Treasury releases partnership updates

The Department of the Treasury and the Internal Revenue Service have released updated instructions for partnership tax filings, including the Instructions for Form 1065, U.S. Return of Partnership Income, and the Partner’s Instructions for Schedule K-1 (Form 1065), Partner’s Share of Income, Deductions, Credits, etc., for tax year 2025. 

Final instructions were issued in January 2026 for processing year 2025 returns. Treasury and the IRS are also encouraging practitioners to submit feedback, signaling that additional refinements may be considered for future tax years.

What stayed the same and what changed

At first glance, Form 1065 and Schedule K-1 will look familiar. The IRS did not overhaul the forms, which should help ease the transition for partnerships that have established filing processes. That said, a few updates stand out.

Form 1065 now includes direct deposit lines on Lines 32b-d, under Line 32a, Overpayment. This change aligns partnership returns more closely with other business filings by adding dedicated lines to request direct deposit when an overpayment exists, rather than issuing a paper check.

Schedule B, Question 19, has been updated to include payments received that are allocable to foreign partners. This provides clearer guidance and supports more consistent reporting.

Schedule K also includes a new checkbox on Line 16b that allows a partnership to indicate it qualifies for an exception from filing Schedule K-2 (Form 1065), Partners’ Distributive Share Items International. For partnerships that meet the criteria for the international reporting exception, this checkbox provides a clearer way to document eligibility and reduce unnecessary filings. 

New reporting codes for Schedule K and K-1

The most substantive changes are found in the instructions, with the IRS introducing several new reporting codes for Schedules K and K-1 to address areas of partnership taxation that have historically caused confusion. According to the IRS, some of the new codes are intended to help partnerships comply with existing rules that preparers have struggled to apply consistently. Other codes implement provisions of the One Big Beautiful Bill Act (OBBBA) and related statutory changes. 

• For example, Line 20, Code AR, has been updated to notify partnerships that an employer identification number (EIN) will be required after 2025 for IRA partners receiving an unrelated business taxable income (UBTI) allocation. This update ensures accurate reporting for IRA partners and aligns with new regulatory standards.
• Additionally, Code X in Box 13 was updated to reflect OBBBA’s expansion of §181 to include qualified sound recording production expenses.

Reporting partnership distributions

Several new codes pertain specifically to partnership distributions, affecting Line 19 of Form 1065 and Box 19 of Schedule K-1:

• Code D: reports deemed distributions of cash under §752(b), including situations where a partner’s share of partnership liabilities decreases or when the partnership assumes a partner’s individual liabilities. These liability shifts are treated as distributions for tax purposes, even if no cash is exchanged.
• Code E: remains reserved for future use.
• Code F and G: apply to distributions made to partners for providing services. Code F applies to cash or marketable securities distributed for services, while Code G applies to property other than cash. These codes distinguish service-related payments from other distributions, which may have different tax consequences. 

Existing distribution codes remain in effect: 

• Code A: cash and marketable securities distributions not related to services
• Code B: property distributions subject to §737
• Code C: property distributions not covered by other categories

Additional codes for other partnership transactions

Two codes have been introduced for reporting certain events or transactions on Line 20 of Schedules K and K-1:

• Code AZ: used to report reimbursements of preformation expenditures under Treasury Regulation §1.707-4(d), addressing the exception to disguised sale rules for qualifying reimbursements. 
• Code ZZ: is used to report information related to gains described in §1062 from sales of qualified farmland property to qualified farmers, allowing partners to elect installment payment treatment for the resulting tax, where permitted. 

IRS requests practitioner feedback

Treasury and the IRS are actively seeking feedback on the revised instructions, as they do with each revision. Comments submitted now will be considered as the agencies develop forms and instructions for tax year 2026. Practitioners can submit comments through the IRS site. Feedback on Form 1065 instructions should use the subject line “Instructions for Form 1065,” while comments on the Schedule K-1 instructions should use “Partner’s Instructions Schedule K-1.” 

Action steps for tax professionals

Partnerships with complex distributions, service arrangements or specialized transactions should review the updated instructions carefully before the filing season. Even modest changes in reporting codes can impact partner basis, taxable income and disclosure accuracy. 

Remaining current with IRS guidance helps minimize downstream corrections and supports more effective client communication. Partnerships and preparers who encounter unclear or impractical reporting requirements are encouraged to submit feedback while Treasury and the IRS are soliciting practitioner input.