Introduction
Line 15 of Form 1065 looks straightforward on the return. The figure you enter still has to tie back to accounting records, and U.S. federal limits can cut the amount the partnership may deduct this year.
This guide is for Australian and other international businesses dealing with a U.S. partnership return, as well as U.S. partnerships, multi-member LLCs taxed as partnerships, and preparers. It covers:
- Eligible interest and calculation inputs
- Section 163(j) and Form 8990
- Schedule K and K-1 reporting
- Final reconciliation checks
The references below follow the 2025 Form 1065 and its instructions. Confirm every rule against the IRS instructions for your filing year before you file.
Key Takeaways
- Line 15 reports trade-or-business interest not claimed elsewhere, subject to tax limits.
- Principal repayments, partner distributions, and unrelated financing costs don't belong there.
- Book interest in the ledger can differ from the amount currently deductible.
- Section 163(j), Form 8990, and Schedule K-1 govern limiting and allocating interest.
Understanding Form 1065 Line 15 Interest Expense
What Line 15 represents
On the 2025 form, Line 15 is "Interest (see instructions)" in the deductions section. Line 22 totals deductions (lines 9 through 21), and Line 23 is ordinary business income (loss), calculated as Line 8 minus Line 22.
Some older guidance refers to Line 22 for ordinary income, so check the form you are actually filing.
The 2025 Form 1065 instructions say to include only interest incurred in partnership trade-or-business activities and not claimed elsewhere. You must attach a statement showing the computation of the deduction.
What generally belongs
- Interest on business loans, mortgages, and credit facilities used in the trade or business
- Original issue discount, deducted over the loan term
- Prepayment penalties on early mortgage payoff, which may be deductible as interest
Timing depends on the accounting method. Under the cash method, interest is deducted when actually paid (a promissory note does not count as payment). Under the accrual method, it is deducted as it accrues. Book recognition may differ from this tax timing.
What does not belong
Only interest is deductible. A partial debt payment is generally applied first to interest, and the rest reduces principal. Keep these out of Line 15:
- Principal repayments, loan proceeds, and capital contributions
- Partner distributions, salaries, and guaranteed payments, which are determined without regard to partnership income
- Taxes and depreciation
- Standby or commitment fees, which aren't interest, though they may qualify as a business expense
- Mortgage acquisition costs such as recording fees, which are capital and amortised over the mortgage term
Several interest types go elsewhere on the return:
| Interest type | Where it goes |
|---|---|
| Rental real estate | Form 8825; Schedule K line 2 / K-1 box 2 |
| Portfolio income | Schedule K line 13c; K-1 box 13 code H |
| Debt proceeds distributed to partners | Schedule K line 13e; K-1 box 13 code AC |
| Interest required to be capitalised | Not currently deducted |
Allocate interest by how the debt proceeds were used, not by the property securing the loan. Treasury's temporary allocation regulation sets out the tracing rules.
Interest income and entity-specific caveats
Interest income is not interest expense. It goes on Schedule K line 5 and is tracked separately, though business interest income raises the Section 163(j) ceiling.
Treatment also varies with the tax year, accounting method, debt structure, related-party arrangements, real estate or investment activity, and any elections.
Under Section 267, an accrual-method partnership generally cannot deduct interest owed to a related cash-method person until it is paid and included in that person's income.
How to Calculate Form 1065 Line 15 Interest Expense
Gather the records first
Start with the trial balance and general ledger detail, then collect:
- Lender statements and amortisation schedules
- Promissory notes and refinancing documents
- Accrued-interest schedules
- Related-party loan agreements
For each debt, record the lender, principal balance, rate, payment dates, business purpose, and the period the interest relates to.
Separate interest from principal and other charges
Split every lender payment into principal, interest, fees, penalties, and other components. Total cash paid to a lender is not automatically the Line 15 amount. A loan payment of $5,000 might include $3,800 of principal, $1,100 of interest, and a $100 fee that needs its own analysis.
Reconcile book interest to tax
Compare ledger interest with the amount your tax records support. Look for differences in:
- Timing (cash versus accrual recognition)
- Classification (rental, portfolio, or distribution-related interest)
- Capitalisation
- Related-party payment timing
- Deductibility under Section 163(j)
Document each difference. Where it applies, it flows into Schedule M-1 or M-3.
