If you received a 2025 Schedule K-1 from a partnership, Box L usually isn’t the number that tells you whether your loss is deductible. For federal tax purposes, Item L shows a tax-basis capital account, while your actual loss limitation usually depends on your separate outside basis, which you must track yourself.
Quick takeaways
- On Schedule K-1 (Form 1065), Item L is the partner’s capital account analysis. It is reported using the tax-basis method if the partnership is required to complete it.
- The IRS says Item L cannot be used to figure a partner’s adjusted basis in the partnership interest. Your capital account and your outside basis are related, but they are not the same number.
- A partner’s outside basis generally matters for loss deductions, distributions, and gain or loss when the partnership interest is sold or liquidated. The partner, not the partnership, is responsible for maintaining that basis.
- For many partners, the biggest reason Item L and outside basis differ is that outside basis generally includes the partner’s share of partnership liabilities, while Item L under the tax-basis method generally does not.
- This article addresses Schedule K-1 (Form 1065) for partnerships, including many LLCs taxed as partnerships. S corporation basis rules are different and generally use Form 7203, not partnership basis rules.
Who this applies to
This article applies to partners in partnerships for tax year 2025, including members of LLCs taxed as partnerships who receive Schedule K-1 (Form 1065). It is most relevant if you are trying to understand Item L, your capital account, your outside basis, loss limits, or partnership distributions on a 2025 return filed in 2026. It is a federal article. State K-1 reporting and state basis rules may differ.
Introduction
Many taxpayers look at Schedule K-1 Box L and assume it shows their tax basis. That is one of the most common partnership tax mistakes. The IRS directly says that although the partnership provides a capital account analysis in Item L, that information is based on the partnership’s books and records and can’t be used to figure the partner’s adjusted basis.
That distinction matters because basis often controls whether you can deduct partnership losses, how you treat distributions, and whether a sale of your partnership interest creates gain or loss. For 2025, the IRS continues to require partners to track their own basis under the Subchapter K rules.
What “Box L” really is
Strictly speaking, on Schedule K-1 (Form 1065) this is Item L, not one of the numbered income or deduction boxes. Item L is titled Partner’s Capital Account Analysis. The partnership reports:
- beginning capital account,
- capital contributed during the year,
- current year net income or loss,
- other increase or decrease,
- withdrawals and distributions, and
- ending capital account.
For 2025, if the partnership is required to complete Item L, it must use the tax-basis method and the transactional approach.
Important terminology
Before going deeper, it helps to separate two concepts:
- Capital account: the partnership’s tax-basis capital account reporting in Item L.
- Outside basis: your adjusted tax basis in your partnership interest, which you use to apply basis limits and other tax rules.
Those numbers may overlap in some years, but they are not interchangeable.
Who is affected: partnerships, not S corporations
This topic is about Schedule K-1 (Form 1065), which applies to partnerships. That includes many multi-member LLCs taxed as partnerships and some entities that elected partnership treatment.
It does not primarily address S corporation basis rules. S corporation shareholders generally use Form 7203, S Corporation Shareholder Stock and Debt Basis Limitations, which is a different system.
So if your K-1 came from an S corporation on Schedule K-1 (Form 1120-S), this article is not the right basis roadmap. The partnership rules below are for partners, not shareholders.
How Item L is reported for 2025
The 2025 Instructions for Form 1065 say the partnership must figure each partner’s capital account using the tax-basis method. If Item L is required, the partnership reports capital movements using tax principles generally consistent with sections 705, 722, 733, and 742.
At a high level, the partnership reports these Item L movements:
Beginning capital account
The partnership starts with the prior year’s ending capital account. If a partner joined during the year through a contribution to the partnership, the partnership enters zero as the beginning capital account.
Capital contributed during the year
The partnership reports the amount of cash plus the adjusted tax basis of property contributed, reduced by liabilities the partnership assumes or liabilities attached to contributed property immediately before contribution. That amount can even be negative in some cases.
Current year net income (loss)
The partnership reports the partner’s share of tax-basis income and gain, including tax-exempt income, minus the partner’s share of tax-basis loss and deductions, including nondeductible, noncapital expenditures.
Other increase (decrease)
This line captures other tax-basis capital changes not reflected elsewhere. The instructions specifically mention items such as certain section 734(b) basis adjustments and transfer-related entries for transferee and transferor partners. The partnership must attach a statement explaining each adjustment.
Withdrawals and distributions
The partnership reports cash plus the adjusted tax basis of property distributed, reduced by liabilities the partner assumes or liabilities the property was subject to immediately before distribution. This number can also be negative.
Ending capital account
The ending capital account is the net result of the Item L lines above. The IRS says an ending tax-basis capital account may be negative if losses and distributions exceed contributions and income.
Why Item L is not your outside basis
This is the core rule.
The IRS says a partner’s ending capital account in Item L may not equal the partner’s adjusted tax basis in the partnership interest for many reasons. The main reason the IRS highlights is that outside basis generally includes the partner’s share of partnership liabilities, while tax-basis capital accounts in Item L generally do not.
Publication 541 makes the same point in direct terms: a partner’s adjusted basis is determined without considering any amount shown in the partnership books as a capital, equity, or similar account.
