
section 1.861-17(f)(1).
Line 15. Gross receipts by SIC code. Add the amounts to the
partner's other gross receipts by SIC code.

Part V. Distributions From Foreign
Corporations to Partnership

Use Part V to determine your share of distributions by foreign
corporations to the partnership (with your share being reported
in this Part V) that are attributable to PTEP in your annual PTEP
accounts with respect to the foreign corporations (which are
excludable from your gross income) or non-previously taxed
E&P, and the amount of foreign currency gain or loss on the
PTEP that you’re required to recognize under section 986(c).
The amount of foreign currency gain or loss on the PTEP that
you’re required to recognize under section 986(c) is equal to the
excess of the U.S. dollar amount of the PTEP over your U.S.
dollar basis in the PTEP. If the distributed PTEP was maintained
in a functional currency other than the U.S. dollar, the U.S. dollar
amount of the distributed PTEP is determined by translating the
distributed PTEP into U.S. dollars using the spot rate on the date
that the PTEP was distributed; see section 989(b)(1). Your U.S.
dollar basis in the distributed PTEP is generally equal to the U.S.
dollar amount of E&P that you previously included in gross
income; see sections 989(b)(1) and (3).
Also use Part V, in combination with other information known
to you, to claim and figure a foreign tax credit on Form 1116 or
1118, and, if eligible, to claim and figure a dividends received
deduction under section 245A on Form 1120 with respect to the
distributions that are attributable to non-previously taxed E&P.
Include the U.S. dollar amount of E&P distributions from
qualified foreign corporations in determining the amount of
qualified dividends you report on Form 1040, line 3a, or the
amount of dividends reported on Form 1120. A foreign
corporation identified as a qualified foreign corporation in column
(j) that is a PFIC (as defined in section 1297) as to you for the tax
year of the foreign corporation in which the distribution was
made, or the preceding tax year, isn’t a qualified foreign
corporation, regardless of whether it’s indicated as such in
column (j). See section 1(h)(11)(C)(iii)(I) and Notice 2004-70,
2004-44 I.R.B. 724.
Include the U.S. dollar amount of E&P distributions from a
nonqualified foreign corporation in determining the amount of
ordinary dividends you report on Form 1040, line 3b; or Form
1120.
12

Include the amount of foreign currency gain or loss that you’re
required to recognize under section 986(c) in determining the
amount to report on Form 1120; or Schedule 1 (Form 1040),
line 8.
Note: If the partnership is a domestic partnership, the
partnership may have annual PTEP accounts under section 959
with respect to the foreign corporation or may have earnings with
respect to the foreign corporation that, when distributed, can be
excluded from the partnership’s income under section 1293(c)
for amounts included in income by the partnership under section
951(a) or 1293(a), respectively. In such a case:
• If the distributing foreign corporation is a PFIC and isn’t a
CFC with respect to which you or any other direct or indirect
partner is a U.S. shareholder (as defined in section 951(b)),
the partnership may exclude your share of any distribution
from the foreign corporation in your Schedule K-3, Part V, to
the extent such distribution constitutes a distribution
excludable from the partnership’s gross income under
section 1293(c);
• If the distributing foreign corporation is a CFC with respect to
which the partnership has PTEP for amounts it included in
income under section 951(a) (only to the extent such PTEP
relates to tax years of the CFC beginning before January 25,
2022), the partnership may exclude your share of any
distribution from the foreign corporation in your
Schedule K-3, Part V, to the extent such distribution is
attributable to PTEP under section 959; or
• If the distributing foreign corporation is both a CFC and a
PFIC, and the partnership has no PTEP for amounts
included in income under section 951(a) that can be
excluded from the partnership’s gross income under section
959 when distributed, the partnership will report your share
of the entire distribution in your Schedule K-3, Part V, and
will provide you with information on any amounts that may
be excluded from the partnership’s gross income under
section 1293(c), if applicable.
If the partnership is a domestic partnership and received a
distribution that is (a) attributable to PTEP in an annual PTEP
account of the partnership, or (b) attributable to E&P that are
excludable from the partnership’s gross income under section
1293(c), that is treated as a dividend for purposes of section
1411 (that is, for purposes of the net investment income tax
(NIIT)) and, therefore, may be net investment income (NII) (such
PTEP, NII PTEP), it’ll attach a statement to Schedule K-3
regarding your share of the partnership’s NII PTEP. If you’re an
individual who is a U.S. citizen or resident, or a domestic trust or
estate, use the U.S. dollar amounts of NII PTEP reported on the
statement, and follow the Instructions for Form 8960 to figure
and report your NII. Corporate partners aren’t subject to the NIIT;
see Regulations sections 1.1411-1 through -10 for details. Note
that your share of a distribution received by the partnership that
is attributable to PTEP in your annual PTEP accounts, or
attributable to E&P that are excludable from your gross income
under section 1293(c), may also be treated as a dividend for
purposes of section 1411 and, therefore, may be NII PTEP.
Note: Columns (e) and (f) are reported in the foreign
corporation’s functional currency.

Partner's Instructions for Schedule K-3 (Form 1065) (2025)

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Line 16. R&E expenses by SIC code. Add the amounts to the
partner’s other R&E expenses by SIC code.

However, don’t include the U.S. dollar amount of E&P
distributions from a foreign corporation to the extent the
distributions are attributable to PTEP in annual PTEP accounts
that you have with respect to the foreign corporation, or
attributable to E&P that are excludable from your gross income
under section 1293(c), in determining the amount of dividends
that you report on Form 1040, line 3a or 3b; or Form 1120. See
Notice 2019-01, 2019-02 I.R.B. 275.

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Part VI. Information on Partner’s
Section 951(a)(1) and Section 951A
Inclusions

Use Part VI to include in gross income the appropriate amount of
subpart F income inclusion and/or section 951(a)(1)(B)
inclusion, and to complete Form 8992.

For each CFC listed in column (a) of Schedule K-3, Part VI, of
which you’re a U.S. shareholder, include the amounts of subpart
F income and section 951(a)(1)(B) inclusion reported on Part VI
in determining the amount you report on Form 1120,
Schedule C, line 16; or Schedule 1 (Form 1040), line 8.
Note that, for corporate partners, in determining the amount
you report on Form 1120, Schedule C, line 16, the section 951(a)
(1)(B) inclusion amounts reported in Schedule K-3, Part VI, may
be reduced under Regulations section 1.956-1(a)(2).