Schedule M-3 is required when any of these apply:
- Year-end assets of $10 million or more
- Adjusted total assets of $10 million or more
- Total receipts of $35 million or more
- A reportable-entity partner owns at least 50%
A partnership with under $50 million of year-end assets that must file M-3 may complete Part I and use M-1 instead of Parts II and III.
Apply limits and special rules
Run the Section 163(j) test before finalising the amount. Also check related-party debt, debt-financed investments, passive activity rules, real estate businesses, and capitalised interest. Keep gross book interest and the allowed current deduction as two separate numbers.
Build a calculation worksheet
Use one row per debt, with columns for:
- Lender or debt identifier and business purpose
- Opening balance
- Interest incurred or paid
- Principal repaid and fees
- Tax treatment and limitation applied
- Final amount included in Line 15
The worksheet should tie to the general ledger, lender statements, and any Form 8990 or supporting schedules.
Hypothetical worked example
All figures below are hypothetical. Thresholds and calculations must be checked against current IRS sources.
A partnership has one term loan for working capital:
- Payments for the year total $60,000: $42,000 principal and $18,000 interest.
- The books also show $2,000 of loan arrangement fees expensed as interest. Those fees are capital costs amortised over the term, so $1,500 is reclassified out this year and documented as a $1,500 book-to-tax adjustment on M-1.
- Tax-basis business interest expense is therefore $18,000 + $500 = $18,500.
- Suppose Section 163(j) applies, business interest income is $0, and 30% of ATI is $15,000. Deductible interest is $15,000.
- Line 15 shows $15,000. The $3,500 disallowed is allocated to partners as excess business interest expense.
How Section 163(j) Can Limit the Deduction
Purpose and definitions
Section 163(j) can limit business interest deductions, which is why Line 15 may be lower than book interest. Per the Form 8990 instructions, business interest expense is interest properly allocable to a trade or business.
It generally excludes investment and personal interest and interest tied to an excepted trade or business. Business interest income is the matching income, excluding investment income.
The limit is generally business interest income plus 30% of adjusted taxable income (ATI) plus floor-plan financing interest. For tax years beginning after 2024, ATI is computed without deductions for depreciation, amortisation, or depletion. For 2022 through 2024, those deductions reduced ATI.
Does the limit apply?
Work through these questions:
- Is the partnership a tax shelter? If so, the small-business exception is unavailable.
- Are average annual gross receipts for the three prior years $31 million or less (Section 448(c) test)? If yes and it isn't a tax shelter, the limit generally doesn't apply.
- Does the partnership have an excepted trade or business?
| Excepted business | Election |
|---|---|
| Real property trade or business | May elect out; must use ADS depreciation |
| Farming business | May elect out; ADS for property with 10+ year recovery period |
| Specified regulated utility | Excepted, subject to rate-regulation conditions |
Don't treat any threshold as universal. Confirm against the current Form 8990 and Form 1065 instructions.
Calculating the allowable deduction
Sequence the work:
- Determine current-year business interest expense and income
- Compute the Section 163(j) limit
- Split the result between allowed and disallowed amounts
The allowed amount goes on the partnership return. The disallowed amount is not carried forward by the partnership. It is allocated to partners as excess business interest expense (EBIE).
When Form 8990 is required
Schedule B, question 24 of Form 1065 is the trigger. Answer "Yes" if the partnership:
- Owns a pass-through entity with current or carryover EBIE
- Has business interest expense and three-year average gross receipts above $31 million
- Is a tax shelter with business interest expense
Gather the business interest figures, ATI components, and any EBIE from lower-tier entities first. Form 8990 results should agree with Line 15, Schedule K, and Schedule K-1.
EBIE for partners
Disallowed interest is allocated to partners as EBIE. On the 2025 Schedule K-1, Partner's Instructions place EBIE in box 13 code K, excess taxable income in box 20 code AE, and excess business interest income in box 20 code AF.
