Updated October 28, 2026. Quick answer: The Partner’s Instructions for Schedule K-1 (Form 1065) print a worksheet for adjusting the basis of your partnership interest: start with last year’s basis, add contributions and your share of income, subtract distributions, then apply your share of losses and deductions to what is left. The losses you can claim this year are capped at the basis left before them (line 14); the ending basis (line 18) is what carries to the end of the year.
What this worksheet is for
“Generally, a partner may only claim their share of a partnership loss (including a capital loss) to the extent it doesn’t exceed their adjusted basis in the partnership at the end of the partnership’s tax year.” The IRS puts the tracking on you: “It’s the partner’s responsibility to track and maintain the information necessary to figure their adjusted basis in the partnership (also known as outside basis).” The capital account in item L does not do the job: “that information is based on the partnership’s books and records and can’t be used to figure the partner’s adjusted basis.” The Form 1065 instructions point to the same worksheet: “See the Partner’s Instructions for Schedule K-1 (Form 1065) for details on how to figure the adjusted basis of a partnership interest.”
The worksheet line by line
| Line | What the worksheet says |
|---|---|
| Part I, line 1 | “Adjusted basis at the beginning of the tax year. Don’t enter less than zero” |
| Line 2 | “Acquisitions of partnership interests and contributions of money and property” |
| Line 3c | “Increase (decrease) in partnership liabilities (subtract line 3b from line 3a)” |
| Line 4a | “Ordinary business income” |
| Line 4b | “Net rental real estate income” |
| Line 4l | “Tax-exempt income” |
| Line 4o | “Total increases (add lines 4a through 4n)” |
| Line 7 | “Total basis before decreases (add lines 1, 2, 3e, 4o, 5, and 6)” |
| Line 8a | “Cash and marketable securities distributed” |
| Line 8d | “Total distributions (add lines 8a through 8c)” |
| Line 10 | “Total distributions and decrease in liabilities (add lines 8d and 9c)” |
| Line 11a | “Basis after distributions (add lines 7 and 10)” “(If the result is negative, enter -0- on line 11a and enter the amount as a positive on line 11b.)” |
| Line 11b | “Gain on distributions in excess of basis” |
| Part II, lines 15a to 15r | Each loss and deduction item runs across five columns: “Current-year distributive share”, “Prior-year carryforward amount”, “Total of columns A and B”, then the allowable amount and the disallowed loss carried forward. |
| Line 18 | “Adjusted basis at the end of the tax year” |
Example: distributions below and above basis
Illustration, not an IRS example. Every input is invented, each result is computed from them, and only part I is shown.
| Item | Illustration |
|---|---|
| Line 1: basis at the start of the year (invented) | $20,000 |
| Line 2: money contributed (invented) | $5,000 |
| Line 4a: ordinary business income, the only income item (invented) | $12,000 |
| Line 7, computed: line 1 plus line 2 plus line 4o | $37,000 (computed) |
| Line 8d: cash distributed, case 1 (invented) | $10,000 |
| Line 11a, case 1, computed: line 7 minus line 8d | $27,000 (computed) |
| Line 8d: cash distributed, case 2 (invented) | $40,000 |
| Line 11b, case 2, computed: line 8d minus line 7 | $3,000 (computed) |
In case 2 the distribution is more than basis, so line 11a is zero and the $3,000 excess is a gain on line 11b.
Where the partnership side is explained
The partnership’s own return lines are on Form 1065 and the partners’ capital accounts on Schedule M-2. Those are books-based or return-level, not your outside basis.
Edition
This page reads the Partner’s Instructions for Schedule K-1 (Form 1065) (2025), the current file irs.gov served on 2026-10-28 (sha256 in the kit data). The worksheet in it is for the tax year 2025 return, filed in 2026. Check the tax year printed on the worksheet in your own copy and use that year’s line numbers and dollar amounts, because a different year’s worksheet can word its lines differently.
Common mistakes
- Using the capital account on Schedule K-1 as your basis. The IRS says it can’t be used for that.
- Entering a negative basis. Line 1 says not to enter less than zero, and line 11a goes to zero with the excess on line 11b.
- Applying losses before distributions. The worksheet takes distributions first and then losses and deductions.
Related: Form 1065, Schedule M-2, and partnership basics.
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Answer againSources
- Partner’s Instructions for Schedule K-1 (Form 1065) (2025): https://www.irs.gov/pub/irs-pdf/i1065sk1.pdf
- Instructions for Form 1065 (2025): https://www.irs.gov/pub/irs-pdf/i1065.pdf
Read from the IRS documents linked above on October 28, 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.