Line 22 - Employee Benefit Programs

Enter the partnership's contributions to employee benefit programs not claimed elsewhere on the return (e.g., insurance, health, and welfare programs) that are not part of a pension, profit-sharing, etc., plan included on line 21.

Do not include amounts paid during the tax year for insurance that constitutes medical care for a partner, a partner's spouse, or a partner's dependents. Instead, include these amounts on line 13 as guaranteed payments and on Schedule K, line 7, and Schedule K-1, box 9, of each partner on whose behalf the amounts were paid.

Line 23 - Other Deductions

Attach your own schedule, listing by type and amount, all allowable deductions related to a trade or business activity only for which there is no separate line on Part I of Form 1065-B. Enter the total on this line.

Include on line 23 qualified expenditures deducted under:

• Section 173, relating to circulation expenditures.
• Section 174, relating to research and experimental expenditures.
• Section 263(c), relating to intangible drilling and development expenditures.
• Section 616(a), relating to development expenditures.
• Section 617(a), relating to mining exploration expenditures.

The election to deduct intangible drilling costs under section 263(c) is made at the partnership level. As stated on page 12, an electing large partnership also has the responsibility with respect to its partners who are not disqualified persons for making an election under section 59(e) to capitalize and amortize certain specified intangible drilling costs. However, disqualified persons make their own separate section 59(e) elections. See Partnerships Holding Oil and Gas Properties on page 12 for more information.

Include on line 23 the deduction taken for amortization. Complete and attach Form 4562 if the partnership is claiming amortization of costs that begins during the tax year. Include amortization of reforestation expenditures under section 194. The partnership can elect to amortize up to $10,000 of qualified reforestation expenditures paid or incurred during the tax year. This amortization is deducted by the partnership instead of separately reporting the amortizable basis to its partners. See Pub. 535 for more information on amortization.

Also, see Special Rules below for limits on certain other deductions.

Do not deduct on line 23:

• Items that must be reported separately on Schedules K and K-1.
• Qualified expenditures to which an election under section 59(e) may apply.
• Fines or penalties paid to a government for violating any law. Report these expenses on Schedule K, line 16.
• Expenses allocable to tax-exempt income. Report these expenses on Schedule K, line 16.
• Any amount that is allocable to a class of exempt income. See section 265(b) for exceptions.
• Net operating losses. Only individuals and corporations may claim a net operating loss deduction.
• Amounts paid or incurred to participate or intervene in any political campaign on behalf of a candidate for public office, or to influence the general public regarding legislative matters, elections, or referendums.
• Expenses paid or incurred to influence Federal or state legislation, or to influence the actions or positions of certain Federal executive branch officials. However, certain in-house lobbying expenditures that do not exceed $2,000 are deductible. See section 162(e) for more details.

Special Rules

Commercial revitalization deduction.    If the partnership constructs, purchases, or substantially rehabilitates a qualified building in a renewal community it may qualify for a deduction of either (a) 50% of qualified capital expenditures in the year the building is placed in service or (b) amortization of 100% of the qualified capital expenditures over a 120-month period beginning with the month the building is placed in service. If the partnership elects to amortize these expenditures, complete and attach Form 4562. To qualify, the building must be nonresidential (as defined in section 168(e)(2)) and placed in service by the partnership. The partnership must be the original user of the building unless it is substantially rehabilitated. The amount of the qualified expenditures cannot exceed the lesser of $10 million or the amount allocated to the building by the commercial revitalization agency of the state in which the building is located. Any remaining expenditures are depreciated over the regular depreciation recovery period. See Pub. 954, Tax Incentives for Empowerment Zones and Other Distressed Communities, and section 1400I for details.

Rental real estate.   Do not report this deduction on line 23 if the building is placed in service as rental real estate. A commercial revitalization deduction for rental real estate is not deducted by the partnership but is passed through to the partners. Report this deduction on an attachment to line 16 of Schedule K and in box 9 of Schedule K-1 using Code R.

Travel, meals, and entertainment.   Subject to limitations and restrictions discussed below, a partnership can deduct ordinary and necessary travel, meals, and entertainment expenses paid or incurred in its trade or business. Special rules apply to deductions for gifts, skybox rentals, luxury water travel, convention expenses, and entertainment tickets. See section 274 and Pub. 463 for more details.