Part VII. Information Regarding
Passive Foreign Investment
Companies (PFICs)

U.S. persons may be required to complete and file Form 8621
and/or include amounts in income with respect to PFICs owned
through a partnership. This includes PFICs with respect to which
no qualified electing fund (QEF) or section 1296 mark-to-market
(MTM) election has been made and unpedigreed QEFs (section
1291 funds), as well as PFICs with respect to which a pedigreed
QEF, a section 1296 MTM, or other election has been, or may
be, made. For information regarding the requirement to file Form
8621, as well as certain filing exceptions, see Regulations
section 1.1298-1 and the Form 8621 instructions.
Use the information provided in this Schedule K-3, Part VII
(including any supplemental attachments (Table 6 or 7, from the
Partnership Instructions for Schedules K-2 and K-3 (Form 1065),
if applicable)), as instructed below, to complete Form 8621 with
respect to each PFIC for which you have a filing obligation.
Additionally, for any PFIC that you own through your interest in
the partnership, use the information provided in this
Schedule K-3, Part VII (including any supplemental attachments
(Table 6 or 7, from the Partnership Instructions for Schedules K-2
and K-3 (Form 1065), if applicable)), to determine your income
inclusion with respect to the PFIC (if any) and complete your U.S.
federal income tax return.
If a PFIC reported on this Schedule K-3 also constitutes a
CFC within the meaning of section 957 (PFIC/CFC) and you’re a
U.S. shareholder (within the meaning of section 951(b)) with
respect to that PFIC/CFC, the information on this schedule with
respect to that PFIC/CFC may not be relevant to you. The box in
Section 1, column (m), will be checked if the PFIC also
constitutes a CFC. See section 1297(d) for additional
information.

Section 1—General Information
Columns (a) through (e). General information. If you’re
required to complete Form 8621 with respect to a PFIC reported
on this schedule, use this information to complete the Form 8621
background information.
Partner's Instructions for Schedule K-3 (Form 1065) (2025)

Note: If you’re making an election under Regulations section
1.1291-10, 1.1297-3, or 1.1298-3 with respect to a PFIC
reported on this Schedule K-3, Part VII, you may need additional
information from the partnership regarding the value of the PFIC
shares reported in column (i) that isn’t reported here.
Column (j). Election made by partnership. If the partnership
is a domestic partnership, this column will indicate to you (using
the codes below) whether the partnership has made an election
with respect to the PFIC which binds the partners. If the
partnership is a foreign partnership, no code will be entered in
this column; however, if certain information with respect to the
PFIC is provided, you may be able to make certain elections with
respect to the PFIC on Form 8621.

Partnership Election Codes for Column (j)
Codes

Election type

QEF

Qualified electing fund election

MTM

Section 1296 mark-to-market election

Note: In general, if the partnership is a domestic partnership
and has made a pedigreed QEF or section 1296 MTM election
with respect to a PFIC, the partnership isn’t required to complete
Schedule K-3, Part VII, with respect to that PFIC if the
partnership files Form 8621 for that PFIC. In that case, you may
not be required to file Form 8621 with respect to that PFIC and
income inclusions with respect to the PFIC, if any, will be figured
by the partnership and reported to you on Schedule K-1, Part III.
However, if the partnership is a domestic partnership that has
made a pedigreed QEF or section 1296 MTM election with
respect to a PFIC for which the partnership doesn’t file Form
8621, if the partnership owns stock of an unpedigreed QEF, or if
the partnership is making a section 1296 MTM election with
respect to stock in a PFIC in the current tax year if the current tax
year isn’t the first year of the partnership’s holding period in the
stock (non-initial section 1296 MTM election), it’s required to
complete Schedule K-3, Part VII, with that PFIC’s information,
and you may be required to file Form 8621 with respect to that
PFIC. See Regulations section 1.1298-1(b)(2) and the Form
8621 instructions for additional information.
Additionally, if the partnership marks to market stock of a
PFIC as described in Regulations section 1.1291-1(c)(4), the
partnership generally doesn’t need to report information about
the PFIC in Schedules K-2 and K-3, Part VII. In such a case, the
partnership should report its MTM gain or loss on Schedule K
and report your share of those amounts in Schedule K-1, Part III.
Note, however, in such a case there may be instances in which
you’ll need additional information from the partnership to meet
your tax obligations with respect to a PFIC for which the
partnership has marked to market the stock as described in
Regulations section 1.1291-1(c)(4), such as when the section
1291 rules apply to you because the stock wasn’t marked by the
partnership in the first year of its holding period. In such
instances, the partnership should provide you with the needed
information and may use Schedule K-3, Part VII, to do so.
Columns (k) through (n). Information regarding elections.
Use the information provided in these columns to make certain
elections with respect to a PFIC on Form 8621, Part II. If you
don’t intend to make any election with respect to a PFIC reported
on this Schedule K-3, Part VII, you may generally ignore these
boxes for that PFIC.

13

DRAFT

DRAFT

For each CFC listed in column (a) for which you’re a U.S.
shareholder, report the tested income and tested loss for each
CFC in columns (c) and (d), respectively, of Schedule A (Form
8992) and include your share of each CFC’s items described in
columns (i) through (n) of Schedule K-3, Part VI, in determining
the amount to report in columns (e) through (j), respectively, of
Schedule A (Form 8992).

Columns (f) through (i). Summary of annual information. If
you’re required to complete Form 8621 with respect to a PFIC
reported on this schedule, enter this information on Form 8621,
Part I, lines 1 through 4.

TREASURY/IRS AND OMB USE ONLY DRAFT
Note: If you’re making an election under Regulations section
1.1291-9, 1.1297-3, or 1.1298-3 with respect to a PFIC/CFC, or
a PFIC that is a former PFIC within the meaning of Regulations
section 1.1291-9(j)(2)(iv), you may need additional information
from the partnership that isn’t reported on this Schedule K-3,
Part VII, including information with respect to the PFIC’s E&P.

Section 2—Additional Information on PFIC or
Qualified Electing Fund (QEF)
Note: The partnership will complete Section 2 with respect to
each PFIC reported in Section 1, and each line completed with
respect to a PFIC in Section 1 corresponds to the same line in
Section 2. If the PFIC has no current year activity or has no other
information for the partnership to report in columns (c) through
(o), the partnership will only include the name and employer
identification number (EIN) or reference ID number of the PFIC in
columns (a) and (b) and will leave columns (c) through (o) blank
with respect to that PFIC.

Columns (c) and (d). Partner’s share of ordinary earnings
and of net capital gain. This information is to assist you in
determining your income inclusions from certain PFICs with
respect to which a QEF election has been, or may be, made.
If the partnership is a domestic partnership that has made a
pedigreed QEF election with respect to a PFIC, and the
domestic partnership files Form 8621 for that PFIC, that PFIC will
typically not be reported in Schedule K-3, Part VII. In that case,
your share of the domestic partnership’s QEF inclusions, if any,
will be reported to you in Schedule K-1, Part III. However, in the
event the domestic partnership doesn’t file Form 8621 for a PFIC
for which the domestic partnership has made a pedigreed QEF
election, or if the domestic partnership owns stock of an
unpedigreed QEF, you may be required to file Form 8621 for that
PFIC. See Regulations section 1.1298-1(b)(2) for additional
information.
If you’re required to file Form 8621 for a PFIC reported in
Schedule K-3, Part VII, enter the amounts from columns (c) and
(d) on Form 8621, Part III, lines 6a and 7a, respectively, and
include these amounts in gross income on your U.S. federal
income tax return unless you’re making an election under section
1294 with respect to the QEF for the current tax year. If you’re
making a section 1294 election with respect to the QEF for the
current tax year, use the rest of Form 8621, Part III, lines 8 and 9,
to determine the amount of deferred tax with respect to the QEF
for the current tax year.
Note: If your interest in the partnership constitutes an applicable
partnership interest within the meaning of section 1061(c) or the
regulations thereunder, you may need additional information not
reported on this Schedule K-3 from the QEF with respect to its
computation of its net capital gain (as defined in Regulations
section 1.1293-1(a)(2)) to perform certain computations under
section 1061 or the regulations thereunder. The partnership may
aid you in obtaining the information from the QEF, though the
QEF isn’t required to provide it. See section 1061 and
Regulations sections 1.1061-4 and -6 for more information.

