Arizona Department of Revenue Form Instructions
165 Schedule K-1 — Resident & Part-Year Partner's Share of Adjustment to Partnership Income (2025 instructions)
preamble
2025 Resident and Part-Year Resident Partner's Arizona Form Share of Adjustment to Partnership Income 165 Schedule K-1
Instructions for Partners
Pass-Through Entity Election
Line A
If the partnership made the PTE election, the "Yes" box will be checked. If it did not make the PTE election, the "No" box will be checked.
Line B
If the partnership's records indicate you did NOT opt out of its PTE election, the "Yes" box will be checked. If the partnership's records indicate you DID opt out of its PTE election, the "No" box will be checked.
Line C
If the partnership's records indicate that you are a grantor trust or a Single Member LLC (SMLLC) disregarded to an individual taxpayer, the "Yes" box will be checked and the name and Tax Identification Number (TIN) of the beneficial owner will be entered in the spaces provided. Otherwise, the "No" box will be checked.
Part 1 - Arizona Partnership Adjustment
The partnership is required to adjust its income from a federal to Arizona basis. Line 3 of Arizona Form 165 Schedule K- 1, is your share of that adjustment. Report the amount from line 3 on your Arizona tax return following the instructions below.
Resident Individuals
• If line 3 is a positive number, enter the amount on Arizona Form 140, page 1, line 16. • If line 3 is a negative number, enter the amount on Arizona Form 140, page 1, line 27.
Part-Year Resident Individuals
• If line 3 is a positive number, enter that portion of line 3 allocable to partnership income taxable by Arizona on Arizona Form 140PY, line 31. • If line 3 is a negative number, enter that portion of line 3 allocable to partnership income taxable by Arizona on Arizona Form 140PY, line 44.
Resident Estates or Resident Trusts
• If line 3 is a positive number, enter the amount on Arizona Form 141AZ, Schedule B, line B3. • If line 3 is a negative number, enter the amount on Arizona Form 141AZ, Schedule B, line B9.
Part 2 - Net Capital Gain (Loss) From Investment in a Qualified Small Business - Information Schedule
Arizona allows individuals, estates and trusts a subtraction from Arizona gross income for any net capital gain derived from investment in a qualified small business if: • The gain is included in: o The individual's federal adjusted gross income, or o The estate or trust's federal taxable income • The business in which the partnership invested is determined to be a qualified small business by the Arizona Commerce Authority.
A partner that is a pass -through entity (estate or trust) will need this information to: • Calculate the subtraction for the estate or trust, or • Complete Arizona Form 141AZ , Schedule K-1 or Schedule K-1(NR), for each beneficiary.
Line 4
Line 4, column (a) is your share of net capital gain (loss) from investment in a qualified small business. See the instructions for Forms 140, 140PY, or 141AZ t o determine if you qualify to take this subtraction.
Part 3 - Gain or Loss on the Sale of Virtual
Currency and Non- Fungible Tokens - Information Schedule
Arizona allows individuals, estates and trusts a subtraction to the extent not already excluded from Arizona gross income under the internal revenue code, the value of virtual currency and non-fungible tokens (NFT) the taxpayer received pursuant to an airdrop at the time of the airdrop. This paragraph may not be interpreted as providing a subtraction for any appreciation in value that occurs from holding the virtual currency after the initial receipt of the airdrop. For the purpose of this subtraction, A.R.S. § 43- 1028 defines the following: • Airdrop as the receipt of virtual currency through a means of distribution of virtual currency to the distributed ledger addresses of multiple taxpayers. • NON-FUNGIBLE TOKENS (NFT) as a non -fungible cryptographic asset on a blockchain that possesses unique identifiers or other metadata that distinguishes the asset from another token or asset in a manner that makes the asset irreplaceable and non -exchangeable for a similar token or asset. • Virtual currency as a digital representation of value that functions as a medium of exchange, a unit of account and a store of value other than a representation of the U.S. dollar or a foreign currency. • Foreign currency as the coin and paper money of a country other than the United States that is designated as legal tender, circulates and is customarily used and accepted as a medium of exchange in the country of issuance.
Line 5
Line 5 is your share of the value of virtual currency and nonfungible tokens received at the time of the airdrop.
Part 4 - Gain or Loss on the Sale of Virtual
Currency and Non- Fungible Tokens - Gas Fees and Non- Fungible Tokens Basis - Information Schedule
Arizona allows individuals, estates and trusts a subtraction for gas fees not already included in the taxpayer's virtual currency or non-fungible tokens basis. For purposes of this subtraction, A.R.S. § 43 -1028 defines "Gas Fees" as a fee paid to the operator of a virtual network f or the use of the network to facilitate the purchase, sale or exchange of virtual currency or an NFT.
