Introduction
Line 16c trips up many preparers because three different depreciation figures sit in the same neighbourhood: total depreciation, depreciation already buried in cost of goods sold (COGS), and the net deductible amount.
Only the last one belongs on 16c.
Tax-year scope matters too. A 2025 partnership return filed in 2026 uses the final 2025 Form 1065 and Form 4562 and their instructions.
A 2026 tax-year return filed in 2027 will use the 2026 revisions. The 2026 drafts are marked not for filing, so treat them as previews only.
This guide covers the line 16a–16c calculation, the Form 4562 link, the special depreciation allowance, Schedule K/K-1 flow, and common errors. The rules are US federal, so figures are in US dollars. Australian owners and advisers dealing with a US partnership can use it as a working reference.
Key Takeaways
- Line 16c is net depreciation after removing amounts reported in COGS or elsewhere.
- Support it with asset ledgers and Form 4562, and confirm line references in the current instructions.
- Section 179 is separately stated on Schedule K, not deducted on 16c.
- Book and tax depreciation differ, so reconcile them and check partner-level reporting.
What Is Form 1065 Line 16c Depreciation?
Line 16c is the depreciation deduction left after adjusting total depreciation for amounts already claimed elsewhere on the return. The face of the form gives it no label of its own. The wording comes from the lines above it:
- Line 16a: "Depreciation (if required, attach Form 4562)"
- Line 16b: "Less depreciation reported on Form 1125-A and elsewhere on return"
- Line 16c: the result of 16a minus 16b
These lines appear on the 2025 Form 1065. The 2026 draft keeps the same three lines.
Why a pass-through entity deducts depreciation
A partnership generally pays no federal income tax itself. The IRS treats Form 1065 as an information return, and profits or losses pass through to partners. The depreciation deduction reduces the income that flows to them.
What line 16c is not
- Not the asset's purchase price
- Not the cash paid during the year
- Not book depreciation from the financial statements
- Not Section 179 expense, which passes to partners separately
For line 16a, enter only depreciation on assets used in a trade or business. Rental real estate runs through Form 8825 instead, and its result lands on Schedule K, line 2.
How to Calculate and Report Line 16c Step by Step
Start with the fixed-asset register. For each asset you need the description, placed-in-service date, cost or adjusted basis, recovery period, convention, method and business-use percentage.
The preparation sequence
- Classify the asset. Decide the MACRS class (commonly 3, 5, 7, 10, 15 or 20 years; 27.5 years for residential rental and 39 years for nonresidential real property).
- Choose the tax method and convention. Half-year is the default. Mid-quarter applies when more than 40% of depreciable basis is placed in service in the last three months. Mid-month applies to real property.
- Calculate depreciation on Form 4562 and your supporting schedules.
- Remove Section 179. The Form 4562 total is not automatically line 16a, because Section 179 is excluded from the partnership deduction.
- Identify depreciation reported elsewhere, such as COGS on Form 1125-A or a rental activity on Form 8825.
- Enter the net amount on line 16c and reconcile it to your schedules.
Attach Form 4562 when property was placed in service during the year or when the partnership claims depreciation on a car or other listed property. File a separate Form 4562 for each business or activity that requires one.
Check the current Form 4562 line that feeds Form 1065 before filing, since line numbers move between revisions.
A hypothetical calculation
The figures below are examples only, to show how the three lines relate.
| Item | Amount |
|---|---|
| Line 16a: depreciation on trade or business assets (excluding Section 179) | $48,000 |
| Line 16b: depreciation included in COGS on Form 1125-A | ($9,000) |
| Line 16c: net depreciation deduction | $39,000 |
The $9,000 has already reduced income through COGS on page 1, line 2. Deducting it again on 16c would claim the same depreciation twice.
Records to keep
- Invoices and closing statements
- Asset ledgers and prior-year depreciation schedules
- Improvement records
- Disposal documentation
- Form 4562 and business-use logs for vehicles
IRS Publication 583 says to keep property records until the limitations period ends for the year the asset is disposed of in a taxable transaction.
Special Depreciation Allowance and Other Depreciation Methods
Bonus depreciation in 2026
The special depreciation allowance, commonly called bonus depreciation, lets a partnership deduct a large share of qualifying property cost in the first year. The rate depends on when the property was acquired and placed in service.
- Acquired after January 19, 2025: a permanent 100% allowance applies unless the partnership elects out. The change comes from Public Law 119-21.
- Acquired before January 20, 2025: the old phase-down still applies. That means 40% for general property placed in service in 2025 and 20% for 2026.
- Transition election: for the first tax year ending after January 19, 2025, a partnership may elect the lower 40% rate (60% for certain longer-production property) instead of 100%.
Qualifying property includes tangible MACRS property with a recovery period of 20 years or less, specified computer software, water utility property and certain qualified productions. It can be new or certain used property. For binding contracts and self-constructed assets, Notice 2026-11 sets the acquisition-date rules, so check both dates for every asset.
