A Schedule K-1 is a pass-through tax form that reports each partner's, shareholder's, or beneficiary's share of a partnership, S-corporation, or trust's income, deductions, and credits. Unlike a W-2 or 1099 - which you enter directly on your return - a K-1 contains dozens of separately stated items that flow to different schedules and forms on your individual return, each with its own character, limitation rules, and reporting requirements. Getting the K-1 wrong is one of the most common errors on individual returns because each item must be traced to the correct form and subject to the correct limitations.
Form 1065 Schedule K-1 - Partnership: Issued by partnerships and LLCs taxed as partnerships. Reports each partner's share of ordinary business income (loss), guaranteed payments, capital gains, rental income, interest, dividends, and separately stated items. Self-employment income is reported in Box 14 for general partners and some LLC members.
Form 1120-S Schedule K-1 - S-Corporation: Issued by S-corporations. Reports each shareholder's pro-rata share of ordinary income (loss), separately stated income items, deductions, and credits. No self-employment income for W-2 shareholder-employees - distributions are not SE income.
Form 1041 Schedule K-1 - Trust or Estate: Issued by trusts and estates to beneficiaries. Reports the character and amount of income distributed to each beneficiary. Character passes through - long-term capital gains distributed by a trust are long-term capital gains to the beneficiary.
Box 1 - Ordinary business income (loss): Net income from the partnership's trade or business. Goes to Schedule E, page 2. Subject to passive activity loss rules if taxpayer does not materially participate. Subject to self-employment tax for general partners and certain LLC members.
Box 2 - Net rental real estate income (loss): Rental activity income. Goes to Schedule E. Subject to passive activity rules (no offset against non-passive income unless real estate professional).
Box 5 - Interest income: Goes to Schedule B.
Box 6a - Ordinary dividends, 6b Qualified dividends: Goes to Schedule B; qualified portion eligible for preferential rates.
Box 9a/9b - Net long-term capital gain (loss): Goes to Schedule D.
Box 14 - Self-employment earnings (loss): Subject to SE tax on Schedule SE. General partners report ordinary income here. Limited partners generally do not have SE income from their K-1.
Box 20 - Other information: Contains items including §199A qualified business income information (code Z), UBIA of qualified property, and other items needed for the QBI deduction calculation.
A K-1 loss must clear three separate hurdles before it is deductible on the individual return:
Hurdle 1 - Basis limitation: Loss deductible only to extent of basis in the interest. IRC §704(d) for partnerships; §1366(d) for S-corps.
Hurdle 2 - At-risk limitation: Even with sufficient basis, loss deductible only to extent of the taxpayer's amount at risk under §465. Non-recourse debt generally does not increase at-risk amounts (except qualified non-recourse real estate financing).
Hurdle 3 - Passive activity loss limitation: Even with sufficient basis and at-risk amount, loss from passive activity (no material participation) deductible only against passive income. IRC §469.