1065 K-1 Line 13K: What It Is & If It’s Tax-Deductible

Table of Contents#

1. What Is Form 1065 Schedule K-1, First?
2. A Deep Dive Into 1065 K-1 Line 13K 2.1 Expenses Included in Line 13K 2.2 How Partnerships Calculate Line 13K Allocations
3. Is 1065 K-1 Line 13K Tax-Deductible? 3.1 Eligibility Rules for Deducting Line 13K 3.2 Limits on Line 13K Deductions
4. How to Report Line 13K on Your Personal Tax Return
5. Common Mistakes to Avoid With Line 13K
6. Frequently Asked Questions
7. References

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1. What Is Form 1065 Schedule K-1, First?#

Form 1065 is the annual tax return filed by U.S. partnerships, which are classified as pass-through entities. Unlike C corporations, partnerships do not pay income tax directly. Instead, all income, losses, deductions, and credits are allocated to individual partners based on their ownership share, and reported to each partner via a Schedule K-1 (Form 1065).

Partners then use the information on their K-1 to report their share of partnership activity on their personal, corporate, or fiduciary tax returns. Line 13 of Schedule K-1 is reserved for "Other Deductions," with alphanumeric codes used to identify specific types of deductible expenses passed through to partners. Code K corresponds to excess business interest expense.

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2. A Deep Dive Into 1065 K-1 Line 13K#

Line 13K reports your share of a partnership’s excess business interest expense (EBIE) under Internal Revenue Code (IRC) Section 163(j), a rule introduced as part of the 2017 Tax Cuts and Jobs Act (TCJA) that limits the amount of business interest expense a business can deduct in a single tax year.

Partnerships are required to apply the Section 163(j) limit at the entity level first. Any interest expense that exceeds the annual limit is not deducted by the partnership itself, but instead passed through to partners via Line 13K for future tax use.

2.1 Expenses Included in Line 13K#

Line 13K only includes interest expenses related to the partnership’s active trade or business, such as:

• Interest on business loans for equipment, real estate, or operating capital
• Interest on business lines of credit
• Interest paid on partnership-level debt used to fund business activities

It does not include personal interest expenses, investment interest, or interest related to tax-exempt income.

2.2 How Partnerships Calculate Line 13K Allocations#

Partnerships follow a standard formula to calculate EBIE for Line 13K:

1. First, calculate the partnership’s annual allowable business interest deduction, equal to 30% of the partnership’s adjusted taxable income (ATI) plus 100% of the partnership’s business interest income for the year
2. Subtract this allowable deduction from the total business interest expense the partnership paid or accrued during the tax year
3. The remaining amount is the total excess business interest expense for the partnership
4. This total is allocated to each partner based on their pro-rata share of partnership profits/losses, and reported on each partner’s Line 13K

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3. Is 1065 K-1 Line 13K Tax-Deductible?#

The short answer is yes, but not in the year you receive the K-1. Line 13K amounts are not immediately deductible on your current-year tax return. Instead, they are carried forward indefinitely until you meet one of the eligibility requirements to claim the deduction.

3.1 Eligibility Rules for Deducting Line 13K#

You can deduct all or part of your accumulated Line 13K carryforward in a future tax year if any of the following apply:

1. The same partnership allocates you excess taxable income (ETI) or excess business interest income (EBII) in a future tax year (these amounts are reported on Schedule K-1 Line 20, codes AE and AF, respectively)
2. You dispose of 100% of your ownership interest in the partnership that issued the K-1 (you may deduct the full remaining carryforward in the year of disposition)
3. The partnership is no longer subject to the Section 163(j) limit (for example, if it qualifies as a small business with average annual gross receipts under $27 million for the prior 3 tax years, as of 2023)

3.2 Limits on Line 13K Deductions#

Even if you meet the eligibility requirements, your Line 13K deduction is subject to additional limits:

• Same-partnership limit: You can only use Line 13K carryforwards from a specific partnership against ETI or EBII from that same partnership. You cannot cross-apply carryforwards between different partnerships.
• Basis limit: You cannot deduct Line 13K amounts if your adjusted basis in the partnership interest is less than the amount you are claiming as a deduction.
• At-risk limit: If you are not personally liable for partnership debts, your deduction is limited to the amount you have at risk in the partnership.
• Passive activity limit: If your partnership interest is classified as a passive activity (you do not materially participate in operations), you can only deduct Line 13K amounts against passive income from the same activity or other passive activities.

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4. How to Report Line 13K on Your Personal Tax Return#

You are required to report Line 13K amounts every year, even if you cannot claim a deduction in the current year, to track your carryforward with the IRS. Follow these steps:

1. File Form 8990 (Limitation on Business Interest Expense Under Section 163(j)) with your Form 1040 or other tax return.
2. Enter your current-year Line 13K amount on Part I, Line 2 of Form 8990, and add any unused Line 13K carryforwards from prior tax years.
3. Report any ETI or EBII allocated to you from the same partnership (Line 20 codes AE and AF of your K-1) on the appropriate lines of Form 8990.
4. Calculate your allowable Line 13K deduction for the current year per Form 8990 instructions. Any unused amount will carry forward to the next tax year.
5. Report the allowable deduction as an other deduction on Schedule E (Form 1040), Line 28, or the appropriate form if you are filing a corporate or fiduciary return.

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5. Common Mistakes to Avoid With Line 13K#

1. Deducting the full Line 13K amount in the year you receive the K-1: This is the most common error, and will almost always trigger an IRS notice, penalty, or adjustment to your return.
2. Forgetting to track carryforwards: If you fail to file Form 8990 annually to track your unused Line 13K amounts, you may lose the ability to claim the deduction in future years.
3. Cross-applying carryforwards between partnerships: Using Line 13K carryforwards from one partnership to offset ETI/EBII from another is not allowed and will result in a disallowed deduction.
4. Ignoring basis, at-risk, and passive activity rules: Failing to apply these limits before claiming a Line 13K deduction will lead to IRS penalties and interest on any underpaid tax.

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6. Frequently Asked Questions#

Q: Can I deduct Line 13K against my W-2 salary or investment income?#

A: No. Line 13K deductions can only be offset against ETI/EBII from the same partnership, or claimed when you dispose of your full partnership interest.

Q: What happens to my Line 13K carryforward if the partnership closes?#

A: You may deduct the full remaining carryforward in the tax year the partnership ceases operations and your ownership interest is terminated.

Q: Do I need to file Form 8990 if I have no allowable deduction this year?#

A: Yes. The IRS requires you to file Form 8990 to document your carryforward amount, even if you cannot claim a deduction in the current year.

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References#

1. Internal Revenue Service. (2023). Instructions for Schedule K-1 (Form 1065). Retrieved from https://www.irs.gov/instructions/i1065sk1
2. Internal Revenue Service. (2023). Instructions for Form 8990. Retrieved from https://www.irs.gov/instructions/i8990
3. Internal Revenue Service. (2023). Publication 535: Business Expenses. Retrieved from https://www.irs.gov/publications/p535
4. Internal Revenue Code § 163(j). Limitation on Business Interest Expense. Retrieved from https://www.law.cornell.edu/uscode/text/26/163j