Form 1065 Other Deductions Statement: Format, Contents, Penalties

The Form 1065 Other Deductions statement is an itemized attachment that breaks down the total reported on Line 21 of Form 1065 by expense category and amount. The IRS requires it whenever a partnership uses Line 21, and the instructions are explicit: “attach a statement listing by type and amount each deduction included on this line.”¹ There is no pre-printed IRS form for it. The partnership builds the schedule itself, and the total on the schedule has to match Line 21 to the dollar.

One quick note before the categories. Older reference materials place Other Deductions on Line 20. Starting with the 2023 form, the IRS moved the energy-efficient commercial buildings deduction onto Line 20 and pushed Other Deductions to Line 21. If your software or checklist still says Line 20, update it.

What Belongs on the Statement

An expense earns a spot on Line 21 only if it’s ordinary and necessary for the partnership’s trade or business and doesn’t have its own dedicated line on Page 1. The IRS instructions call out several typical categories:¹

Amortization, including amortization of start-up and organizational costs. Attach Form 4562 if amortization began during the tax year.
Insurance premiums for general liability, professional liability, property, and similar business coverage.
Legal and professional fees for ongoing operations. Fees tied to acquiring a capital asset get capitalized into that asset’s cost instead.
Supplies used and consumed in the business.
Utilities such as electricity, internet, and phone service.
Business start-up and organizational costs, subject to the special limits described below.

Other items that commonly appear here include bank service charges, postage, small tools below the partnership’s capitalization threshold, software subscriptions, and professional development.

Business meals that aren’t already embedded in another line go on Line 21 at 50% of actual cost.² The 50% cap covers client meals and meals while traveling on business. Watch one change for 2026: meals provided at the convenience of the employer, such as company cafeterias and on-premises dining, are fully nondeductible for amounts paid or incurred after December 31, 2025.

What Does Not Belong on the Statement

This is where preparers get into trouble. Several categories look like Line 21 candidates and aren’t:

Separately stated items. Charitable contributions, investment interest, Section 1231 gains and losses, and portfolio income and expenses belong on Schedule K and each partner’s Schedule K-1, because they affect each partner differently.³
Entertainment, amusement, and recreation expenses. Fully nondeductible. Don’t include them anywhere on the return as a deduction.²
Fines and government penalties. Nondeductible; report on Schedule K, Line 18c.¹
Political campaign and lobbying expenses. Nondeductible; also Schedule K, Line 18c.
Expenses allocable to tax-exempt income. Nondeductible; Schedule K, Line 18c.
Sexual harassment settlements paid under a nondisclosure agreement, and related attorney’s fees. Nondeductible under Section 162(q).
Net operating losses. Only individuals and corporations claim an NOL deduction. Partnerships do not.

Before adding an expense to the statement, check whether a dedicated line already covers it. Salaries and wages go on Line 9; guaranteed payments to partners on Line 10; repairs and maintenance on Line 11; rent on Line 13; taxes and licenses on Line 14; interest on Line 15; depreciation and Section 179 on Line 16 via Form 4562; retirement plans on Line 18; employee benefits on Line 19; and the energy-efficient commercial buildings deduction on Line 20 via Form 7205.⁴

Two frequent slip-ups: guaranteed payments to a partner for services or use of capital belong on Line 10, not tucked into Line 21 as “salaries” or “management fees.” And depreciation never lands on Line 21, even though amortization does; depreciation is a Form 4562 calculation that flows to Line 16.⁵

One boundary on interest: if the partnership’s average annual gross receipts exceed the Section 163(j) threshold ($31 million for 2025, adjusted for inflation), any disallowed business interest doesn’t sit on Line 21. Excess business interest expense passes through to partners as a separately stated item on Schedule K-1.⁶

Start-Up and Organizational Costs

New partnerships almost always have Line 21 activity from start-up and organizational costs, and these follow their own rules. Under Sections 195 and 709, a partnership can deduct up to $5,000 of each category immediately in the year it begins business. That $5,000 phases out dollar-for-dollar once the category’s total exceeds $50,000, and disappears entirely at $55,000.⁷⁸ So a partnership with $53,000 of start-up costs deducts $2,000 immediately (the $5,000 cap reduced by the $3,000 overage).

