K-1 Box 17 Code AC: It’s in Box 20 or Box 13

Code AC does not appear in Box 17 of Schedule K-1 (Form 1065). Box 17 is reserved for Alternative Minimum Tax items and uses only single-letter codes A through F. If your K-1 shows “AC,” it is almost certainly sitting in Box 20, where it reports your share of collectibles gain taxed at a maximum 28-percent rate, or in Box 13, where it reports interest expense on partnership debt whose proceeds were distributed to you. Which box holds your Code AC determines both how the amount is taxed and where it goes on your return.

What Box 17 Actually Contains

Box 17 is labeled “Alternative Minimum Tax (AMT) Items.” The figures there, combined with your own AMT adjustments, feed Form 6251.{¹} The only codes it uses are:

Code A: Post-1986 depreciation adjustment
Code B: Adjusted gain or loss
Code C: Depletion (other than oil and gas)
Codes D and E: Oil, gas, and geothermal properties
Code F: Other AMT items

No Code AC. The confusion is understandable: the K-1 packs a lot of information into a small space, and code letters reset from box to box. Look at the box number printed next to the “AC” on your form. That tells you which of the two situations below applies.

Code AC in Box 20: Collectibles Gain

Box 20 is labeled “Other Information” and uses multi-letter codes running from A through AZ and beyond. Code AC here reports your share of gain taxable at the collectibles rate under Section 1(h)(5) of the Internal Revenue Code.{¹} This is the version most individual partners see.

Collectibles for tax purposes include artwork, antiques, precious metals, gems, stamps, coins, and certain exchange-traded funds that hold physical commodities. When you sell your interest in a partnership that held these assets, a portion of your gain is attributable to the partnership’s unrealized appreciation in those items. The partnership carves out that slice and reports it under Box 20, Code AC because it faces a different tax rate than the rest of your capital gain. This differs from Box 9c, which reports collectibles gain generated during partnership operations. Box 20, Code AC captures the collectibles portion of your gain when you sold your partnership interest.{¹}

How the 28-Percent Rate Works

Long-term capital gains are normally taxed at 0, 15, or 20 percent depending on your income. Collectibles gain is the exception, facing a maximum rate of 28 percent. That ceiling applies regardless of the ordinary long-term bracket you would otherwise land in. If your ordinary income tax rate is below 28 percent, you pay the lower rate instead.

When you report the sale of your partnership interest on Schedule D, the Code AC amount gets pulled out of your total gain and run through the 28% Rate Gain Worksheet in the Schedule D instructions. The remaining gain is taxed at the standard long-term rates. Skipping this step means undertaxing the collectibles portion, or, less commonly, overtaxing it.

Code AC in Box 13: Interest on Debt-Financed Distributions

Box 13 is labeled “Other Deductions.” Code AC in this box reports your allocated share of interest expense on partnership debt whose proceeds were distributed to you.{¹} This happens when the partnership borrows money and passes the loan proceeds to its partners rather than using the cash in the business.

The partnership itself cannot deduct this interest. It allocates each partner’s share on the K-1, and whether you can deduct it depends on what you did with the cash. The IRS calls this interest tracing: the character of the interest follows the use of the distributed proceeds, not the purpose of the original loan.

The Four Use Categories

Under Treasury Regulation Section 1.163-8T, the interest reported in Box 13, Code AC falls into one of four buckets based on how you spent the money:

Trade or business use. If you put the cash into a business in which you materially participate, the interest is fully deductible against business income and goes on Schedule E (Form 1040), line 28.{}¹
Passive activity use. If you invested in a business where you do not materially participate, the interest becomes a passive expense subject to the loss limits on Form 8582.{}²
Investment use. If the money bought stocks, bonds, or other investments, the interest is investment interest expense. Report it on Form 4952. Your deduction is capped at your net investment income for the year, with any excess carrying forward.{}³
Personal use. If the money paid for a vacation, home renovation, vehicle, or other personal expense, the interest is not deductible at all.{}¹

Split the proceeds across categories and you allocate the interest proportionally. Put $50,000 into a business and $30,000 toward personal expenses, and only the business share is deductible. Keep records of how you spent the money. The IRS can ask you to prove the allocation during an audit.

Where the Amount Lands on Your Return

Box 20 Code AC (Collectibles Gain)

Report the collectibles portion as part of your overall gain from selling the partnership interest on Schedule D. The 28% Rate Gain Worksheet in the Schedule D instructions separates the Code AC amount and applies the 28-percent ceiling. If the partnership also issued you a Schedule K-3, the same collectibles figure may show up on Part XIII and flow into the same calculation.

Box 13 Code AC (Debt-Financed Distribution Interest)

Where the interest lands depends on the category above:

Business interest: Schedule E, Part II, line 28. Enter the partnership name and note “interest expense” in column (a). If you materially participated, the amount goes in column (i); if not, run it through Form 8582 first and enter the allowed portion in column (g).{}¹
Investment interest: Form 4952, line 1, which flows to Schedule A, line 9 as an itemized deduction.{}³
Personal interest: Nowhere. It cannot be deducted.

Do not attach the K-1 to your return. The IRS already has a copy from the partnership’s filing. Keep the K-1 and your records of how the distributed proceeds were used with your tax files.{⁴}

If You Were Looking for Partnership Debt Figures

One reason people hunt around Box 17 is that partnership debt affects loss deductibility, and they assume the debt lives in a numbered box. It does not. Your share of the partnership’s nonrecourse liabilities, qualified nonrecourse financing, and recourse liabilities appears in Item K1 in Part II of the K-1, showing beginning and ending amounts.{¹} Those numbers feed the basis worksheet that determines how much loss you can deduct. Code AC has nothing to do with that calculation.

Penalties for Getting Code AC Wrong

Misreporting Code AC can trigger the accuracy-related penalty under Section 6662 of the Internal Revenue Code. If the error causes a substantial understatement of tax, the penalty is 20 percent of the underpayment. For gross valuation misstatements, it doubles to 40 percent.{⁵}

The two most common mistakes are treating Box 20 Code AC collectibles gain as ordinary long-term capital gain, which undertaxes it, and deducting Box 13 Code AC interest that was actually used for personal purposes. Both reduce reported tax and fall within what the IRS treats as negligence. The penalty applies on top of the additional tax and interest you already owe.

1
Internal Revenue Service. Partner’s Instructions for Schedule K-1 (Form 1065)
2
Internal Revenue Service. 2025 Instructions for Form 8582 – Passive Activity Loss Limitations
3
Internal Revenue Service. Form 4952 – Investment Interest Expense Deduction
4
Internal Revenue Service. Instructions for Schedule E (Form 1040)
5
Office of the Law Revision Counsel. 26 USC 6662 – Imposition of Accuracy-Related Penalty on Underpayments