165 Schedule K-1
Line 6
Line 6 is your share of the gas fees included in virtual currency or non-fungible tokens basis.
Part 5 - Net Capital Gain (Loss) From the Exchange of Legal Tender - Information Schedule
For taxable years beginning from and after December 31, 2017, Arizona allows the exclusion from gross income the amount of net capital gain (loss) derived from the exchange of one kind of legal tender for another kind of legal tender.
(a) "Legal tender" means a medium of exchange, including specie, that is authorized by the United States Constitution or Congress for the payment of debts, public charges, taxes and dues. (b) "Specie" means coins having precious metal content.
Line 7
Line 7 is your share of the net capital gain (loss) derived from the exchange of one kind of legal tender for another. A net capital gain is reported as a positive number. A net capital loss is reported as a negative number.
Part 6 - Net Long -Term Capital Gain
Subtraction - Information Schedule
Arizona allows individuals, estates, and trusts a subtraction from Arizona gross income for a percentage of any net long - term capital gain if: • The gain arises from assets acquired after December 31, 2011. • The gain must be included in: o The individual's federal adjusted gross income, or, o The estate or trust's federal taxable income. In addition: • Only include net long- term gains if you can verify the asset was acquired after December 31, 2011. • If you cannot verify the asset was acquired after December 31, 2011, treat it as a capital gain asset acquired before January 1, 2012. • An asset acquired by gift or inheritance is considered acquired on the date it was acquired by the gift -giver, or the deceased.
A partner that is a pass -through entity (estate or trust) will need this information to: • Calculate the subtraction for the estate or trust, or, • Complete Arizona Form 141AZ, Schedule K -1, or Schedule K-1(NR), for each beneficiary.
Line 8
Line 8, column (c), is your share of net long -term capital gain (loss) from assets acquired after December 31, 2011.
Line 9
Line 9, column (c) is your share of the partnership's net longterm capital gain from investment in a qualified small business that is included in the amount on line 8, column (c). The amount on line 9 cannot be included in your subtraction for any net long- term capital gain from assets acquired after December 31, 2011.
For more information, see the instructions for Arizona Form 140, Arizona Form 140PY, or Arizona Form 141AZ.
Line 10
Line 10, column (c) is your share of the partnership's net long-term capital gain (loss) from the exchange of one form of legal tender for another that is included in the amount on line 8 column (c). The amount on line 10 , column (c) cannot be included in your subtraction for any net long- term capital gain from assets acquired after December 31, 2011. Worksheet for Long -Term Capital Gain Subtraction for Assets Acquired After December 31, 2011 (Worksheet)
To determine if you qualify to claim a subtraction from income on your Arizona tax return: • Full-year resident partners, use the amounts on line 8 , line 9, column (c), and line 10 , column (c) to figure the allowable subtraction on the Worksheet included in the instructions for Arizona Form 140.
• Part-year resident partners, use the amounts on line 8 , line 9, column (c) , and line 10 , column (c) that are included in your Arizona gross income to figure the allowable subtraction on the Worksheet included in the instructions for Arizona Form 140PY. • Resident estate or trust partners, use the amount s on line 8, line 9, column (c) , and line 10, column (c) to complete the Worksheet included in the instructions for Arizona Form 141AZ. If the resident estate or trust distributed the gain (loss) to the beneficiaries, the Worksheet will assist the estate or trust in completing the Net Long -Term Capital Gain Subtraction - Information Schedule on Arizona Form 141AZ, Schedule K- 1, or Schedule K -1(NR) for each beneficiary.
Part 7 - Partner's Share of the Partnership 's
Pass-Through Entity Election
If the Partnership is making the election to pay tax at the entity level on its pass -through income AND you as the resident or part-year resident individual or estate and trust shareholder did not opt out of that election, Part 7 provides you with your prorata share of the pass-through credit.
Line 11
Line 11 is your pro -rata share of the Partnership 's PTE Tax Credit.
Individuals, enter this amount on Credit Form 355, Part 1, line 1.
Estates and trusts, see the instructions for Form 141AZ, line 19 to claim this credit.
Line 12
Line 12 is your pro- rata share of the Partnership 's Arizona PTE Taxes paid in 2025 for taxable years prior to 2025.
election, add this amount back on Form 140, page 5, line P, or Form 140PY, page 5, line N.
Individuals that made the Small Business Income election , add this amount back on Form 140 -SBI, line 25, or Form 140PY-SBI, line 25.