Section 1296 Mark-to-Market Information
Columns (e) and (f). FMV of PFIC shares at beginning and
end of tax year. This information is to assist you in determining
your gain or loss from certain PFICs with respect to which an
MTM election under section 1296 has been, or may be, made
(MTM PFIC), including PFICs with respect to which the
partnership is making a non-initial section 1296 MTM election.
14

Section 1291 and Other Information
Generally, this information is to assist you in satisfying any
information reporting obligations for, and in figuring income
inclusions with respect to, section 1291 funds. However, except
as otherwise provided, this information may be relevant to PFICs
with respect to which a pedigreed QEF election, a section 1296
MTM election (including a non-initial section 1296 MTM
election), or other election has been made by you or the
partnership.
Column (g). Dates PFIC shares were acquired. This
information is provided to help you assess your holding period in
the PFIC stock through your ownership in the partnership.
Unless also provided in column (g) of Section 1, with respect to
an acquisition of stock in the PFIC during the partnership’s tax

Partner's Instructions for Schedule K-3 (Form 1065) (2025)

DRAFT

DRAFT

QEF Information

If the partnership is a domestic partnership and has made an
MTM election under section 1296 with respect to a PFIC (other
than a non-initial section 1296 MTM election), and the domestic
partnership files Form 8621 for that MTM PFIC, that MTM PFIC
will typically not be reported in Schedule K-3, Part VII. In that
case, your share of the domestic partnership’s MTM gain or loss,
if any, will be reported to you in Schedule K-1, Part III. However,
in the event the domestic partnership doesn’t file Form 8621 for
an MTM PFIC or if the domestic partnership is making a
non-initial section 1296 MTM election with respect to a PFIC,
you may have a reporting obligation for that PFIC. See
Regulations section 1.1298-1(b)(2) for additional information. A
partnership is also not required to complete Schedule K-3, Part
VII, with respect to a PFIC if it has marked stock of a PFIC to
market as described in Regulations section 1.1291-1(c)(4),
though it may provide you with certain information in
Schedule K-3, Part VII, if the PFIC stock isn’t marked to market in
the first year of the partnership’s holding period.
If you’re required to file Form 8621 with respect to an MTM
PFIC reported in Schedule K-3, Part VII, enter the amount from
column (f) on Form 8621, Part IV, line 10a. You may need
additional information from the partnership regarding your share
of its adjusted tax basis in the MTM PFIC stock to complete the
rest of Form 8621, Part IV. Your share of the partnership’s
adjusted tax basis in the MTM PFIC stock may be equal to your
share of the fair market value (FMV) of the stock at the beginning
of the prior tax year reported in column (e) of Schedule K-3, Part
VII, Section 2. However, your share of the partnership’s adjusted
tax basis in the MTM PFIC stock may not be equal to the FMV of
the stock at the beginning of the prior tax year, depending on the
amounts of prior year income inclusions and the amounts
allowed a deduction with respect to the MTM PFIC. Once you
determine your share of the partnership’s adjusted tax basis in
the MTM PFIC shares, enter this amount on Form 8621, Part IV,
line 10b, and use the rest of Form 8621, Part IV, lines 10c
through 12, to determine your MTM gain or loss to include on
your U.S. federal income tax return.
Additionally, if the partnership is a domestic partnership and
is making a non-initial section 1296 MTM election with respect to
a PFIC, you should use the information for that PFIC from
columns (g) through (o) of Schedule K-3, Part VII, Section 2, and
the corresponding instructions described below to determine
whether you have received an excess distribution with respect to
the PFIC stock, or whether your distributive share of the
domestic partnership’s section 1296(a) gain for the tax year (if
any) is treated as an excess distribution. This will help you
determine any corresponding additions to tax and interest
charges under section 1291. For special rules related to RICs
that are shareholders of PFICs with respect to which a non-initial
section 1296 MTM election has been made, see Regulations
section 1.1296-1(i)(3).

TREASURY/IRS AND OMB USE ONLY DRAFT
year, these dates don’t need to be entered on Form 8621 or on
your U.S. federal income tax return.
Note: The dates entered in this column (g) will be the dates the
partnership acquired the PFIC stock. If you acquired your
partnership interest after the date listed with respect to a PFIC,
you may have a different holding period with respect to the PFIC
stock.
Column (h). Amount of cash and FMV of property distributed by PFIC during the current tax year. Your share of the
amount of cash and FMV of property distributed by the PFIC
during the tax year may be reported on different parts of Form
8621, or not reported at all on Form 8621.

IF you’re a shareholder of a...

THEN...

section 1291 fund, PFIC with respect
to which a domestic partnership is
making a non-initial section 1296
MTM election, or a PFIC for which
now may be treated as a qualifying
insurance corporation, and for which
you’re required to file Form 8621

enter this amount on Form 8621, Part
V, line 15a.

QEF for which you aren’t making a
section 1294 election for the current
tax year

you don’t need to enter this on Form
8621.

QEF for which you’re making a
section 1294 election for the current
tax year

enter this amount on Form 8621, Part
III, line 8b.

MTM PFIC (other than a PFIC with
respect to which the partnership is
making a non-initial section 1296
MTM election)

you don’t need to enter this on Form
8621.

Column (k). Total distributions from PFIC in preceding 3
tax years. This information is to help you assess your excess
distribution and resulting other income, additional tax, and
interest charge with respect to each section 1291 fund in which
you’re a shareholder through your ownership in the partnership
or with respect to a PFIC for which the partnership is making a
non-initial section 1296 MTM election. If you’re required to file
Form 8621 with respect to one of these types of PFICs owned by
the partnership, use this amount to determine the amount to
include on Form 8621, Part V, line 15b, and use the rest of Form
8621, Part V, lines 15 and 16, to determine the amount of any
excess distribution and resulting other income, additional tax,
and interest charge to include on your U.S. federal income tax
return with respect to the section 1291 fund.
Note: The information in column (k) of Schedule K-3, Part VII,
Section 2, is only relevant with respect to section 1291 funds and
PFICs with respect to which the partnership is making a
non-initial section 1296 MTM election and isn’t relevant for any
PFIC with respect to which a pedigreed QEF election or other
section 1296 MTM election has been, or may be, made.
Column (l). Dates PFIC shares disposed of during tax year.
This information is provided to help you assess the treatment to
you on any disposition by the partnership of stock in a PFIC in
combination with column (g). These dates don’t need to be
entered on Form 8621.
Note: Your holding period of the PFIC stock may have begun on
a different date than the partnership’s holding period.

