Form 1065 Schedule B: Other Information for Partnerships

This part of the partnership return is a set of questions rather than figures, which is exactly why it gets answered carelessly.

Several of the answers decide whether other schedules become mandatory, how the partnership is treated under the centralised audit rules, and what has to be disclosed. An answer given from memory rather than from the partnership agreement can create an obligation nobody noticed or hide one that exists.

This covers what the questions are actually asking, the ones that carry consequences beyond the box itself, and the errors that come up most often.

Schedule B is Part II of Form 1065, the U.S. Return of Partnership Income. It is a series of yes/no (and some numeric) questions about the partnership's structure, operations, and elections. While it looks like a formality, answering incorrectly or leaving questions blank can trigger IRS correspondence, increase audit risk, or result in penalties. This guide walks through each major section.

Overview of Schedule B Questions

Schedule B contains approximately 25 questions (the exact number changes with form revisions). They cover:

• Accounting method used
• Number and nature of partners
• Whether any partner is a disregarded entity, foreign partner, or tax-exempt organization
• Whether the partnership made distributions in property or cash
• Whether the partnership owned interests in foreign entities
• Whether the partnership had PFIC investments
• Whether a Section 754 election is in effect
• Whether the partnership is a publicly traded partnership (PTP)
• Whether the partnership is filing under TEFRA or BBA (centralized audit) rules

Line-by-Line Key Questions

Question 1, Accounting Method

Check cash, accrual, or other. Most small partnerships use cash basis. If the answer is 'other,' attach an explanation.

Question 2, Number of K-1s Issued

Enter the number of Schedules K-1 attached. This must match the number of partners (or members) at the end of the year. If partners joined or left mid-year, include all who were partners at any point.

Question 3, Disregarded Entities as Partners

Was any partner a disregarded entity (e.g., a single-member LLC that has not elected to be treated as a corporation)? If yes, the partnership must report the underlying owner's information on the K-1, not just the disregarded entity.

Question 4, Partnership Interests in Other Partnerships

Did the partnership own an interest in another partnership? If so, tiered K-1 reporting rules apply. Answer yes triggers enhanced disclosure obligations.

Question 5, Foreign Partners

Were any partners non-U.S. persons? Foreign partners trigger withholding obligations (Forms 8804, 8805, 8813) and potentially FIRPTA on real estate dispositions.

Question 6, Tax-Exempt Partners

Did any partner hold a tax-exempt status? Unrelated business taxable income (UBTI) allocation rules apply.

Question 10, Distributions

Did the partnership make distributions of property other than cash? Property distributions can trigger gain recognition under Section 731. Provide a description of the distributed property.

Question 12, Section 754 Election

Is a Section 754 election in effect? A 754 election allows the partnership to adjust the basis of its assets upon a partner's death or sale of a partnership interest. Once made, the election is generally irrevocable without IRS consent.

Pro Tip: If you are filing a large partnership return for the first time, engage a tax attorney to review Schedule B answers. Errors on Schedule B are common audit triggers.

Question 14, Foreign Accounts and FBAR

Did the partnership have an interest in, or signature authority over, a financial account in a foreign country? If yes, Form 114 (FBAR) may be required separately with FinCEN.

BBA Centralized Audit Regime

Partnerships with 100 or fewer partners may elect out of the centralized audit regime (BBA) on Schedule B. If eligible and you want to elect out, check the box and list all partners with their TINs on a separate statement.

Common Errors on Schedule B

• Leaving questions blank instead of checking 'No', the IRS treats blank as potentially unreported information
• Forgetting to update the 754 election disclosure when a partner transfer occurs
• Failing to disclose foreign partner status when a foreign LLC becomes a partner
• Misreporting the number of K-1s when a partner joined or exited mid-year
• Not attaching explanations for 'Other' accounting method responses

Frequently Asked Questions

Written by

Ankit Sarawagi, CPA, CA, MBA

Ankit leads the finance team at Profitjets, where he has worked with 500+ businesses across the US on bookkeeping, tax and CFO-level strategy. He writes about the habits that keep small business books accurate all year. Connect on LinkedIn