The IRS K-1 Basis Worksheet: Every Line Explained with Examples

What This Worksheet Is

The Partner’s Adjusted Basis Worksheet appears in the IRS Partner’s Instructions for Schedule K-1 (Form 1065), page 2. It is not a form you file — it is a computation worksheet you must complete every year you hold MLP units. Your ending basis each year (Line 18) becomes next year’s beginning basis (Line 1). If you skip a year, every subsequent year’s basis is wrong. When you eventually sell, Line 18 is the number the IRS expects on Form 8949 — not the cost basis your broker reports on 1099-B.

Lines 1-3: Starting Point — Basis Before Current-Year Activity

Line 1 — Beginning of year basis: For year 1, this is your total purchase price (e.g., 500 EPD units at $26 = $13,000). For subsequent years, it is the prior year’s Line 18 ending basis. Line 2 — Contributions during the year: Cash or property contributed to the partnership. For publicly traded MLPs, this is $0 — you don’t make capital contributions after purchase. Line 3 — Increase in share of liabilities: Compare Item K on this year’s K-1 to last year’s. If ending liabilities exceed beginning liabilities, the increase goes here. Under IRC §752, increases in a partner’s share of partnership liabilities are treated as deemed cash contributions — they add to basis. For 500 EPD units, a typical liability increase is $200–$500/year.

Lines 4a-4o: Income Items (Positive Amounts Only)

Lines 4a through 4o capture only POSITIVE income items from your K-1. Negative amounts (losses) are excluded here — they enter the loss-class allocation in Part II on Line 15a. Line 4a (Box 1, ordinary income): Usually $0 for midstream MLPs because Box 1 is typically negative (the partnership’s depreciation exceeds its allocated revenue). If Box 1 is positive — more common with fuel distribution MLPs like SUN — that amount enters here. Lines 4b-4j (Boxes 2–11): Rental income, interest, dividends, royalties, short-term capital gains, long-term capital gains, §1231 gains, and other income. Most are $0 for typical midstream MLPs, but check each box. Line 4m (Box 18A): Tax-exempt income. EPD typically reports a small amount here ($25–$75 for 500 units). Line 4n (Box 20 Code N) — BIE addback: Enter the Business Interest Expense reported in Box 20 Code N as a positive number. This restores gross pre-BIE income for the basis computation. The IRS labels this line “BIE (enter as a positive).” The corresponding deduction happens later on Line 15q under Reg §1.163(j)-6(h)(1) — the addback and deduction do NOT cancel out (see worked BIE example below). Line 4o: Total of all positive income items. This is the amount that increases your basis before distributions hit.

Lines 5-7: Subtotal — The High Water Mark

Line 5: §737 gain — $0 for all publicly traded MLP investors. Line 6: Excess depletion — $0 for pipeline MLPs (relevant for royalty MLPs like NRP or BSM). Line 7: Subtotal = Lines 1 + 2 + 3e + 4o + 5 + 6. This is your “high water mark” — the maximum basis before distributions and losses reduce it. The IRS form breaks Line 3 into subparts 3a–3e for the liability-share computation; only the net result on Line 3e feeds the Line 7 sum. For the EPD example: $11,400 + $0 + $350 + $25 + $0 + $0 = $11,775.

Lines 8-10: Distributions and Total Decreases

Line 8a (Box 19A): Total cash distributions received during the year. This is the primary driver of basis erosion. For 500 EPD units at $2.05/unit: $1,025. Line 8b: Property distributions ($0 for virtually all retail MLP investors). Line 8c: Total distributions (8a + 8b). Line 9: Decreased share of liabilities from Item K. If ending liabilities are LESS than beginning, the decrease goes here as a basis reduction. Line 10: Total decreases = Line 8c + Line 9. This is the gross amount that will reduce the Line 7 subtotal in the next step. The §731(a)(1) excess-distribution test happens at Line 11b in the next section — not on Line 10. See what happens when basis reaches zero.

Lines 11a–11b: Basis After Part I and the §731(a) Gain Trigger

Part I of the worksheet ends here. Line 11a: Basis after Part I = Line 7 minus Line 10, if positive. For the EPD example: $11,775 − $1,025 = $10,750. This is the basis going into Part II (nondeductible expenses, depletion, and loss-class allocation across columns A–E). Line 11b: §731(a) gain on excess distributions. If Line 7 minus Line 10 would be negative, the negative amount is recognized as taxable gain under §731(a)(1) and reported on Line 11b; Line 11a is then set to zero. This is where the excess-distribution rule mechanically applies on the worksheet — before any loss-class allocation in Part II. For the EPD example, Line 11b = $0 (no excess this year).