Partners use these amounts in their own Section 163(j) computation. A partner allocated EBIE from another partnership must file Form 8990. Verify codes for the filing year.
How Line 15 Flows Through Schedule K and Schedule K-1
From Line 15 to ordinary income
The allowed deduction reduces total deductions on Line 22 and flows into ordinary business income on Line 23, then to Schedule K, line 1. Interest income sits on Schedule K, line 5.
Keep rental, portfolio, and distribution-related interest separate, because not every interest amount appears in the same place.
Partner-level reporting
The partnership issues Schedule K-1 to report each partner's share of income, deductions, credits, and other items. Interest-related items include:
- Box 13 code H: investment interest expense
- Box 13 code K: excess business interest expense (EBIE)
- Box 20 code N: deductible business interest expense (informational; already deducted elsewhere)
- Box 20 codes AE and AF: excess taxable income and excess business interest income
Always check the current K-1 instructions before citing a box or code.
Cross-border considerations for Australian or foreign partners
Foreign ownership alone doesn't decide every requirement, but it triggers questions. Schedule K-2 extends Schedule K for international items, and K-3 reports each partner's share. The domestic filing exception is unavailable if any direct partner isn't a qualifying U.S. person or entity, so a direct Australian partner generally means K-3 reporting.
Section 1446(a) withholding is separate. It is based on effectively connected taxable income allocable to foreign partners, regardless of distributions, and is reported on Forms 8804, 8805, and 8813.
Don't confuse this with the Schedule B question 4 small-partnership exception (receipts under $250,000, assets under $1 million, timely K-1s, and no Form M-3).
Common Errors and Final Review Checklist
Errors that distort the Line 15 amount
No published statistic measures how often these errors occur, but they are classic review points:
- Including principal repayments or loan proceeds
- Double-counting accrued and paid interest
- Omitting accrued interest under the accrual method
- Mixing partner payments with business interest
- Putting rental, investment, or distribution-related interest on Line 15
- Skipping the Line 15 computation statement
- Misclassifying K-1 codes H, K, N, AE, or AF
Related-party debt, refinancing, foreign-currency interest, capitalised interest, and lender-fee classification need extra review rather than automatic Line 15 treatment.
Reconciliation checklist
- Line 15 agrees with the general ledger, lender statements, amortisation schedules, and tax workpapers
- Form 8990 results match Line 15 and the K-1 EBIE figures
- Total deductions, ordinary income, Schedule K, and K-1s are consistent
- Required statements are attached
Mistakes are costly. The late-filing penalty is $255 per partner per month, up to 12 months. For an amended return, an e-filed Form 1065 uses box G(5) with a statement of changes. Partnerships under the centralised audit regime file an Administrative Adjustment Request instead.
When to get professional support
Bring in a specialist for complex debt structures, related-party loans, foreign partners, Section 163(j) limits, amended returns, or uncertainty about capitalised financing costs.
VJM Global's offshore tax professionals are trained in U.S. tax law, IRS regulations, and Form 1065, and the firm assists with federal and state partnership filings. It can support Australian and multinational businesses managing U.S. partnership reporting alongside accounting outsourcing. VJM Global doesn't operate a local Australian office for this work, and no firm can guarantee a particular tax result.
Frequently Asked Questions
What is a K-1 form?
Schedule K-1 reports a partner's share of partnership income, deductions, credits, and other items from Form 1065. Interest information appears in coded boxes or attached statements.
How is interest expense reported on Form 1065 Line 15?
Line 15 reports business interest not claimed elsewhere, after reviewing records and limits including Section 163(j). Attach a statement showing the computation.
Is principal repayment included in Form 1065 Line 15?
No. Principal reduces debt and isn't interest expense. Split each lender payment into principal, interest, fees, and other components.
Does Section 163(j) limit all interest expense reported on Form 1065?
No. It limits certain business interest deductions, but small-business status, elections, and excepted businesses change the result. Review current rules and Form 8990 requirements.
Where does a partner's share of interest expense appear on Schedule K-1?
It depends on the type. Ordinary business interest is included in box 1, investment interest is box 13 code H, and excess business interest expense (EBIE) is box 13 code K. Check the current K-1 instructions.