Travel.   The partnership cannot deduct travel expenses of any individual accompanying a partner or partnership employee, including a spouse or dependent of the partner or employee, unless:

• That individual is an employee of the partnership and
• His or her travel is for a bona fide business purpose and would otherwise be deductible by that individual.

Meals and entertainment.   Generally, the partnership can deduct only 50% of the amount otherwise allowable for meals and entertainment expenses. In addition (subject to exceptions under section 274(k)(2)):

• Meals must not be lavish or extravagant,
• A bona fide business discussion must occur during, immediately before, or immediately after the meal, and
• A partner or employee of the partnership must be present at the meal.

See section 274(n)(3) for a special rule that applies to expenses for meals consumed by individuals subject to the hours of service limits of the Department of Transportation.

Membership dues.   The partnership may deduct amounts paid or incurred for membership dues in civic or public service organizations, professional organizations, business leagues, trade associations, chambers of commerce, boards of trade, and real estate boards. However, no deduction is allowed if a principal purpose of the organization is to entertain, or provide entertainment facilities for, members or their guests. In addition, the partnership may not deduct membership dues in any club organized for business, pleasure, recreation, or other social purpose. This includes country clubs, golf and athletic clubs, airline and hotel clubs, and clubs operated to provide meals under conditions favorable to business discussion.

Entertainment facilities.   The partnership cannot deduct an expense paid or incurred for a facility (such as a yacht or hunting lodge) used for an activity usually considered entertainment, amusement, or recreation.

Note:   The partnership may be able to deduct otherwise nondeductible meals, travel, and entertainment expenses if the amounts are treated as compensation and reported on Form W-2 for an employee or on Form 1099-MISC for an independent contractor.

Line 26 - Tax

Net recapture taxes.   Recapture of the low-income housing credit and investment credit is imposed at the partnership level, and the amount of recapture is determined by assuming that the credit was fully utilized to reduce tax. Credit recapture does not result from any transfer of an interest in an electing large partnership. Report recapture of low-income housing and investment credit as follows:

1. Apply the recapture to reduce any current year credit of the same type (low-income housing or investment credit).
2. Report any remaining recapture on line 26. The partnership is liable to pay any unapplied recapture amount.

Report recapture of any other credit as a separately stated item.

Interest on deferred tax attributable to installment sales of certain timeshares and residential lots.   For sales of timeshares and residential lots reported under the installment method, the partnership's income tax is increased by the interest payable under section 453(l)(3). In determining the amount of interest payable, the partnership is treated as subject to tax at a 38.6% rate. Report this amount on line 26 with the notation Section 453(l)(3) interest. Attach a schedule showing the computation.

Interest on tax deferred under the installment method for certain nondealer real property installment obligations.   If an obligation arising from the disposition of real property to which section 453A applies is outstanding at the close of the year, the partnership must include the interest due under section 453A(c). In determining the amount of interest payable, the partnership is treated as subject to tax at a 38.6% rate. Report this amount on line 26 with the notation Section 453A(c) interest. Attach a schedule showing the computation.

Line 27

Enter the total amounts from line 2 of Form 2439, Notice to Shareholder of Undistributed Long-Term Capital Gains, and line 10 of Form 4136, Credit for Federal Tax Paid on Fuels. The credit for tax paid on undistributed capital gains of a regulated investment company or a real estate investment trust and the refundable credit for fuel used for certain purposes are allowed to the partnership. They are not separately reported to partners.

Line 28

Attach a check or money order payable to the United States Treasury. Write 2002 Form 1065-B, and the partnership's name, address, phone number, and EIN on the payment.

Part II - Taxable Income or Loss From Other Activities

Report in Part II only income (loss) and deductions from activities not included in Part I (for example, portfolio income and deductions). See page 10 for a definition of portfolio income.

Lines 1 and 2

Enter only taxable interest and ordinary dividends (not from passive loss limitation activities) on these lines.

Line 5

Report and identify other income or loss on an attachment for line 5.

Line 7

Investment interest is interest paid or accrued on debt properly allocable to property held for investment. Property held for investment includes property that produces income (unless derived in the ordinary course of a trade or business) from interest, dividends, annuities, or royalties; and gains from the disposition of property that produces those types of income or is held for investment. Investment interest does not include interest expense allocable to passive loss limitation activities.