165 Schedule K-1
Line 13
Line 13 is your pro- rata share of the Partnership 's Arizona PTE Taxes paid in 2025 for taxable year 2025.
election, add this amount back on Form 140, page 5, line P, or Form 140PY, page 5, line N.
Individuals that made the Small Business Income election , add this amount back on Form 140 -SBI, line 25, or Form 140PY-SBI, line 25.
Line 14
Line 14 is your pro-rata share of comparable PTE Taxes from other states paid in 2025 for taxable years prior to 2025.
election, add this amount back on Form 140, page 5, line P, or Form 140PY, page 5, line N.
Individuals that made the Small Business Income election , add this amount back on Form 140 -SBI, line 25, or Form 140PY-SBI, line 25.
Line 15
Line 15 is your pro-rata share of comparable PTE Taxes from other states paid in 2025 for taxable year 2025.
election, add this amount back on Form 140, page 5, line P, or Form 140PY, page 5, line N.
Individuals that made the Small Business Income election , add this amount back on Form 140 -SBI, line 25, or Form 140PY-SBI, line 25.
2025 Nonresident and Out-of-State Partner's Arizona Form Share of Adjustment to Partnership Income 165 Schedule K-1(NR)
Instructions for Partners
Pass-Through Entity Election
Line A
If the partnership made the PTE election, the "Yes" box will be checked. If it did not make the PTE election, the "No" box will be checked.
Line B
If the partnership's records indicate you did NOT opt out of its PTE election, the "Yes" box will be checked. If the partnership's records indicate you DID opt out of its PTE election, the "No" box will be checked.
Line C
If the partnership's records indicate that you are a grantor trust or a Single Member LLC (SMLLC) disregarded to an individual taxpayer, the "Yes" box will be checked and the name and Tax Identification Number (TIN) of the beneficial owner will be entered in the spaces provided. Otherwise, the "No" box will be checked.
Line 15
Nonresident Individuals, Estates and Trusts:
Line 15 reflects the amount of partnership income which must be adjusted to determine the difference between Internal Revenue Code § 702(a)(8) and Arizona Revised Statutes § 43-1401(2).
If the amount on line 15, column (c) is a positive number: • Individual partners, enter this amount as an "other addition to income" on Arizona Form 140NR, line 31. • Estates or trusts, enter this amount as an "other addition" on Arizona Form 141AZ, page 2, line B3.
If the amount on line 15, column (c) is a negative number: • Individual partners, enter this amount as an "other subtraction from income" on Arizona Form 140NR, line 41. • Estates or trusts, enter this amount as an "other subtraction" on Arizona Form 141AZ, page 2, line B9.
Corporate partners:
• If the amount on line 15 is positive, enter the amount from line 15, column (a) on Schedule A, line A8 of Form(s) 120 or 120A.
• If the amount on line 1 5 is negative, enter the amount from line 15, column (a) on Schedule B, line B10 of Form(s) 120 or 120A.
Partnerships that are partners:
• If the amount on line 1 5 is positive, enter the amount from line 1 5, column (a) on Schedule A, line A 4 of Arizona Form 165.
• If the amount on line 1 5 is negative, enter the amount from line 1 5, column (a) on Schedule B, line B 5 of Arizona Form 165.
Part 3 - Net Capital Gain (Loss) from Investment in a Qualified Small Business - Information Schedule
Arizona allows individuals, estates and trusts a subtraction from Arizona gross income for any net capital gain derived from investment in a qualified small business if: • The gain is included in: o The individual's federal adjusted gross income, or o The federal taxable income of the estate or trust. • The business in which the partnership invested is determined to be a qualified small business by the Arizona Commerce Authority.
Although the subtraction is only available to individuals, estates and trusts, a partner that is a pass -through entity (estate, partnership, S corporation, or trust) will need this information to calculate the subtraction for the estate or trust, or to complete:
• Arizona Form 141AZ, Schedule K-1 or Schedule K-1(NR), for each beneficiary; • Arizona Form 120S, Schedule K-1 or Schedule K-1(NR), for each shareholder; or, • Arizona Form 165, Schedule K-1 or Schedule K-1(NR), for each partner.
Line 16
The amount on line 1 6, column (c), is your share of net capital gain (loss) from investment in a qualified small business that is apportioned to Arizona. To determine if you qualify to claim this subtraction from your Arizona tax return, see the instructions for Arizona Form 140NR or Arizona Form 141AZ.
