Updated October 16, 2026. Quick answer: Box 7 of Schedule K-1 (Form 1065) is your share of the partnership’s royalties. The 2025 partner instructions say to report royalties on Schedule E (Form 1040), line 4, and they list royalties inside portfolio income, which is not subject to the passive activity limitations.
What box 7 reports
Part III box 7 carries the label “Royalties”.
“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.
Where box 7 goes on your return
The instruction is short. “Report royalties on Schedule E (Form 1040), line 4.” The comparison below shows how that differs from the business income line and from the catch-all portfolio box.
| Item | What the instructions say |
|---|---|
| Box 7 royalties | “Report royalties on Schedule E (Form 1040), line 4.” |
| Box 11, code A | “The partnership will report portfolio income other than interest, ordinary dividend, royalty, and capital gain (loss) income, and attach a statement to tell you what kind of portfolio income is reported.” |
| Business income in box 1 | “Report box 1 income (loss) from partnership trade or business activities in which you materially participated in column (i) or (k) of Schedule E (Form 1040), line 28.” |
Schedule E is covered on the Schedule E page. Passive loss limits, which apply to the rental boxes, are covered on the Form 8582 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.”
Why royalties count as portfolio income
“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.”
The word royalties appears in that list next to interest and ordinary dividends, which is how the instructions place box 7 with boxes 5 and 6 rather than with the business boxes. The passive activity rules, by contrast, are described this way: “Generally, passive activities include the following.” “Trade or business activities in which you didn’t materially participate.” “Activities that meet the definition of rental activities”. Those are the two descriptions the instructions give for passive activities, and the portfolio definition above is the one that names royalties.
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.”
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.”
A royalty box is normally an income amount, but the instructions state the basis, at-risk and passive tests for the schedule as a whole, and they apply to losses from boxes that can carry one. “The amount of loss and deduction you may claim on your tax return may be less than the amount reported on Schedule K-1.” “It’s the partner’s responsibility to consider and apply any applicable limitations.”
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.”
Items must also match what the partnership reported, but the instructions tie that rule to the centralized partnership audit regime. “If you’re a partner in a partnership that hasn’t elected out of the centralized partnership audit regime enacted by the Bipartisan Budget Act of 2015 (the BBA), 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.” If your treatment on an original or amended return is inconsistent with the partnership’s, “you must file Form 8082, Notice of Inconsistent Treatment or Administrative Adjustment Request (AAR), with your original or amended return”.
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.”
“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
- Putting box 7 on the same line as box 1. The instructions send royalties to Schedule E, line 4, while business income goes in the columns of Schedule E, line 28.
- Running royalties through the passive loss form. The instructions place royalties in portfolio income, which they say is not subject to the passive activity limitations.
- Changing the amount on 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.
Related: Schedule E (Form 1040), Form 8582 passive losses, Form 6198 at-risk limitations, and Form 1040.
Sources
- 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.