To figure the deductible amount of investment interest, complete Form 4952. Enter the amount from line 8 of Form 4952.

Line 8

Include on line 8 state and local income taxes paid by the partnership that would be allowed as itemized deductions on any partners' income tax returns if they were paid directly by the partner for the same purpose.

Line 9

Enter contributions or gifts actually paid during the tax year to or for the use of charitable and governmental organizations described in section 170(c). The total amount claimed may not be more than 10% of the partnership's taxable income (total income minus deductions) figured without regard to the deduction for charitable contributions. The deduction for certain contributions of ordinary income and capital gain property is reduced under section 170(e).

Generally, no deduction is allowed for any contribution of $250 or more unless the partnership obtains a written acknowledgment from the charitable organization that shows the amount of cash contributed, describes any property contributed, and gives an estimate of the value of any goods or services provided in return for the contribution. The acknowledgment must be obtained by the due date (including extensions) of the partnership return or, if earlier, the date the partnership files its return. Do not attach the acknowledgment to the tax return, but keep it with the partnership's records. These rules apply in addition to the filing requirements for Form 8283.

Form 8283, Noncash Charitable Contributions, must be completed and attached to Form 1065-B if the deduction claimed for noncash contributions exceeds $500.

Certain contributions made to an organization conducting lobbying activities are not deductible. See section 170(f)(9) for more details.

If the partnership made a qualified conservation contribution, include the FMV of the underlying property before and after the donation, as well as the type of legal interest contributed, and describe the conservation purpose furthered by the donation.

Lines 10a and 10b

Enter on line 10a miscellaneous itemized deductions as defined in section 67(b). These deductions include expenses for the production or collection of income under section 212, such as investment advisory fees, subscriptions to investment advisory publications, and the cost of safe deposit boxes. Multiply line 10a by 30% (.30) and enter the result on line 10b. The remaining 70% of the amount on line 10a is not allowed as a deduction to the partnership or its partners.

Line 11

Other allowable deductions include items such as:

• Real estate taxes and personal property taxes on investment property.
• Casualty and theft losses on income-producing property.
• Any penalty on the early withdrawal of savings.

Attach a schedule for line 11 listing the type and amount of each allowable deduction for which there is no separate line in Part II of Form 1065-B.

Schedule A - Cost of Goods Sold

Generally, inventories are required at the beginning and end of each tax year if the production, purchase, or sale of merchandise is an income-producing factor. See Regulations section 1.471-1.

However, if the partnership is a qualifying taxpayer or a qualifying small business taxpayer, it may adopt or change its accounting method to account for inventoriable items in the same manner as materials and supplies that are not incidental.

A qualifying taxpayer is a taxpayer (a) whose average annual gross receipts for the 3 prior tax years are $1 million or less and (b) whose business is not a tax shelter (as defined in section 448(d)(3)).

A qualifying small business taxpayer is a taxpayer (a) whose average annual gross receipts for the 3 prior tax years are more than $1 million but not more than $10 million, (b) whose business is not a tax shelter (as defined in section 448(d)(3)), and (c) whose principal business activity is not an ineligible activity as explained in Rev. Proc. 2002-28.

Under this accounting method, inventory costs for raw materials purchased for use in producing finished goods and merchandise purchased for resale are deductible in the year the finished goods or merchandise are sold (but not before the year the partnership paid for the raw materials or merchandise, if it is also using the cash method). Enter amounts paid for all raw materials and merchandise during the tax year on line 2. The amount the partnership can deduct for the tax year is figured on line 8. For additional guidance on this method of accounting for inventory items, see Rev. Proc. 2001-10, 2001-2 I.R.B. 272 if you are a qualifying taxpayer, or Rev. Proc. 2002-28 if you are a qualifying small business taxpayer.

All filers that have not elected to treat inventoriable items as materials and supplies that are not incidental should see Section 263A uniform capitalization rules on page 14 before completing Schedule A.

Line 1 - Inventory at Beginning of Year

If the partnership is changing its method of accounting for the current tax year, it must refigure last year's closing inventory using its new method of accounting and enter the result on line 1. If there is a difference between last year's closing inventory and the refigured amount, attach an explanation and take it into account when figuring the partnership's section 481(a) adjustment (explained on page 5).