Note: Your share of foreign taxes in column (j) of Schedule K-3,
Part VII, Section 2, includes only foreign taxes within the

Columns (m) through (o). This information is to assist you in
figuring any gain or loss on the partnership’s disposition of PFIC
stock.
For each section 1291 fund in which you’re a shareholder
through your ownership in the partnership or with respect to any
PFIC for which the partnership is making a non-initial section
1296 MTM election for which you’re required to file Form 8621,
enter the amount from column (o) of Schedule K-3, Part VII,
Section 2, on Form 8621, Part V, line 15f, and use the rest of
Form 8621, Part V, line 16, to determine the amount of any
resulting other income, additional tax, and interest charge to
include on your U.S. federal income tax return with respect to the
PFIC. Your adjusted tax basis in the PFIC shares as reported by
the partnership should reflect any adjustments in the
partnership’s shares in the PFIC that are specific to you; you may
also need to make corresponding adjustments to your basis in
your partnership interest.
For each MTM PFIC (including a PFIC with respect to which a
domestic partnership is making a non-initial section 1296 MTM
election) in which you’re a shareholder through your ownership in
the partnership, and with respect to which you’re required to file
Form 8621, enter the amounts from columns (m) and (n) of
Schedule K-3, Part VII, Section 2, on Form 8621, Part IV, lines
13a and 13b, respectively. Complete the rest of Form 8621, Part
IV, lines 13 and 14, to determine your MTM gain or loss to
include on your U.S. federal income tax return. Your basis in the
MTM PFIC shares as reported by the partnership should reflect
adjustments made by the partnership with respect to the MTM
PFIC, as well as any other partner-specific adjustments such as
section 743(b) adjustments; you may also need to make
corresponding adjustments to your basis in your partnership
interest. See section 1296(b)(2) for additional information on
adjustments to basis in MTM PFIC shares held by foreign

Partner's Instructions for Schedule K-3 (Form 1065) (2025)

15

Note: Deemed distributions by QEFs aren’t reported in
Schedule K-3, Part VII. If you make, or have made, an election
under section 1294 and are deemed to have received a
distribution from the QEF, this information is required to complete
Form 8621, Parts III and VI. See section 1294(f) and Temporary
Regulations section 1.1294-1T for additional information.
Note: If you have made a section 1294 election with respect to a
QEF owned by the partnership, a distribution of earnings by the
QEF will terminate the section 1294 election to the extent the
election is attributable to the earnings distributed. In such a case,
enter the amount of the distribution on Form 8621, Part VI,
line 22. See Temporary Regulations section 1.1294-1T(e) and
the Form 8621, Part VI, instructions for additional information.
Column (i). Dates of distribution. This information is to help
you assess any information related to the date of a distribution
from a PFIC. You don’t need to enter these dates on Form 8621
or on your U.S. federal income tax return.
Column (j). Total creditable foreign taxes attributable to
distribution by PFIC. This information is to help you assess
any available foreign tax credit attributable to an excess
distribution from a section 1291 fund or PFIC with respect to
which the partnership is making a non-initial section 1296 MTM
election in which you’re a shareholder through your ownership in
the partnership. If you’re required to file Form 8621 with respect
to one of these types of PFICs owned by the partnership, use
this amount to determine your foreign tax credit to include on
Form 8621, Part V, line 16d. See section 1291(g) for additional
information on creditable foreign taxes.

DRAFT

DRAFT

Where on Form 8621 To Report Distributions From
PFICs

meaning of section 1291(g) and doesn’t include taxes
attributable to QEF inclusions under section 1293. If you’re a
corporate shareholder of a QEF that meets the ownership
requirements of section 1293(f)(3), use Part VIII to determine
your deemed paid foreign tax credit under section 960, including
with respect to inclusions under section 1293(f).

TREASURY/IRS AND OMB USE ONLY DRAFT
partnerships with respect to section 1296 income inclusions and
deductions.
For each QEF in which you’re a shareholder through your
ownership in the partnership with respect to which you have
previously made a section 1294 election, and for which you’re
required to file Form 8621, if amounts are reported in columns
(m) through (o) of Schedule K-3, Part VII, Section 2, with respect
to the QEF, the disposition may have partially or completely
terminated your election, and you may need to complete Form
8621, Part VI, lines 21 through 24. See Temporary Regulations
section 1.1294-1T and the Form 8621 instructions for additional
information.
Note: If you have made a QEF election with respect to a PFIC
which you own indirectly through the partnership, you may be
required to adjust your share of the tax basis in the PFIC shares
as reported by the partnership, and thus your gain or loss
reported in column (o), by cumulative QEF inclusions and
distributions made by the QEF; your basis in your partnership
interest may need to be similarly adjusted. See section 1293(d)
for more information on basis adjustments with respect to QEFs.

Note: Amounts on this part are reported in foreign currency.
In general, for purposes of the foreign tax credit, a domestic
corporate U.S. shareholder of a CFC is deemed to pay all or a
portion of the foreign income taxes paid or accrued by the CFC
that are properly attributable to subpart F income or tested
income of the CFC that the U.S. shareholder includes in gross
income; see sections 960(a) and (d). See also section 1293(f)
with respect to QEF inclusions from a PFIC. The domestic
corporate U.S. shareholder may claim a credit for such foreign
taxes, subject to certain limitations. Individuals, estates, and
trusts may also claim a foreign tax credit for foreign income taxes
deemed paid with respect to a CFC. However, they must make
an election under section 962.
To calculate the foreign taxes deemed paid by a partner that’s
a corporate U.S. shareholder of a CFC held by a partnership, the
income, deductions, and taxes of the CFC must be assigned to
separate categories of income and then to income groups in
those separate categories; see Regulations section 1.960-1(c)
(1). This is completed on Schedule Q (Form 5471), CFC Income
by CFC Income Groups. The income groups include the subpart
F income group, the tested income group, and the residual
income group. Each single item of foreign base company income
as defined in Regulations section 1.954-1(c)(1)(iii) is a separate
subpart F income group; see Regulations section 1.960-1(d)(2)
(ii)(B). The tested income group consists of tested income within
a section 904 category; see Regulations section 1.960-1(d)(2)(ii)
(C). The residual income group consists of any income not in the

A partner claiming a deemed paid credit with respect to an
inclusion under section 951 will use Schedule K-3, Part VIII, to
complete Form 1118, Schedule C; see section 960(a).

Where To Report Information From Schedule K-3
(Form 1065), Part VIII
Use information from
Schedule K-3, Part VIII, column...

To report in Form 1118,
Schedule C, column...

(ii)

8(a)

(iii)

6

(iv)

7

The partner must also complete column 5 of Form 1118,
Schedule C, with information from Schedule K-3, Part VIII.
Note: The amount entered in column 8(a) of Form 1118,
Schedule C, won’t equal the share of the net income in the
subpart F income group if there’s a qualified deficit. See
Regulations section 1.960-2(b)(3)(ii).
Similarly, a partner claiming a deemed paid credit with
respect to an inclusion under section 951A will use the
information reported on Schedule K-3, Part VIII, line 2, to
complete Form 1118, Schedule D; see section 960(d).