Lines 12–14: Nondeductible Expenses and Depletion (Part II)

Part II processes loss-class allocations across columns A through E. Lines 12 and 13 are basis reductions that come before the loss-class allocation in Lines 15a–15t. Line 12: Nondeductible expenses (Box 18C). Most retail MLPs report $0 here. Line 13: Depletion (oil and gas). $0 for pure pipeline/midstream MLPs; may be non-zero for royalty partnerships. Line 14: Basis after nondeductible expenses and depletion = Line 11a − Lines 12 and 13. For the EPD example: $10,750 − $0 − $0 = $10,750. Line 14 is the basis available to absorb losses in the next step.

Lines 15–18: §704(d) Loss Class Allocation and Ending Basis

Lines 15a–15t allocate available basis (Line 14) among loss classes when current-year losses exceed available basis. This is NOT the §465 at-risk computation — that lives on Form 6198, separately from this worksheet. Key entries for MLP investors: 15a ordinary loss (negative Box 1), 15g net long-term capital loss, 15i §179 deduction (Box 12), 15k charitable contributions (Box 13 Codes A–G), 15n prior-year EBIE carryforward bucket (Box 13 Code K input from a prior year), 15q current-year BIE (Box 20 Code N), 15r BIE class result. Three distinct mechanics under Reg §1.163(j)-6(h)(1): (1) Line 15q absorbs basis first — current-year BIE deducts against available basis. (2) Line 15n is the prior-year EBIE bucket; it absorbs basis only when this year’s Box 20AE/20AF releases the prior-year carryforward. (3) Unabsorbed current-year BIE rolls forward to next year’s 15n — not this year’s. Lines 16–17: Column-allocated subtotals. Line 18: Ending adjusted basis. This is the final number — it becomes Line 1 next year. When you sell, Line 18 is the basis the IRS expects on Form 8949. Your broker does not have this number. For the EPD example: $10,750 (Line 14) − $480 ordinary loss absorbed via Line 15a = $10,270 (Line 18 ending basis).

Worked BIE Example: Why Line 4n and Line 15q Don’t Cancel Out

The most common point of confusion on the basis worksheet. Line 4n adds BIE back to gross income; Line 15q deducts BIE as a loss class. Sometimes they cancel; sometimes they don’t. The difference is whether the Line 4n cap binds. Per IRS Partner’s Instructions TY2025 Line 4n: enter the BIE reported in box 20 code N, or the amount by which BIE reduced positive ordinary income in box 1, 2, or 3, if less. Scenario A — cap does NOT bind: Box 1 = +$500, Box 20N = $300, beginning basis $1,000. Line 4a = $500. Line 4n = min($300, $500) = $300 (cap doesn’t bind). Line 4o = $800. Line 7 = $1,800. Line 15q = $300. Line 18 = $1,500. Net basis change: +$500 — addback and deduction cancel; basis change equals positive ordinary income. Scenario B — cap BINDS: Box 1 = +$200, Box 20N = $300, beginning basis $1,000. Line 4a = $200. Line 4n = min($300, $200) = $200 (cap binds). Line 4o = $400. Line 7 = $1,400. Line 15q = $300 (full Box 20N). Line 18 = $1,100. Net basis change: +$100, not +$200 — the $100 excess BIE (beyond what positive income could offset) reduces basis. The pattern: when Box 20N ≤ positive Box 1+2+3 they cancel; when Box 20N exceeds positive Box 1+2+3, the cap holds Line 4n down but Line 15q is uncapped, so basis reduces by the difference.

Filled EPD Worksheet: 500 Units, Year 2

The following shows the complete 18-line worksheet for 500 EPD units in their second year of ownership. Each line shows the computed value and the K-1 source.

After just 2 years, IRS basis is $10,270. The broker shows $13,000 (the original purchase price). Gap: $2,730 (21%). The basis worksheet captured four adjustments the broker missed: $350 liability increase, $25 tax-exempt income, $1,025 in distributions, and $480 in ordinary losses. Each of these came from specific K-1 boxes that brokers never receive.

Why Line 18 Is the Only Number That Matters at Sale

When you sell MLP units, you report on Form 8949. The “cost or other basis” column must reflect your K-1-adjusted basis — Line 18 from your most recent worksheet. Your broker’s 1099-B reports your original purchase price, which ignores every K-1 adjustment since purchase. If you use the broker’s number, you underreport your gain. The IRS will receive the K-1 data from the partnership and compare it to your reported basis. The discrepancy triggers a CP2000 notice. Additionally, part of your gain at sale is §751 ordinary income — the accumulated depreciation that reduced your basis each year is recaptured and taxed at up to 37%. Line 18 is the foundation for both the total gain calculation and the §751 split.