The portfolio deductions reported on K-1 line 13W are your share of investment-related expenses the partnership paid, such as advisory, custodial, or accounting fees tied to the entity’s portfolio. For an individual partner, that amount is not deductible on your federal return. The Tax Cuts and Jobs Act suspended miscellaneous itemized deductions starting in 2018, and the One Big Beautiful Bill Act made the suspension permanent by removing the sunset. The statute now bars any miscellaneous itemized deduction for tax years beginning after December 31, 2017, with no expiration.1Office of the Law Revision Counsel. 26 USC 67 – 2-Percent Floor on Miscellaneous Itemized Deductions The number on your K-1 is real. The tax benefit is zero.
What the 13W Amount Represents
Portfolio deductions are investment-related expenses a partnership or S corporation incurred while managing assets that produce interest, dividends, royalties, or capital gains. Typical items include investment advisory fees, custodial fees, and accounting or legal costs tied directly to the entity’s investment portfolio. Their legal footing is Section 212, which allows deductions for ordinary and necessary expenses paid to produce or collect income, or to manage income-producing property.2Office of the Law Revision Counsel. 26 USC 212 – Expenses for Production of Income
The entity does not deduct these costs against its own income. It passes them through so each partner or shareholder can evaluate deductibility on their personal return. On a partnership K-1 (Form 1065) the amount appears in Box 13 under the applicable code for itemized deductions; the IRS periodically reassigns code letters, so what was once Code W may appear under a different letter in a given year. On an S corporation K-1 (Form 1120-S) it shows up under Box 12, Code L, labeled “Deductions—portfolio income (other).”3Internal Revenue Service. Instructions for Schedule K-1 (Form 1120-S) Wherever it lands on your K-1, the federal treatment is the same.
Why It’s Not Deductible
Portfolio expenses fall within the statutory definition of “miscellaneous itemized deductions.” Section 67 defines that category as essentially all itemized deductions except a specific list of carve-outs: mortgage interest, state and local taxes, charitable contributions, medical expenses, and casualty losses, among others.1Office of the Law Revision Counsel. 26 USC 67 – 2-Percent Floor on Miscellaneous Itemized Deductions Investment advisory fees and similar portfolio costs are not on that exclusion list.
Before 2018, these expenses were deductible to the extent they exceeded 2% of adjusted gross income.4Internal Revenue Service. Publication 529 – Miscellaneous Deductions The TCJA eliminated them entirely, and the elimination was originally scheduled to expire after 2025. Many investors were expecting the old rules to return in 2026. They aren’t. The One Big Beautiful Bill Act removed the sunset date from the statute, so the disallowance now continues indefinitely unless Congress acts again.1Office of the Law Revision Counsel. 26 USC 67 – 2-Percent Floor on Miscellaneous Itemized Deductions
How to Handle the Amount on Your Return
You still need to account for the K-1 amount, because the IRS matches K-1 data against individual returns and an unreported item can prompt a notice.
If you take the standard deduction, the portfolio deduction has no effect on your return. If you itemize on Schedule A, the amount may need to be entered on the line for other itemized deductions depending on the form’s instructions for that year, but the final calculation zeroes it out. The line reconciles the K-1 to your return; it does not reduce taxable income.
Hold onto your K-1 and any documentation of the underlying investment expenses. If Congress reverses course later, organized records will make it easier to reconstruct historical amounts. These figures can also matter in related calculations, such as the investment interest expense limitation on Form 4952.
Investment Interest Expense Is a Separate Item
Investment interest expense often appears alongside portfolio deductions on a K-1, and the two get confused. They shouldn’t be. Investment interest expense falls under Section 163, which is specifically excluded from the miscellaneous category.1Office of the Law Revision Counsel. 26 USC 67 – 2-Percent Floor on Miscellaneous Itemized Deductions On an S corporation K-1, it appears at Box 12, Code H.3Internal Revenue Service. Instructions for Schedule K-1 (Form 1120-S)
You report investment interest expense on Form 4952, and it remains deductible up to your net investment income. The permanent suspension does not touch it. If your K-1 shows both items, treat them as completely separate: the interest is still deductible within limits; the portfolio deduction is not.
Narrow Exceptions
Two exceptions exist, and neither helps a typical individual partner or S corporation shareholder.
Estates and trusts can still deduct certain administration costs under Section 67(e). The test is whether the expense would not have been incurred if the property were not held in a trust or estate. A trustee’s fee for administering the trust generally qualifies. An investment advisory fee that anyone could incur, trust or no trust, generally does not. When a trust or estate terminates, excess deductions pass to beneficiaries on a Form 1041 K-1 and keep their character, so Section 67(e) expenses retain above-the-line treatment on the beneficiary’s individual return.5Internal Revenue Service. Instructions for Schedule K-1 (Form 1041) for a Beneficiary Filing Form 1040 or 1040-SR This applies only where the entity itself is an estate or trust.
Impairment-related work expenses are expressly excluded from the miscellaneous category and survived the suspension.1Office of the Law Revision Counsel. 26 USC 67 – 2-Percent Floor on Miscellaneous Itemized Deductions They relate to employment, not investment management, and virtually never appear as portfolio deductions on a K-1.
State Tax Treatment May Still Give You a Benefit
Federal law controls the federal return, but state income tax rules don’t always follow federal changes. Some states never adopted the TCJA suspension and continue to allow miscellaneous itemized deductions, typically subject to the original 2% AGI floor. If you file in a state with its own itemized deduction rules, check whether your state conforms to current federal treatment. The 13W amount that produces no federal benefit may still reduce your state taxable income.