Where To Report Information From Schedule K-3
(Form 1065), Part VIII, Line 2
Use information from
Schedule K-3, Part VIII, line 2,
column...

To report in Form 1118,
Schedule D, Part I, column...

(ii)

5

(iii)

6

(iv)

8

Example 7—use Schedule K-3 to claim deemed paid
credit. In Year 1, USP, a domestic partnership, has two
domestic corporate partners with equal interests in the
partnership. USP wholly owns CFC. CFC’s reference ID number
is 1234. CFC earns passive category interest income of 100u
sourced from Country X and pays a withholding tax of $20 to
Country X. The code for Country X is X. USP reports the
following to each of its partners in Schedule K-3, Part VIII.

Example 7—USP’s Schedule K-3, Part VIII, for Partners
A

EIN or reference ID number of CFC

C

If PAS was entered on line B, applicable grouping under Regulations section 1.904-4(c)

1

B Separate category

. . . . . . . . . .

. . . . . . . . . . . . . . . . . . . . . . . .

PAS
(i)

(i) Country code

(ii) Partner’s share of
foreign corporation’s net
income (functional
currency)

(iii) Foreign
corporation’s total net
income (functional
currency)

(iv) Foreign
corporation’s current
year foreign taxes for
which credit allowed
(U.S. dollars)

X

50u

100u

$20

Subpart F income groups
a Dividends, interest, rents, royalties, and annuities
(total)
(1) Unit: CFC

16

1234

. . . . . . .

Partner's Instructions for Schedule K-3 (Form 1065) (2025)

DRAFT

DRAFT

Part VIII. Partner’s Interest in Foreign
Corporation Income (Section 960)

other income groups or in a PTEP group; see Regulations
section 1.960-1(d)(2)(ii)(D). See Regulations section 1.960-3(c)
(3) with respect to the PTEP groups. The PTEP groups aren’t
reported in this Schedule K-3, Part VIII.

TREASURY/IRS AND OMB USE ONLY DRAFT
On Form 1118, Schedule C, for the passive category income,
each domestic corporate partner reports the information

received on Schedule K-3 as shown in Example—Domestic
Corporate Partner’s Form 1118, Schedule C.

Example—Domestic Corporate Partner’s Form 1118, Schedule C
5. Subpart F Income Group
1a. Name of
Foreign
Corporation

CFC

(a) Reg. sec.
(b) Reg. sec.
1.960-1(d)(2)(ii) 1.904-4(c)(3)(i)–
(B)(2)
(iv)
DIRRA

i

(c) Unit

CFC

6. Total Net
Income in
Subpart F
Income Group
(functional
currency)

7. Total Eligible
Current Year
Taxes in Subpart
F Income Group
(U.S. dollars)

100u

$20

If you’re a corporate partner of a partnership, use this part from
the partnership to determine your BEAT liability, if any. The BEAT
is generally levied on certain large corporations that have
deductions and certain other similar items paid or accrued to
foreign related parties that are 3% of their total deductions or
higher (2% in the case of certain banks or registered securities
dealers), a determination referred to as the "base erosion
percentage test." Corporate partners that are applicable
taxpayers under Regulations section 1.59A-2 may be subject to
the BEAT. See Regulations section 1.59A-7 for further
information regarding the application of section 59A to
partnerships, and the Instructions for Form 8991 to determine
whether a corporate partner is an applicable taxpayer subject to
the BEAT. Certain small partners aren’t required to include the
partner’s amount of base erosion tax benefits resulting from a
base erosion payment made by a partnership. See Regulations
section 1.59A-7(d)(2) for further information regarding the
application of the exception for small partners.

Section 1—Applicable Taxpayer
Lines 1 Through 4
The amounts shown on lines 1 through 4 reflect the partner’s
distributive share of gross receipts from the partnership’s
business or rental activities. The partner should use the
information from lines 2 through 4 to complete Form 8991, Part I,
line 1b.
Line 1. Gross receipts for section 59A(e). This is the
partner’s distributive share of gross receipts for the tax year as
described in Temporary Regulations section 1.448-1T(f)(2)(iv).
Line 5. Amounts included in the denominator of the base
erosion percentage as described in Regulations section
1.59A-2(e)(3)(i)(B). This is the partner’s distributive share of

Partner's Instructions for Schedule K-3 (Form 1065) (2025)

(a)
Functional
Currency
50u

(b) U.S.
Dollars

9. Divide
Column
8(a) by
Column 6

10. Tax
Deemed Paid
(multiply
column 7 by
column 9)

0.500

$10

the partnership’s deductions to be included in the denominator
of the partner’s base erosion percentage. For a description of
deductions that aren’t included in the denominator, see
Regulations section 1.59A-2(e)(3)(ii).

Section 2—Base Erosion Payments and Base
Erosion Tax Benefits
Lines 6 Through 19
The partner should use the information from lines 7 through 16 to
complete Form 8991, Schedule A, lines 2 through 11.
Line 7. Cost sharing transaction payments. Include the
amounts from columns (b) and (c) on Form 8991, Schedule A,
line 2.
Line 8. Purchase or creations of property rights for intangibles (patents, trademarks, etc.). This is the partner’s
distributive share of amounts paid or accrued to a foreign person
that’s a related party of the partner in connection with the
acquisition or creation of intangible property rights (patents,
copyrights, trademarks, trade secrets, etc.) that’s subject to the
allowance for depreciation (or amortization in lieu of
depreciation). Include the amounts from columns (b) and (c) on
Form 8991, Schedule A, line 3.
Line 9. Rents, royalties, and license fees. Include the
amounts from columns (b) and (c) on Form 8991, Schedule A,
line 4.
Line 10a. Compensation/consideration paid for services
NOT excepted by section 59A(d)(5). Include the amounts
from columns (b) and (c) on Form 8991, Schedule A, line 5a.
Line 10b. Compensation/consideration paid for services
excepted by section 59A(d)(5). Include the amount from
column (a) on Form 8991, Schedule A, line 5b.
Line 11. Interest expense. If you’re a foreign corporate partner,
the partnership completed Worksheet A for your distributive
share of items. Use the information to help complete your Form
8991.

