Updated October 18, 2026. Quick answer: Schedule M-2 shows what changed the partners’ tax-basis capital accounts during the year. It starts with the beginning balance, adds contributions, net income and other increases, subtracts distributions and other decreases, and ends with the year-end balance, which should match the partners’ Schedules K-1.
What Schedule M-2 is
The form heading is “Analysis of Partners’ Capital Accounts”. The instructions say “Show what caused changes during the tax year in the partners’ tax-basis capital accounts.” It is at the bottom of page 6 of the Form 1065 return. The instructions’ tip reads “Schedules L, M-1, and M-2 aren’t required to be completed if the partnership answered” Yes to question 4 on Schedule B (see the Schedule B questions 4 and 5 page).
Line 1: balance at beginning of year
The form caption is “Balance at beginning of year”. The instructions say “The balance at the beginning of the year should equal the total of the amounts reported as the partners’ beginning tax-basis capital accounts in item L of all the partners’ Schedules K-1.” “If not, the partnership should attach an explanation of the difference.” “Generally, the balance at the beginning of the year should equal the adjusted tax basis of the partnership’s assets at the beginning of the year reduced by the partnership’s liabilities at the beginning of the year.”
Lines 2 to 5: increases
Line 2 has two parts. “Include on line 2a the amount of money contributed by each partner to the partnership, as reflected on the partnership’s books and records.” “Include on line 2b the adjusted tax basis of property net of liabilities contributed by each partner to the partnership, as reflected on the partnership’s books and records.”
Line 3: “Enter on Schedule M-2, line 3, the amount from the Analysis of Net Income (Loss) per Return, line 1.” “Generally, this is the same as the amount entered on Schedule M-1, line 9” (the Schedule M-1 and the analysis of net income page). The instructions then say “Because section 743(b) basis adjustments and income from guaranteed payments aren’t included in the partners’ tax-basis capital accounts, certain adjustments may be necessary.” “If net income includes income from guaranteed payments made to partners, remove such income on line 7.”
Line 4: “Enter on line 4 the sum of all other increases to the partners’ tax-basis capital accounts during the year not reflected on lines 2 and 3.” Line 5 is printed on the form as “Add lines 1 through 4.”
Lines 6 to 8: decreases
Line 6a: “Enter the amount of money distributed to each partner by the partnership.” “For purposes of line 6a, money includes marketable securities, as described in section 731(c).”
Line 6b: “Enter the sum of the adjusted tax bases of property net of liabilities distributed to each partner by the partnership as reflected on the partnership’s books and records.” “Include withdrawals from inventory for the personal use of a partner.”
Line 7: “Enter on line 7 the sum of all other decreases to the partners’ tax-basis capital accounts during the year not reflected on line 6.” Line 8 is printed as “Add lines 6 and 7.” Line 7 is also where guaranteed payment income goes if line 3 includes it: “Likewise, if line 3 includes income from guaranteed payments reported on Schedule K, line 4c, include that amount as a decrease on line 7.”
Line 9: balance at end of year
The form caption is “Balance at end of year. Subtract line 8 from line 5”. The instructions say “The balance at the end of the year should equal the total of the amounts reported as the partners’ ending capital accounts in item L of all the partners’ Schedules K-1.”
Where the number comes from
The beginning balance comes from the partners’ Schedule K-1 item L amounts, the contribution and distribution lines come from the partnership’s books and records, and line 3 comes from the analysis of net income on the same page. Distributions also appear on Schedule K lines 19a and 19b, covered on the Schedule K lines 15 to 21 page.
Where it goes next
The year-end balance is checked against the partners’ Schedules K-1, as the line 9 instruction above says. When Schedule L is on the tax basis, “attach a statement reconciling any differences.” That comparison is on the Schedule L page.
Edition and line numbers
This page reads the 2025 Form 1065 and its 2025 instructions, the current files irs.gov served on 2026-10-18. They are the files for the tax year 2025 return, filed in 2026. Form 1065 carries no “Attach to” caption, so the form’s own title line is the identifier: “U.S. Return of Partnership Income”, with the header “For calendar year 2025, or tax year beginning”. Check the tax year printed on the form you are filling in and use the line numbers on that year’s form, because a different year’s form can number or word its lines differently.
Common mistakes
- Starting M-2 from a number that does not match the partners’ K-1s. The instructions say “If not, the partnership should attach an explanation of the difference.”
- Leaving guaranteed payment income in the net income line. The instructions say “If net income includes income from guaranteed payments made to partners, remove such income on line 7.”
- Forgetting that property is reported net of liabilities. The instructions say “Include on line 2b the adjusted tax basis of property net of liabilities contributed by each partner to the partnership, as reflected on the partnership’s books and records.”
Related: Form 1065, Schedule K-1 (Form 1065) boxes, Schedule K-1 box 19, and Form 7203.
Sources
- Instructions for Form 1065, U.S. Return of Partnership Income (2025): https://www.irs.gov/pub/irs-pdf/i1065.pdf
- Form 1065, U.S. Return of Partnership Income (2025): https://www.irs.gov/pub/irs-pdf/f1065.pdf
Read from the IRS documents linked above on October 18, 2026. General information, not tax advice. Your own facts decide the outcome, and a preparer, the account provider or the IRS is the right place to confirm anything consequential.