Updated October 16, 2026. Quick answer: Box 5 of Schedule K-1 (Form 1065) is your share of the partnership’s interest income, and the 2025 partner instructions say to report it on Form 1040 or 1040-SR, line 2b. It is portfolio income, so the passive activity limitations do not apply to it. If it includes interest from clean renewable energy bond credits, the partnership attaches a statement and you reduce your basis by the same amount.
What box 5 reports
On the schedule itself, Part III box 5 carries the label “Interest income”.
“The partnership uses Schedule K-1 to report your share of the partnership’s income, deductions, credits, etc.” “Keep it for your records.” “Don’t file it with your tax return unless you’re specifically required to do so.”
“Although the partnership generally isn’t subject to income tax, you may be liable for tax on your share of the partnership income, whether or not distributed.” “Include your share on your tax return if a return is required.”
This page covers one box. The full walk through every box on the schedule is on the Schedule K-1 (Form 1065) boxes page.
The instructions open Part III with a statement that frames every box. “The amounts shown in boxes 1 through 21 reflect your share of income, loss, deductions, credits, and other items from partnership business or rental activities without reference to limitations on losses” and the four items that follow: “The adjusted basis of your partnership interest,” “The amount for which you’re at risk,” “The passive activity limitations, and” “The excess business loss limitations.”
Where box 5 goes on your return
The instruction for this box is one sentence long, and the table below sets it beside the related rules in the same instructions.
| Situation | What the instructions say |
|---|---|
| Box 5 amount on the schedule | “Report interest income on Form 1040 or 1040-SR, line 2b.” |
| Interest from clean renewable energy bond credits | “the partnership will attach a statement to Schedule K-1 showing your share of interest income from these credits.” |
| Basis of the partnership interest | “you must reduce your basis by the same amount.” |
| Partner that is not an individual | “If you aren’t an individual, report the amounts in each box as instructed on your tax return.” |
An interest figure from a partnership looks like interest from a bank or broker, and the return line is the same line. The bank side is explained on the 1099-INT box 1 page. The schedule that lists interest and dividends is covered on the Schedule B page.
“If you’re an individual and the passive activity rules don’t apply to the amounts shown on your Schedule K-1, take the amounts shown and enter them on the appropriate lines of your tax return.” “If you aren’t an individual, report the amounts in each box as instructed on your tax return.”
“If the partnership reports a section 743(b) adjustment to partnership items, report these adjustments as separate items on Form 1040 or 1040-SR in accordance with the reporting instructions for the partnership item being adjusted.”
The year to report in depends on the partnership’s year end. “If you file your tax return on a calendar-year basis, but your partnership files a return for a fiscal year, report the amounts on your tax return for the year in which the partnership’s fiscal year ends.” “if the partnership’s tax year ends in February 2026, report the amounts on your 2026 tax return.”
Portfolio income and the passive limits
“Portfolio income or loss (shown in boxes 5 through 9b and in box 11, code A) isn’t subject to the passive activity limitations.” “Portfolio income includes income (not derived in the ordinary course of a trade or business) from interest, ordinary dividends, annuities or royalties, and gain or loss on the sale of property that produces such income or is held for investment.”
That is the difference between box 5 and boxes 1 through 3. The business box is reported by the material participation tests described in the instructions, while the interest in box 5 sits in the portfolio group named in the first sentence above.
Clean renewable energy bond interest and your basis
Some box 5 amounts need a second step. “If the amount of interest income included in box 5 includes interest from the credit for holders of clean renewable energy bonds, the partnership will attach a statement to Schedule K-1 showing your share of interest income from these credits.” “Because the basis of your interest in the partnership has been increased by your share of the interest income from these credits, you must reduce your basis by the same amount.”
The instructions point to the basis worksheet for the mechanics. “See the line 4d instructions for the Worksheet for Adjusting the Basis of a Partner’s Interest in the Partnership.” The worksheet line says the same thing from the other direction: “Reduce interest income reported on this line by any amount included in interest income with respect to the credit to holders of clean renewable energy bonds.”