17

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Part IX. Partner’s Information for Base
Erosion and Anti-Abuse Tax (Section
59A)

8. Section 951(a)(1)
Inclusion Attributable to
Subpart F Income Group

TREASURY/IRS AND OMB USE ONLY DRAFT
Worksheet A
Foreign Partner’s Distributive Share of Interest Paid or Accrued by the Partnership
(a)

(b)

Total interest paid or accrued in the
current year

(c)

Interest paid or accrued to foreign
Interest expense paid or accrued to
related parties of the foreign partner foreign related parties of the foreign
in the current year
partner that is allowed as a
deduction in the current year

(1) Foreign partner’s distributive share of interest
expense on liabilities described in Regulations
section 1.882-5(a)(1)(ii)(A) or (B)
(2) Foreign partner’s distributive share of interest
paid on U.S.-booked liabilities under Regulations
section 1.882-5(d)(2)(vii)
(3) Foreign partner’s distributive share of interest
paid on all other liabilities of the partnership

Column (a). This is the partner’s distributive share of all
interest paid or accrued by the partnership for the tax year
(excluding interest paid or accrued in a prior year treated as paid
or accrued in the current year under section 163(j) or similar
provisions).
Column (b). This is the partner’s distributive share of all
interest expense paid or accrued by the partnership for the tax
year (excluding interest paid or accrued in a prior year treated as
paid or accrued in the current year under section 163(j) or similar
provisions) that is paid or accrued to a foreign person that is a
related party of the partner.
Column (c). This is the partner’s base erosion tax benefit
attributable to interest expense paid or accrued by the
partnership that is allowed as a deduction in the current tax year.
See Regulations section 1.59A-3(b)(4) for more information on
how a foreign corporation with a U.S. trade or business or
permanent establishment determines the amount of interest that
is a base erosion tax benefit.
For domestic corporate partners, include the total amount
from line 11 in columns (a-1), (a-2), (b-1), and (b-2) of Form
8991, Schedule A, line 6.
For foreign corporate partners, the amounts in columns (b)
and (c) of Worksheet A, are used to determine the amounts to be
included in columns (a-1), (a-2), (b-1), and (b-2) of Form 8991,
Schedule A, line 6.

Line 14b. Qualified derivative payments excepted by section 59A(h). This is the partner’s distributive share of qualified
derivative payments excepted by section 59A(h). Generally, a
qualified derivative payment is any payment made by the
taxpayer pursuant to a derivative contract, provided that the
taxpayer (a) recognizes gain or loss on the derivative contract as
if it were sold for its FMV on the last business day of the tax year;
(b) treats the gain or loss as ordinary; and (c) treats the
character of all other items of income, deduction, gain, or loss
with respect to a payment pursuant to the derivative as ordinary.
A payment isn’t a qualified derivative payment if the payment
would be treated as a base erosion payment if it were not made
pursuant to a derivative (such as interest, royalty, or services
income). With respect to a contract with both derivative and
nonderivative components, a payment isn’t a qualified derivative
payment if it’s properly allocable to the nonderivative component.
Enter the amount from line 14b on Form 8991, Schedule A,
line 9b. This meets the reporting requirements of Regulations
sections 1.59A-6(b)(2) and 1.6038A-2(b)(7)(ix).

Line 12. Payments for the purchase of tangible personal
property. Include the amounts from columns (b) and (c) on
Form 8991, Schedule A, line 7.

Line 17, column (c). Base erosion tax benefits related to
payments included on lines 6 through 16, on which tax is
imposed by section 871, 881, or 884(f), with respect to which tax
has been withheld under section 1441 or 1442 at the 30%
statutory withholding tax rate or subject to tax under Regulations
section 1.884-4(a)(2)(ii) at the 30% statutory rate. Include the
amount from column (c) on Form 8991, Schedule A, line 13.

Line 13. Premiums and/or other considerations paid or accrued for insurance and reinsurance as covered by sections 59A(d)(3) and (c)(2)(A)(iii). Include the amounts from
columns (b) and (c) on Form 8991, Schedule A, line 8.
Line 14a. Nonqualified derivative payments. The amounts
on this line are reported on Form 8991, Schedule A, line 9.
Column (a). This is the partner’s distributive share of all
amounts paid or accrued by the partnership attributable to
derivative contracts as defined in section 59A(h)(4).
Column (b). This is the partner’s distributive share of
amounts paid or accrued by the partnership to a foreign person
that is a related party of the partner attributable to derivative
contracts that aren’t eligible for the qualified derivative payments
exception under Regulations section 1.59A-6 (nonqualified
derivative payments).
Column (c). This is the partner’s base erosion tax benefit
attributable to nonqualified derivative payments paid or accrued
by the partnership to a foreign person that is a related party of
the partner.
18

Line 15. Payments reducing gross receipts made to surrogate foreign corporation. Include the amounts from columns
(b) and (c) on Form 8991, Schedule A, line 10.
Line 16. Other payments—specify. Include the amounts from
columns (b) and (c) on Form 8991, Schedule A, line 11.

Line 18, column (c). Portion of base erosion tax benefits
included on lines 6 through 16, on which tax is imposed by
section 871 or 881, with respect to which tax has been withheld
under section 1441 or 1442 at a reduced withholding rate
pursuant to an income tax treaty or subject to a reduced rate of
tax under Regulations section 1.844-4(a)(2)(ii). Multiply the
amount of the base erosion tax benefit by a fraction equal to the
rate of tax imposed under the treaty over the 30% (0.30)
statutory rate. Include the amount from column (c) on Form
8991, Schedule A, line 14.
For more information regarding this computation, see the
Instructions for Worksheet for Schedule A, Line 14 in the
Instructions for Form 8991.
Line 19, column (c). Total base erosion tax benefits. The
partner should use the information from Section 1, lines 1
through 5, and column (c) of Section 2, line 19, to assist in the
Partner's Instructions for Schedule K-3 (Form 1065) (2025)

DRAFT

DRAFT

Totals. Combine lines (1) through (3)

TREASURY/IRS AND OMB USE ONLY DRAFT
partner’s determination of whether the partner is an applicable
taxpayer and to complete the applicable lines on Form 8991 and
Schedule A.

Part X. Foreign Partner’s Character
and Source of Income and
Deductions

Use this part if you’re a foreign person that earns ECI from U.S.
and/or foreign sources and/or U.S. source FDAP income to
determine if you have a U.S. tax obligation for the applicable tax
year. You may be required to figure your U.S. income tax liability
and file U.S. income tax returns and forms (for example, Form
1040-NR, Form 1120-F, and other applicable forms).

Section 1—Gross Income

Column (a). Total. This is your distributive share of the
partnership’s gross income.
Column (b). Partner determination. If income is reported in
column (b), it means that the partnership was unable to
determine the income’s source. You must determine the source
of income in column (b). The source of income is important in
determining how to report income on your tax return. Each type
of income has its own sourcing rules. For example, if you have
capital gains listed in column (b), you must determine the source
of such gain under section 865. For more information on
sourcing rules for particular items of income, see Pub. 514 and
section 865. Once you have determined the source of the
income in column (b), use the statement the partnership
attached to Schedule K-3 to report the income. If you determine
the income is U.S. source, the statement attached to
Schedule K-3 will advise reporting the income as either ECI,
FDAP, or other. If you determine the income is foreign source, the
statement will advise whether the income should be reported as
ECI.
Columns (c) and (d). Effectively connected income.
Nonresident aliens should complete Form 1040-NR using the
following instructions.
Caution: Foreign corporations should report ECI on Schedule P
(Form 1120-F), in accordance with its instructions.
Lines 1 through 5. Report amounts of ECI from lines 1 through
5 on Schedule E (Form 1040), Supplemental Income and Loss,
and attach it to your tax return. See Income (Loss) under Part III
in the Partner’s Instructions for Schedule K-1 (Form 1065) for
more information on how to complete Schedule E.
Line 6. Interest income. Report amounts of ECI from line 6 on
Form 1040-NR, line 2b.
Line 7. Dividends. Report amounts of ECI from line 7 on Form
1040-NR, line 3a or 3b.
Line 8. Dividend equivalents. If you’re a pass-through entity
and provide Schedules K-3 to your partners, see the instructions
for Part X, line 8, in the Partnership Instructions for Schedules
K-2 and K-3 (Form 1065).
Line 9. Royalties and license fees. Report amounts of ECI
from line 9 on Schedule E (Form 1040), line 4.