So if you are trying to answer any of these questions:
- Can I deduct this partnership loss?
- Did this distribution exceed my basis?
- What is my gain or loss on sale?
- What basis do I carry into next year?
you should not rely on Item L alone.
What outside basis generally includes
For partnerships, outside basis is governed by the Subchapter K rules, including sections 705, 722, 733, and 742. The partner’s basis usually changes over time.
Publication 541 explains that basis generally increases by items such as:
- money and property contributed,
- the partner’s distributive share of taxable and nontaxable income, and
- certain increases in the partner’s share of partnership liabilities.
It generally decreases by items such as:
- cash and property distributions,
- the partner’s share of losses,
- nondeductible noncapital expenses, and
- certain decreases in the partner’s share of partnership liabilities.
The partner’s share of liabilities is especially important. The partner basis worksheet in the 2025 K-1 instructions specifically tells partners to use Item K1 liabilities in figuring basis.
Why liability reporting matters so much
The partner’s instructions say to use the total of the liability amounts in Item K1 when figuring the adjusted basis of the partnership interest. They also walk partners through comparing beginning and ending liabilities as part of the basis worksheet.
That is why a partner can have:
- an ending capital account in Item L of, say, $40,000, but
- an outside basis of $90,000 because liabilities add another $50,000.
That example is just illustrative, but it reflects the rule the IRS describes.
Basis limitations for 2025 loss deductions
For 2025, the partner’s instructions say a partner generally may claim a partnership loss only to the extent the loss does not exceed the partner’s adjusted basis in the partnership at the end of the partnership’s tax year. Disallowed losses are generally carried forward.
The IRS also reminds partners that basis is only the first major limitation. The general order of limitations is:
- basis limitations,
- at-risk limitations,
- passive activity limitations, and
- excess business loss limitations.
That means even if your outside basis is high enough, you may still lose some or all of the current deduction under later limitation rules. Item L does not answer those later questions either.
Special basis and capital account differences to watch
Several partnership events can make Item L and outside basis diverge even more.
Section 743(b) adjustments
The 2025 Instructions for Form 1065 say section 743(b) basis adjustments are not taken into account in calculating a partner’s Item L capital account under the tax-basis method.
That means a transferee partner may have a partner-specific basis adjustment affecting outside basis or asset basis economics, while Item L does not reflect it.
Transfers by sale, exchange, gift, or death
The Item L instructions include special transfer rules. For example, a transferee may receive an “other increase” equal to the transferor’s ending capital account immediately before transfer, figured under the tax-basis method. But that still does not make Item L the same as outside basis.
Distributions
Publication 541 explains that distributions can reduce outside basis and can limit the basis assigned to distributed property. The K-1 basis worksheet also requires point-in-time basis calculations for some transactions and distributions.
When Item L may be blank or not required
The 2025 Instructions for Form 1065 say Item L is not required if the partnership answered “Yes” to Schedule B, question 4.
So if your 2025 K-1 does not show Item L, that does not necessarily mean the partnership made a mistake. But it also means you still need to maintain your own basis records if basis matters to your return.
Common mistakes
A few mistakes come up over and over:
- Treating Item L as if it were outside basis.
- Deducting a partnership loss just because the K-1 shows a negative number, without checking basis first.
- Forgetting to include liability changes from Item K1 when tracking outside basis.
- Assuming a capital account reported under the tax-basis method must match sale economics or liquidation value in all cases.
- Applying these partnership rules to an S corporation K-1, where Form 7203 is the relevant basis form instead.
Myth vs. fact
Myth: If Item L shows a positive ending capital account, I can deduct all K-1 losses. Fact: Not necessarily. Loss deductions are generally limited by outside basis, then potentially by at-risk, passive, and excess business loss rules. Item L alone does not answer that question.
When to get professional help
You should strongly consider working with a CPA, EA, or tax attorney if any of these apply:
- you bought or sold a partnership interest in 2025,
- you received property distributions,
- the partnership has section 754, 743(b), or 734(b) adjustments,
- your Item L ending capital account is negative,
- you are deducting a large loss,
- or you are dealing with both federal and state K-1 differences.
These are the kinds of situations where basis often becomes point-in-time and fact-specific. The IRS partner instructions explicitly say some transactions and distributions require basis to be determined at the time of the event, not just at year-end.
Bottom line
For tax year 2025, Schedule K-1 (Form 1065) Item L is a tax-basis capital account analysis, not your final answer for outside basis. The IRS is clear that Item L can’t be used by itself to figure adjusted basis. Partners must maintain their own basis records, and those records usually need to include liabilities, partner-specific adjustments, and transaction-level changes that Item L may not fully capture.
What to do next
- Compare Item L to your own basis records, but do not assume they match.
- Use Item K1 liability amounts when updating outside basis for 2025.
- If you are claiming a loss, apply the basis limit before moving to at-risk or passive loss rules.
- If your K-1 came from an S corporation, switch to the correct basis framework, usually Form 7203.
- If you had transfers, property distributions, or special basis adjustments, get professional help before filing your 2025 return.
Source note: Sources consulted: IRS Form 1065 instructions, Partner’s Instructions for Schedule K-1 (Form 1065), Publication 541, and related official IRS forms guidance.
