Updated October 18, 2026. Quick answer: Line 1a is the partnership’s gross receipts or sales from its trade or business, line 1b takes out returns and allowances, and line 1c is the balance. Line 2 is the cost of goods sold that comes from Form 1125-A, and line 3 is the gross profit. The receipts come from the partnership’s books; the cost of goods sold comes from the attached Form 1125-A.
What goes on line 1a
The instructions say: “Enter on line 1a gross receipts or sales from all trade or business operations, except for amounts that must be reported on lines 4 through 7.” They add “If a cost offset method under section 451(b) or (c) is used, the resulting gross income is reported on line 1a.” The form’s caption for the line is “Gross receipts or sales”. This page is part of the Form 1065 line-by-line walk-through, and it is followed by lines 4 to 8.
What stays off line 1a
The instructions name items that belong elsewhere: “don’t include gross receipts from farming on line 1a.” Instead they say “show the net profit (loss) from farming on line 5.” They also say “Also, don’t include on line 1a rental activity income or portfolio income.” The form carries the same limit in a caution above the income lines: “Include only trade or business income and expenses on lines 1a through 23 below.” Self-employed filers meet the same sorting question on Schedule C lines 2 to 5.
Timing and special cases
On timing, the instructions say “In general, advance payments are reported in the year of receipt.” For the special accrual cases the instructions give, read the full text of the line 1a instructions.
Lines 1b and 1c: returns and allowances, then the balance
Line 1b is captioned “Less returns and allowances” and line 1c is captioned Balance. The instructions have no separate paragraph for lines 1b or 1c (checked by searching both text extractions for the headings), so the printed captions are what the form gives you. The captions show the arithmetic: 1a, less 1b, leaves 1c. As a computed illustration, not an IRS example, gross receipts of $250,000 less returns and allowances of $10,000 leave a balance of $240,000.
Line 2: cost of goods sold
The form’s caption is “Cost of goods sold (attach Form 1125-A)”. The instructions say “If the partnership has a cost of goods sold deduction, complete and attach Form 1125-A.” They continue “Enter on Form 1065, page 1, line 2, the amount from Form 1125-A, line 8.” The cost figure is therefore built on Form 1125-A first, and line 2 only receives the result.
Line 3: gross profit
The caption reads “Gross profit. Subtract line 2 from line 1c”. The instructions have no separate paragraph for line 3 (checked in both extractions), so the caption is the whole rule. Continuing the computed illustration, not an IRS example, a balance of $240,000 less cost of goods sold of $90,000 gives a line 3 gross profit of $150,000.
Where the number comes from
Line 1a comes from the partnership’s own books and sales records for the tax year. Line 1b comes from its records of returns and allowances. Line 2 comes from Form 1125-A, line 8. Partners who also file a sole proprietor schedule can compare the layout with Schedule C, where the same receipts-to-gross-profit sequence appears for a single owner.
Where it goes next
Line 3 is the first subtotal of the income section. The caption for the next subtotal is “Total income (loss). Combine lines 3 through 7”, which is on the lines 4 to 8 page. The deductions that follow begin with lines 9 and 10, and line 23 later subtracts total deductions from total income.
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 has no “Attach to” caption, so the form’s own title line is the check: it reads “U.S. Return of Partnership Income” and the period line reads “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
- Putting farm receipts on line 1a. The instructions say “don’t include gross receipts from farming on line 1a.”
- Putting rental or portfolio income on line 1a. The instructions say “Also, don’t include on line 1a rental activity income or portfolio income.”
- Typing a cost of goods sold figure on line 2 without the form behind it. The instructions say “If the partnership has a cost of goods sold deduction, complete and attach Form 1125-A.”
Related: Form 1065, Schedule C lines 2 to 5, Schedule C, and farm LLC or partnership basics.
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.