Partner's Instructions for Schedule K-3 (Form 1065) (2025)

Line 11. Net long-term capital gain. Line 11 doesn’t include
gains reported on lines 12, 13, and 14.
Line 14. Net section 1231 gain. Line 14 doesn’t include net
section 1231 gain that is also unrecaptured section 1250 gain.
Such gain is reported on line 13.
Note: Don’t report foreign source income listed in column (d) as
ECI if you determine it’s subpart F income as defined under
section 952(a).
Caution: Don’t report income listed in column (d) as ECI if it’s
dividends, interest, or royalties paid by a foreign corporation in
which you own or are considered to own (within the meaning of
section 958) more than 50% of the total combined voting power
of all classes of stock entitled to vote.
Column (e). U.S. source non-ECI (FDAP).
Nonresident aliens. Generally, amounts of U.S. source
non-ECI from column (e) are entered on your Schedule NEC
(Form 1040-NR).
Foreign corporations. Generally, amounts of U.S. source
non-ECI from column (e) are reported on your Form 1120-F,
Section I.

DRAFT

DRAFT

The partnership uses Part X to report your distributive share of
income that is subject to tax in the United States. You must
report items of income from your Part X on your tax return and
accompanying schedules. Each line in this section of the
schedule corresponds to a line on Form 1065, Schedule K, lines
1 through 11. For a more detailed description of the types of
income listed on each line, see Income (Loss) under Part III in
the Partner’s Instructions for Schedule K-1 (Form 1065).

Lines 10 through 14. Report amounts of ECI from lines 10
through 14 on Schedule D (Form 1040) or Form 4797, Sales of
Business Property, attached to your tax return. Such amounts
include, for example, gains from the disposition of a U.S. real
property interest. See Income (Loss) under Part III in the
Partner’s Instructions for Schedule K-1 (Form 1065), and the
instructions for Form 1040-NR, line 7, for more information on
how to report this income.

Caution: Although the partnership determined this income isn’t
effectively connected to its trade or business, the income could
be effectively connected to your U.S. trade or business. See Pub.
519, U.S. Tax Guide for Aliens, or the Instructions for Form
1120-F for more information on when U.S. source income is ECI.
Column (f). U.S. source non-ECI (other). If you’re engaged in
any trade or business within the United States, report these
amounts as ECI on your tax return as directed by the Instructions
for Form 1040-NR or the Instructions for Form 1120-F. If you
aren’t so engaged, you generally don’t need to report these
amounts on your tax return. However, non-ECI transportation
income subject to tax under section 887 is reported on Form
1120-F, Section I, line 9, as applicable. Nonresident individuals
report the section 887 non-ECI transportation tax on Form
1040-NR, line 23c.

Section 2—Deductions, Losses, and Net Income

In figuring a foreign corporation’s or nonresident alien’s ECI,
deductions are allowed only if they are allocated and
apportioned to income effectively connected with a U.S. trade or
business; see sections 861(b), 873, and 882(c). To determine
ECI, a foreign corporation and nonresident alien individual must
allocate and apportion deductions and losses to gross income in
the ECI statutory grouping and to gross income in the non-ECI
residual grouping; see Regulations section 1.861-8(f)(1)(iv). For
additional guidance for foreign corporations, see Schedule H
(Form 1120-F), Deductions Allocated to Effectively Connected
Income Under Regulations Section 1.861-8; and Schedule I
(Form 1120-F), Interest Expense Allocation Under Regulations
Section 1.882-5. For additional guidance for nonresident aliens,
see the Instructions for Form 1040-NR. Schedule K-3, Part X,
Section 2, also generally corresponds to the deductions
separately reported on Form 1065, Schedule K.
Add the foreign corporation’s share of partnership expenses
to the foreign corporation’s expenses and enter those expenses
on Schedule H (Form 1120-F). The following instructions provide
19

TREASURY/IRS AND OMB USE ONLY DRAFT
specific instructions for reporting expenses on Form 1120-F. See
the Instructions for Form 1040-NR to determine the appropriate
placement of the nonresident alien partner’s share of the
partnership’s expenses.
Column (b). Partner determination. Include the foreign
corporation’s share of partnership expenses that must be
apportioned to ECI by the foreign corporation on Schedule H
(Form 1120-F), Part II. This includes R&E expenses and interest
expense.
Columns (c) and (d). Partnership determination—ECI.
Enter the foreign corporation’s share of partnership deductions
definitely related and allocated to ECI in Schedule H (Form
1120-F), Part I.
Columns (e) through (g). Partnership determination—non-ECI. Enter the foreign corporation’s share of
partnership deductions definitely related and allocated to
non-ECI in Schedule H (Form 1120-F), Part I.

Line 3b. Directly allocated partnership indebtedness.
These amounts may be reported by the foreign partner on
Schedule P (Form 1120-F), Part III, line 10a. The interest
expense on indebtedness described in Regulations section
1.882-5(a)(1)(ii)(B) should generally be reported by the foreign
partner on Schedule P (Form 1120-F), Part II, line 7; and
Schedule I (Form 1120-F), line 22.
Line 4a. Personnel of U.S. trade or business. Add the
amount reported on this line to other amounts you report on
Schedule H (Form 1120-F), Part III, line 23a.
Line 4b. Worldwide personnel. Add the amount reported on
this line to other amounts you report on Schedule H (Form
1120-F), Part III, line 23b.

Line 7. Interest expense on U.S.-booked liabilities. A foreign
corporate partner generally reports its share of interest expense
on the partnership’s U.S.-booked liabilities, as described in
Regulations section 1.882-5(d)(2)(vii), on Schedule P (Form
1120-F), Part II, line 8. Then, the total interest expense on
U.S.-booked liabilities from Schedule P (Form 1120-F), line 8,
(including the amount from column (b) of Schedule K-3, Part X,
Section 2, line 7) will be entered in , column (b) of Schedule I
(Form 1120-F), line 9.

Line 5. Gross receipts from sales or services by SIC code.
If you have R&E expenses, use the appropriate information from
this line.

Line 10. Section 59(e)(2) expenditures. R&E expenses aren’t
included on this line. R&E expenses that are also section 59(e)
(2) expenditures are included on line 2.

Part XI. Section 871(m) Covered
Partnerships

Line 12. Net long-term capital loss. Line 12 doesn’t include
losses reported on line 13.
Line 16. Charitable contributions. Charitable contributions
may be deducted whether or not they’re effectively connected
with a U.S. trade or business. See sections 873(b)(2) and 882(c)
(1)(B), and Regulations section 1.882-4(b) for more information.
Caution: If box 6 of Part I is checked, interest or royalty
expenses may include amounts for which the partner isn’t
allowed a deduction under section 267A. See the statement for
box 6 of Part I attached to Schedule K-3.