The limits that apply before it reaches the return
“There are potential limitations on partnership losses that you can deduct on your return.” The order is stated too: “the basis limitations, the at-risk limitations, the passive activity limitations, and the excess business loss limitations.”
Box 5 reports income, and the limits in the next paragraphs are written for losses and deductions on the schedule as a whole. They are listed here because a partner with a loss in another box meets them in the order above.
Basis comes first. “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.” “Any losses and deductions not allowed can be carried forward.” Tracking the figure falls to you: “It’s the partner’s responsibility to track and maintain the information necessary to figure their adjusted basis in the partnership”. The capital account on the schedule does not substitute: “that information is based on the partnership’s books and records and can’t be used to figure the partner’s adjusted basis.”
The at-risk rules come next. “Generally, if you have (a) a loss or other deduction from any activity carried on as a trade or business or for the production of income by the partnership, and (b) amounts in the activity for which you aren’t at risk, you’ll have to complete Form 6198, At-Risk Limitations, to figure your allowable loss for the activity.” The form is explained on the Form 6198 page. “The at-risk rules generally limit the amount of loss and other deductions that you can claim to the amount you could actually lose in the activity.”
The last limit applies to business losses. “Your distributive share of losses attributable to all of the partnership’s trades or businesses may be limited under section 461(l).” “See Form 461, Limitation on Business Losses, and its instructions for more information.”
Corrections, matching and the year to report
If a figure on the schedule looks wrong, the instructions give one route. “If you believe the partnership has made an error on your Schedule K-1, notify the partnership and ask for a corrected Schedule K-1.” “Don’t change any items on your copy of Schedule K-1.”
The matching rule applies to a partner in a partnership that has not elected out of the centralized partnership audit regime enacted by the Bipartisan Budget Act of 2015: “you must report the items shown on your Schedule K-1 (and any attached statements) the same way that the partnership treated the items on its return.” Form 8082 is required only in two cases, “If the treatment on your original or amended return is inconsistent with the partnership’s treatment, or if the partnership was required to file a return but hasn’t”, and then “you must file Form 8082, Notice of Inconsistent Treatment or Administrative Adjustment Request (AAR), with your original or amended return”.
“If you have losses, deductions, or credits from a prior year that weren’t deductible or usable because of certain limitations, such as the basis limitations or the at-risk limitations, take them into account in determining your net income, loss, or credits for this year.”
Which revision applies
The edition read for this page is the 2025 Partner’s Instructions for Schedule K-1 (Form 1065) together with the 2025 Schedule K-1 (Form 1065) itself, which are the revisions irs.gov served when they were read on 2026-10-16. Check the revision printed on the Schedule K-1 you received, because a later revision can change the box layout, the codes and the reporting lines.
Common mistakes
- Treating box 5 as a passive activity amount. The instructions say portfolio income or loss shown in boxes 5 through 9b isn’t subject to the passive activity limitations.
- Skipping the basis reduction for clean renewable energy bond interest. The instructions say the partner must reduce basis by the same amount the interest income increased it.
- Editing the schedule. The instructions say not to change any items on your copy of Schedule K-1 and to ask the partnership for a corrected one if an error is suspected.
Related: 1099-INT box 1 interest income, Schedule B (Form 1040), Form 6198 at-risk limitations, Form 1040, and net investment income tax.
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Answer againSources
- 2025 Partner’s Instructions for Schedule K-1 (Form 1065): https://www.irs.gov/pub/irs-pdf/i1065sk1.pdf
- Schedule K-1 (Form 1065) (2025), Partner’s Share of Income, Deductions, Credits, etc.: https://www.irs.gov/pub/irs-pdf/f1065sk1.pdf
Read from the IRS documents linked above on October 16, 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.