Part 4 - Gain or Loss on the Sale of Virtual
Currency and Non- Fungible Tokens - Information Schedule
Arizona allows individuals, estates and trusts a subtraction to the extent not already excluded from Arizona gross income under the internal revenue code, the value of virtual currency and non- fungible tokens (NFT) the taxpayer received pursuant to an airdrop at the time of the airdrop. This paragraph may not be interpreted as providing a subtraction for any appreciation in value that occurs from holding the virtual currency after the initial receipt of the airdrop. For the purpose of this subtraction, A.R.S. § 43-1028 defines the following: • Airdrop as the receipt of virtual currency through a means of distribution of virtual currency to the distributed ledger addresses of multiple taxpayers. • NON-FUNGIBLE TOKENS (NFT) as a non -fungible cryptographic asset on a blockchain that possesses unique identifiers or other metadata that distinguishes the asset from another token or asset in a manner that makes the asset irreplaceable and non -exchangeable for a similar token or asset. • Virtual currency as a digital representation of value that functions as a medium of exchange, a unit of account and a store of value other than a representation of the U.S. dollar or a foreign currency. • Foreign currency as the coin and paper money of a country other than the U nited States that is designated as legal tender, circulates and is customarily used and accepted as a medium of exchange in the country of issuance.
Although the subtraction is only available to individuals, estates and trusts, a partner that is a pass -through entity (estate, partnership, S corporation, or trust) will need this information to calculate the subtraction for the estate or trust, or to complete: • Arizona Form 141AZ, Schedule K-1 or Schedule K-1(NR), for each beneficiary; • Arizona Form 120S, Schedule K-1 or Schedule K-1(NR), for each shareholder; or, • Arizona Form 165, Schedule K-1 or Schedule K-1(NR), for each partner.
Line 17
Line 17 is your share of the value of virtual currency and non-fungible tokens received at the time of the airdrop.
Part 5 - Gain or Loss on the Sale of Virtual
Currency and Non-Fungible Tokens - Gas Fees and Non-Fungible Tokens Basis - Information Schedule
Arizona allows individuals, estates and trusts a subtraction for gas fees not already included in the taxpayer's virtual currency or non -fungible tokens basis. For purposes of this subtraction, A.R.S. § 43 -1028 defines "Gas Fees" as a fee paid to the operator of a virtual network f or the use of the network to facilitate the purchase, sale or exchange of virtual currency or an NFT.
Although the subtraction is only available to individuals, estates and trusts, a partner that is a pass -through entity (estate, partnership, S corporation, or trust) will need this information to calculate the subtraction for the estate or trust, or to complete: • Arizona Form 141AZ, Schedule K-1 or Schedule K-1(NR), for each beneficiary; • Arizona Form 120S, Schedule K-1 or Schedule K-1(NR), for each shareholder; or, • Arizona Form 165, Schedule K-1 or Schedule K-1(NR), for each partner.
Line 18
Line 18 is your share of the gas fees included in virtual currency or non-fungible tokens basis
Part 6 - Net Capital Gain (Loss) from the Exchange of Legal Tender - Information Schedule
For taxable years beginning from and after December 31, 2017, Arizona allows the exclusion from gross income the amount of net capital gain (loss) derived from the exchange of one kind of legal tender for another kind of legal tender. (a) "Legal tender" means a medium of exchange, including specie, that is authorized by the United States Constitution or Congress for the payment of debts, public charges, taxes and dues. (b) "Specie" means coins having precious metal content.
Line 19
The amount on line 19, column (c) is your share of net capital gain (loss) from the exchange of legal tender that is apportioned to Arizona.
Part 7 - Net Long -Term Capital Gain
Subtraction - Information Schedule
Arizona allows a subtraction from Arizona gross income for a percentage of any net long-term capital gain if: • The gain arises from assets acquired after December 31, 2011, • The gain is included in: o The individual taxpayer's federal adjusted gross income, or, o The federal taxable income of the estate or trust.
In addition, • Only include net long-term gains if you can verify the asset was acquired after December 31, 2011. • If you cannot verify the asset was acquired after December 31, 2011, treat it as a capital gain asset acquired before January 1, 2012. • An asset acquired by gift or inheritance is considered acquired on the date it was acquired by the gift -giver, or the deceased.
Although the subtraction is only available to individuals, estates and trusts, a partner that is a pass -through entity (estate, partnership, S corporation, or trust) will need this information to: • Calculate the subtraction for the estate or trust, or • To complete: o Arizona Form 141AZ , Schedule K -1, or Schedule K-1(NR), for each beneficiary; o Arizona Form 120S , Schedule K -1, or Schedule K-1(NR), for each shareholder; or o Arizona Form 165, Schedule K-1, or Schedule K-1(NR), for each partner.