Section 3—Allocation and Apportionment
Methods for Deductions

Section 3 provides information you may use to apportion
deductions to ECI or non-ECI. See Regulations sections 1.861-8
through -20 and Temporary Regulations sections 1.861-8T
and -9T. The ratios listed below generally correspond to the
ratios in Schedule H (Form 1120-F), Part III.
Line 1a. Gross ECI. Add the amount reported on this line to
other amounts you report on Schedule H (Form 1120-F), Part III,
line 21a.
Line 1b. Worldwide gross income. Add the amount reported
on this line to other amounts you report on Schedule H (Form
1120-F), Part III, line 21b.
Line 2a. Average U.S. assets (inside basis). If you use the
ratio of the U.S. assets (inside basis) to the worldwide assets
method to apportion expenses to ECI, check “Yes” on
Schedule H (Form 1120-F), Part III, line 24, and attach a
statement.
20

Lines 7 and 8. Other allocation and apportionment key.
Check “Yes” on Schedule H (Form 1120-F), Part III, line 24 or 25,
if you used another apportionment method based on amounts
entered on lines 7 and 8. Attach a statement to Form 1120-F.

Section 4—Reserved for Future Use

If you’re a U.S. or foreign person that has entered into a section
871(m) transaction that references units in the partnership, use
this part to determine your U.S. withholding tax and reporting
obligations with respect to those transactions under section
871(m) and related sections, including for purposes of
determining the amounts to report on Forms 1042 and 1042-S.
This part will be provided if the partnership is a PTP that (a) is
a covered partnership as defined in Regulations section
1.871-15(m)(1), or (b) directly or indirectly holds an interest in a
lower-tier partnership that is a covered partnership. The
information in this part is to permit you to determine your U.S.
withholding tax and reporting obligations under section 871(m)
and related rules if you’re a U.S. or foreign person that has
entered into a section 871(m) transaction that references units in
the partnership, including for purposes of determining the
amounts to report on Forms 1042 and 1042-S.
If you’ve entered into a potential section 871(m) transaction
with another person that references units in the partnership, you
may need this information to determine your obligations under
section 871(m) and related rules. Generally, a potential section
871(m) transaction is a securities lending or sale-repurchase
transaction, a notional principal contract, or any other specified
financial transaction that references one or more underlying
securities, and an underlying security is any interest in an entity
that could give rise to a U.S. source dividend. See Regulations
section 1.871-15 for additional information, including the
definitions of underlying securities and potential section 871(m)
transactions.

Partner's Instructions for Schedule K-3 (Form 1065) (2025)

DRAFT

DRAFT

Line 2. R&E expenses. Add the foreign corporation’s share of
partnership R&E expenses to the foreign corporation’s other
R&E expenses and apportion such R&E expenses to ECI. Enter
the resultant amount on Schedule H (Form 1120-F), Part I and
Part II. See Regulations section 1.861-17(f).

Line 3a. U.S.-booked liabilities of partnership. These
amounts may be reported by the foreign partner on Schedule P
(Form 1120-F), Part III, line 11; and in column (b) of Schedule I
(Form 1120-F), line 8. As indicated in the instructions for Part X,
Section 2, line 7, the interest expense on U.S.-booked liabilities
as defined in Regulations section 1.882-5(d)(2)(vii) should
generally be reported by the foreign partner on Schedule P
(Form 1120-F), line 8; and in column (b) of Schedule I (Form
1120-F), line 9.

TREASURY/IRS AND OMB USE ONLY DRAFT

Part XII. Section 871(m) Tax Liability
of a Qualified Derivatives Dealer
(QDD)

If you’re a U.S. or foreign person that is a partner in a partnership
that is, or has one or more branches that are, a QDD, as defined
under the qualified intermediary agreement in Rev. Proc.
2022-43 (QDD partnership), use this part to determine your U.S.
tax or withholding tax and reporting obligations with respect to
the QDD activities, including, if applicable, to determine the
amounts to report on Forms 1042 and 1042-S.

Part XIII. Foreign Partner’s
Distributive Share of Deemed Sale
Items on Transfer of Partnership
Interest

In general. Section 864(c)(8) requires a foreign partner that
directly or indirectly transfers part or all of an interest in a
partnership engaged in the conduct of a trade or business in the
United States to include in income the effectively connected gain
or loss from the transfer. A partnership distribution is considered
a transfer when it results in recognition of gain or loss. See
Regulations section 1.731-1(a).
Information regarding the transfer of an interest in a
partnership engaged in the conduct of a trade or business in the
United States must be provided to the partnership no later than
30 days after the transfer by any of the following transferors: (a) a
foreign person; (b) a domestic partnership that has a foreign
person as a direct partner; or (c) a domestic partnership that has
actual knowledge that a foreign person holds, through one or
more partnerships, an interest in the domestic partnership.
To determine the amount of gain or loss described in section
864(c)(8), generally, a foreign transferor must first determine its
gain or loss on the transfer of a partnership interest (outside gain
or loss). For this purpose, outside gain or loss is determined

Partner's Instructions for Schedule K-3 (Form 1065) (2025)

Line instructions. The foreign transferor must compare the
outside gain or loss amounts with the relevant aggregate
deemed sale effectively connected gain or loss provided on Part
XIII, lines 2 and 3. The foreign transferor only includes in income
the lower of the outside amount and the deemed sale effectively
connected amount. This determination is made separately with
respect to capital gain or loss and ordinary gain or loss. For
example, a foreign transferor would compare its outside ordinary
gain to its aggregate deemed sale effectively connected ordinary
gain, treating the former as effectively connected gain only to the
extent it doesn’t exceed the latter. Similarly, the foreign transferor
would compare its outside capital gain to its aggregate deemed
sale effectively connected capital gain, treating the former as
effectively connected gain only to the extent it doesn’t exceed
the latter.
Amounts entered on lines 4 and 5 are subsets of the amount
entered on line 3 and don’t apply to a foreign transferor that is a
corporation.
Unless there is an amount only entered on line 7, use this
information as follows.
• If you’re a nonresident alien individual, foreign trust, or
foreign estate, complete Schedule P (Form 1040-NR).
• If you’re a foreign corporation, complete Schedule P (Form
1120-F), Parts IV and V.
• If you’re a foreign partnership, complete Form 4797 and
Form 8949, Sales and Other Dispositions of Capital Assets,
as needed.
• If this is an installment sale, see Form 6252.
If an amount is only entered on line 7, use it to determine gain
or loss from the transfer of the partnership interest when
completing Form 8949.

21

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Use this part to determine the information you must report about
the effectively connected gain or loss arising from the transfer of
an interest in a partnership.

under all relevant provisions of the Code and the regulations
thereunder. A foreign transferor may recognize capital gain or
loss (outside capital gain or loss) and ordinary gain or loss
(outside ordinary gain or loss) on the transfer of its partnership
interest and must separately apply section 864(c)(8) with respect
to its capital gain or loss and its ordinary gain or loss. Part XIII,
line 1, provides the information for the partner to determine its
outside ordinary gain or outside ordinary loss. The partner then
applies Regulations section 1.751-1(a)(2) to determine its
outside capital gain or loss.