Line 2 - Purchases

Reduce purchases by items withdrawn for personal use. The cost of items withdrawn for personal use should be shown as property distributions on an attachment to line 16 of Schedule K and in box 9 of Schedule K-1.

Line 4 - Additional Section 263A Costs

An entry is required on this line only for partnerships that have elected a simplified method.

For partnerships that have elected the simplified production method, additional section 263A costs are generally those costs, other than interest, that were not capitalized under the partnership's method of accounting immediately prior to the effective date of section 263A that are required to be capitalized under section 263A. Interest must be accounted for separately. For new partnerships, additional section 263A costs are the costs, other than interest, that must be capitalized under section 263A, but which the partnership would not have been required to capitalize if it had existed before the effective date of section 263A. For more details, see Regulations section 1.263A-2(b).

For partnerships that have elected the simplified resale method, additional section 263A costs are generally those costs incurred with respect to the following categories:

• Off-site storage or warehousing.
• Purchasing.
• Handling, such as processing, assembly, repackaging, and transporting.
• General and administrative costs (mixed service costs).

For more details, see Regulations section 1.263A-3(d).

Enter on line 4 the balance of section 263A costs paid or incurred during the tax year not includible on lines 2, 3, and 5. Attach a schedule listing these costs.

Line 5 - Other Costs

Enter on line 5 any other inventoriable costs paid or incurred during the tax year not entered on lines 2 through 4. Attach a schedule.

Line 7 - Inventory at End of Year

See Regulations sections 1.263A-1 through 1.263A-3 for details on figuring the amount of additional section 263A costs to be included in ending inventory.

If the partnership accounts for inventoriable items in the same manner as materials and supplies that are not incidental, enter on line 7 the portion of its raw materials and merchandise purchased for resale that are included on line 6 and were not sold during the year. See Rev. Proc. 2001-10 and Rev. Proc. 2002-28 for more information.

Lines 9a through 9e - Inventory Valuation Methods

Inventories can be valued at:

• Cost,
• Cost or market value (whichever is lower), or
• Any other method approved by the IRS that conforms to the requirements of the applicable regulations.

However, the partnership is required to use cost if it is using the cash method of accounting.

Partnerships that account for inventoriable items in the same manner as materials and supplies that are not incidental may currently deduct expenditures for direct labor and all indirect costs that would otherwise be included in inventory costs. See Rev. Proc. 2001-10 and Rev. Proc. 2002-28 for more information.

The average cost (rolling average) method of valuing inventories generally does not conform to the requirements of the regulations. See Rev. Rul. 71-234, 1971-1 C.B. 148.

Partnerships that use erroneous valuation methods must change to a method permitted for Federal tax purposes. To make this change, use Form 3115.

On line 9a, check the methods used for valuing inventories. Under lower of cost or market, the term market (for normal goods) means the current bid price prevailing on the inventory valuation date for the particular merchandise in the volume usually purchased by the taxpayer. For a manufacturer, market applies to the basic elements of cost - raw materials, labor, and burden. If section 263A applies to the taxpayer, the basic elements of cost must reflect the current bid price of all direct costs and all indirect costs properly allocable to goods on hand at the inventory date.

Inventory may be valued below cost when the merchandise is unsalable at normal prices or unusable in the normal way because the goods are subnormal due to damage, imperfections, shop wear, etc., within the meaning of Regulations section 1.471-2(c). These goods may be valued at the current bona fide selling price minus the direct cost of disposition (but not less than scrap value) if such a price can be established.

If this is the first year the last-in first-out (LIFO) inventory method was either adopted or extended to inventory goods not previously valued under the LIFO method, attach Form 970, Application To Use LIFO Inventory Method, or a statement with the information required by Form 970. Also check the box on line 9c.

If the partnership has changed or extended its inventory method to LIFO and has had to write up its opening inventory to cost in the year of election, report the effect of this write-up as income (line 10, Part I, Form 1065-B) proportionately over a 3-year period that begins in the tax year of the LIFO election.

For more information on inventory valuation methods, see Pub. 538, Accounting Periods and Methods.

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