Line 20
Line 20, column (d) is your share of net long-term capital gain (loss) from assets acquired after December 31, 2011.
Line 21
Line 21 is your share of the partnership's net long-term capital gain from investment in a qualified small business that is included in the amount on line 20, column (d). The amount on line 21 cannot be included in your subtraction for any net longterm capital gain from assets acquired after December 31, 2011.
For more information, see the instructions for Arizona Form 140PY or Arizona Form 141AZ.
Line 22
Line 22 is your share of the partnership's net long-term capital gain (loss) from the exchange of legal tender that is included in the amount on line 20 , column (d). The amount on line 22 cannot be included in your subtraction for any net long-term capital gain from the exchange of legal tender from assets acquired after December 31, 2011.
Worksheet for Long-Term Capital Gain Subtraction for Assets Acquired After December 31, 2011 (Worksheet)
To determine if you qualify to claim a subtraction from income on your Arizona personal income tax return:
• Nonresident partner, complete the worksheet included in the instructions for Arizona Form 140NR. Use only the amount of Arizona -sourced, net long- term capital gain (loss) entered on line 21, column (d), and line 22, column (d) to figure the subtraction on the Worksheet included in the instructions for Arizona Form 140NR • Nonresident Estate or Trust partner, use only the amount of Arizona -sourced, net long- term capital gain (loss) entered on line 21, column (d), and line 22, column (d) to complete the Worksheet included in the instructions for Arizona Form 141AZ. o If the net long-term capital gain (loss) in Part 6 and Part 7 is distributed to the beneficiaries, the Worksheet will assist the estate or trust in completing the Net Long -Term Capital Gain Subtraction - Information Schedule, on Arizona Form 141AZ Schedule K -1, or Schedule K -1(NR) for each beneficiary, • Partnership or S corporation partner , use only the amount of Arizona -sourced, net long- term capital gain (loss) entered on line 21 column (d) , and line 22 column (d) to figure the subtraction on the Worksheet. The Worksheet will assist the partnership or S corporation in completing the Net Long -Term Capital Gain Subtraction - Information Schedule, on: o Arizona Form 165 Schedule K-1 or Schedule K-1(NR), for each partner, or o Arizona Form 120S, Schedule K-1 or Schedule K-1(NR) for each shareholder. • C Corporation or Exempt Organization partner, this subtraction is not allowed for a C corporation or an exempt organization. The information in Part 7 is informational only and is not required to be reported by the C corporation or the exempt organization. Part 8 - Partner's Share of the Partnership's Pass-Through Entity Tax Credit
If the partnership is making the election to pay tax at the entity level on its pass -through income AND you as the nonresident individual or estate and trust partner did not opt out of that election, Part 8 provides you with your pro -rata share of the pass-through credit.
Line 23
Line 2 3 is your share of the pro -rata share of the partnership's PTE Tax Credit.
Individuals, enter this amount on Credit Form 355, Part 1, line 1.
Estates and trusts, see the instructions for Form 141AZ, line 19 to claim this credit.
Line 24
Line 24 is your pro- rata share of the partnership's Arizona PTE taxes paid in 2025 for taxable years prior to 2025.
election , add this amount back on Form 140NR, page 5, line L, or Form 140PY, page 5, line N.
Individuals that made the Small Business Income election, add this amount back on Form 140NR-SBI, line 24, or Form 140PY- SBI, line 25..
Line 25
Line 25 is your pro- rata share of the partnership's Arizona PTE taxes paid in 2025 for taxable year 2025.
election, add this amount back on Form 140NR, page 5, line L, or Form 140PY, page 5, line N.
Individuals that made the Small Business Income election, add this amount back on Form 140NR-SBI, line 24, or Form 140PY- SBI, line 25.
Line 26
Line 26 is the partner's pro -rata share of comparable PTE Taxes paid from other states in 2025 for taxable year s prior to 2025.
election , add this amount back on Form 140NR, page 5, line L, or Form 140PY, page 5, line N.
Individuals that made the Small Business Income election, add this amount back on Form 140NR-SBI, line 24, or Form 140PY- SBI, line 25.
Estates and trusts, add this amount back on Form 141AZ,
Line 27
Line 27 is the partner's pro -rata share of comparable PTE Taxes paid from other states in 2025 for taxable year 2025.
election , add this amount back on Form 140NR, page 5, line L, or Form 140PY, page 5, line N.
Individuals that made the Small Business Income election, add this amount back on Form 140NR-SBI, line 24, or Form 140PY- SBI, line 25.
Estates and trusts, add this amount back on Form 141AZ,
Source: official text