Bonus depreciation is reported on Form 4562 and flows into the depreciation computation. After removing Section 179 and amounts reported elsewhere, the remainder lands on line 16c. Confirm the current Form 4562 instructions, because the 2026 forms are still drafts.
Comparing the methods
| Method | Key feature | Partnership reporting |
|---|---|---|
| MACRS | Spreads cost over a class life with a set convention | Form 4562, then line 16a |
| Special allowance | First-year deduction by acquisition date; election out available | Form 4562, then line 16a/16c |
| Section 179 | Elected expensing with cost and income limits | Schedule K line 12, K-1 box 12 |
For tax years beginning in 2026, the Section 179 maximum is $2,560,000, phasing out above $4,090,000 of qualifying property cost, per Rev. Proc. 2025-32. Limits apply at both partnership and partner level.
Situations needing extra care
- Listed property and vehicles: business use of 50% or less requires straight-line ADS
- Mixed personal and business use: separate and document the business portion
- Improvements and late-year additions: confirm placed-in-service dates and conventions
- Dispositions: report on Form 4797 (rental assets via Form 8825)
- Assets used in more than one partnership activity: allocate depreciation across activities
- Qualified improvement property: check the current Code and final instructions before using a recovery period
How Line 16c Flows Through the Partnership Return
Line 16c adds to total deductions, which lowers ordinary business income (loss) on page 1, line 23. That figure carries to Schedule K, line 1, and each partner's Schedule K-1, box 1.
Allocation and partner-level limits
Allocations generally follow the partnership agreement, subject to Section 704(b) and substantial economic effect. Each partner’s benefit from the depreciation deduction depends on their own limits. A partner's loss is tested in order against:
- Outside basis
- At-risk rules
- Passive activity limits
- The excess business loss limit
Passive activity limits apply to each partner's share, not at partnership level.
Book versus tax depreciation
Book depreciation (straight-line or another GAAP method) often differs from tax depreciation. Schedule M-1 reconciles the two.
Schedules L, M-1 and M-2 are optional when Schedule B, question 4 is answered Yes. That requires receipts under $250,000, year-end assets under $1 million, timely K-1s, and no Schedule M-3 requirement.
Larger partnerships, such as those with assets of $10 million or receipts of $35 million and above, generally file Schedule M-3.
Deduction is not cash
Depreciation lowers taxable income but involves no current-year payment. A partner who sees a loss on a K-1 may still have received cash distributions, so partners should not read the K-1 as a cash statement.
Depreciation in other activities
Depreciation tied to other activities follows a different path on the return. COGS depreciation goes through Form 1125-A line 8 to page 1, line 2. Rental depreciation flows from Form 8825 to Schedule K line 2.
Common Mistakes and Final Form 1065 Line 16c Checklist
Frequent errors
- Using book depreciation instead of tax depreciation
- Not subtracting COGS depreciation on line 16b
- Counting an asset twice
- Putting Section 179 on line 16a instead of Schedule K line 12
- Applying an outdated bonus rule or missing the January 19/20, 2025 boundary
- Omitting Form 4562 or required statements
Late or incomplete returns carry a penalty of $255 per partner per month (up to 12 months) for 2025 returns, absent reasonable cause.
Pre-filing checklist
- Current form and instruction revision confirmed
- Additions and disposals recorded
- Placed-in-service dates and business-use percentages checked
- Method and convention verified
- Form 4562 totals tied to line 16a
- Line 16b adjustments documented
- Schedule K and K-1 figures consistent
- Schedule M-1 differences explained
When to get help
Bring in a qualified tax professional when any of these apply:
- Foreign partners (Forms 8804, 8805 and 8813 may apply)
- Multiple activities or heavy fixed assets
- Amended returns or ownership changes
VJM Global's tax compliance and accounting team helps partnerships prepare Form 1065, maintain depreciation schedules, reconcile book and tax figures, and support accurate partner reporting.
Frequently Asked Questions
What is Form 1065 and how does it relate to Schedule K-1?
Form 1065 reports the partnership's overall income, deductions, gains, losses and credits. Schedule K-1 reports each partner's allocated share of those items.
What qualifies for the special depreciation allowance and how much can you deduct on line 16c?
Eligibility and the percentage depend on the property and its acquisition and placed-in-service dates. Check the current Form 4562 and Form 1065 instructions.
What is the difference between Form 1065 lines 16a, 16b and 16c?
Line 16a is depreciation claimed. Line 16b subtracts depreciation reported on Form 1125-A or elsewhere. Line 16c is the net result.
Do Section 179 deductions go on Form 1065 line 16c?
No. Section 179 is separately stated on Schedule K line 12 and Schedule K-1 box 12, and each partner applies their own limits.
How do I report depreciation included in cost of goods sold?
Identify it on Form 1125-A and subtract it on line 16b. That keeps it out of line 16c and avoids double-counting.
Does book depreciation have to match tax depreciation?
No. They often differ, but the difference must be supported and reconciled, typically on Schedule M-1 where required.