Whatever isn’t deducted immediately amortizes over 180 months, beginning the month the business starts. Both the current-year deduction and the ongoing amortization go on Line 21, with Form 4562 attached in the first year amortization begins.¹ Start-up and organizational costs are tracked as separate buckets, so a partnership could deduct up to $5,000 of each in year one, provided each category stays under its own $50,000 threshold.

How to Format the Statement

The statement is a schedule the partnership creates. Put the partnership’s name and EIN at the top, identify the form and line (“Form 1065, Page 1, Line 21 — Other Deductions”), and list categories with dollar amounts. Aggregate at a useful level. Not every receipt, not one lump sum. Categories should be specific enough that a reviewer understands the nature of each cost and can tie it back to the general ledger.

A typical statement for a professional services partnership looks like this:

ABC Partners LLC — EIN: 12-3456789
Form 1065, Page 1, Line 21 — Other Deductions Statement

Legal and professional fees: $18,200
Insurance premiums: $12,400
Office supplies: $4,800
Utilities: $6,100
Software subscriptions: $3,600
Bank service charges: $1,900
Postage and shipping: $2,100
Business meals (50% deductible portion): $3,400
Professional development: $2,500
Amortization of organizational costs: $1,667
Total Line 21 Other Deductions: $56,667

The line-item total must equal the Line 21 entry exactly. Each category should tie back to the partnership’s general ledger, which in turn should be supported by invoices, receipts, and bank statements. Amortization figures should reconcile with Form 4562.

E-Filing the Attachment

Partnerships filing through the Modernized e-File system attach the statement as a PDF. File names cap at 64 characters and descriptions at 128 characters.⁹ Most tax software generates the statement automatically from mapped ledger accounts, but review it before transmitting. Auto-generated attachments sometimes label expenses “Miscellaneous,” which invites an IRS inquiry.

Penalties for a Missing or Vague Statement

A partnership return filed without the required Line 21 attachment can be treated as incomplete. For tax years beginning in 2026 (returns due in 2027), the penalty for filing an incomplete partnership return is $260 per partner per month, for up to 12 months.¹⁰ For a 10-partner firm, that’s $2,600 a month and up to $31,200 across the full period. The IRS doesn’t always assess the maximum, but an incomplete return gives it the authority.

Separate from the filing penalty, unsubstantiated deductions on Line 21 expose the partnership to the accuracy-related penalty if an IRS adjustment produces an underpayment. That penalty is 20% of the underpayment.¹¹ A cleanly itemized statement backed by records that tie to the general ledger is the practical defense against both risks. Auditors who can trace Line 21 to a supporting schedule and from there to invoices tend to move on. Auditors who can’t will keep digging.

1
Internal Revenue Service. 2025 Instructions for Form 1065
2
Office of the Law Revision Counsel. 26 U.S. Code 274 – Disallowance of Certain Entertainment, Etc., Expenses
3
Internal Revenue Service. Partner’s Instructions for Schedule K-1 (Form 1065) (2025)
4
Internal Revenue Service. Form 1065 (2025)
5
Internal Revenue Service. Form 4562 – Depreciation and Amortization
6
Internal Revenue Service. Questions and Answers About the Limitation on the Deduction for Business Interest Expense
7
Office of the Law Revision Counsel. 26 USC 195 – Start-up Expenditures
8
Office of the Law Revision Counsel. 26 USC 709 – Treatment of Organization and Syndication Fees
9
Internal Revenue Service. Recommended Names and Descriptions for PDF Files Attached to Modernized e-File (MeF) Business Submissions
10
Internal Revenue Service. Rev. Proc. 2025-32
11
Office of the Law Revision Counsel. 26 U.S. Code 6662 – Imposition of Accuracy-Related Penalty on Underpayments