Form 1120-S K-1: What It Is and How to Report It

An S corporation has a tax status that allows its financial results to “pass through” to its owners, avoiding income tax at the corporate level. This process uses the Schedule K-1 of Form 1120-S, which details each shareholder’s specific portion of the company’s income, losses, deductions, and credits. The corporation files a copy with the IRS and provides each shareholder with their individual schedule.

Shareholders are liable for tax on their share of the corporation’s income, regardless of whether the company distributed cash to them. This structure ensures that profits are taxed once at the individual shareholder level. While the K-1 reports the shareholder’s portion of income, non-dividend distributions, which are a return of investment, are also reported on the schedule. Certain dividend distributions may be reported separately on Form 1099-DIV.

Information Required to Prepare Schedule K-1

To accurately complete a Schedule K-1, the S corporation must gather key information for every shareholder. This includes their identification details and a precise accounting of each shareholder’s ownership stake. Any changes in ownership percentage during the year must be tracked for a correct pro-rata allocation of financial items. The corporation must also maintain detailed financial records of all capital contributions from and distributions to each shareholder.

Understanding the Parts of Your Schedule K-1

A Schedule K-1 is organized into three distinct parts. The form provides a standardized report of a shareholder’s portion of the S corporation’s financial activities for the year.

Part I: Information About the Corporation

This section provides identifying information about the S corporation. It lists the corporation’s legal name, mailing address, and its Employer Identification Number (EIN).

Part II: Information About the Shareholder

Part II contains the shareholder’s name, address, and taxpayer identification number. This section also specifies the shareholder’s percentage of stock ownership for the tax year, which determines how the corporation’s financial figures were allocated. The K-1 may show only the last four digits of the shareholder’s identifying number for protection.

Part III: Shareholder’s Share of Current Year Items

This section details the specific financial items passed through to the shareholder.

• Box 1 reports ordinary business income or loss from the corporation’s primary activities.
• Box 2 details any net income or loss from rental real estate activities.
• Box 5 provides details on interest and dividend income, with ordinary dividends in Box 5b and qualified dividends in Box 5c.
• Box 11 shows the shareholder’s portion of any Section 179 deduction for expensing certain business property.
• Box 12 is used for other itemized deductions.
• Box 13 uses various codes to report tax credits, such as the low-income housing credit or credits for federal tax paid on fuels.
• Box 16 reports items affecting shareholder basis, such as property distributions (code D) or tax-exempt income.

Reporting K-1 Information on Your Personal Tax Return

The information from your Schedule K-1 must be transferred to your personal tax return, Form 1040. The K-1 instructions and tax preparation software provide guidance on where to report each item.

The figure from Box 1, ordinary business income or loss, is generally reported on Schedule E (Form 1040). This income is considered non-passive for shareholders who materially participate in the business. Net rental real estate income or loss from Box 2 is also reported on Schedule E but may be subject to passive activity limitations.

Other income items have specific destinations. Interest and dividend income from Box 5 are carried to Schedule B (Form 1040). The Section 179 deduction from Box 11 is used to complete Part I of Form 4562, Depreciation and Amortization, with the allowable deduction then reported on Schedule E. For credits listed in Box 13, the specific code provided will direct you to the correct form, such as Form 3800 for general business credits.

The Importance of Shareholder Basis

A shareholder’s basis is a measure of their economic investment in an S corporation, and each shareholder is responsible for tracking it. The starting point is the cost of the stock plus any loans the shareholder made to the corporation. This figure is then adjusted annually.

Basis is increased by additional capital contributions and the shareholder’s share of the corporation’s income. It is decreased by distributions of property or cash and by the shareholder’s share of corporate losses. Form 7203 is used to perform this calculation and may need to be filed with the shareholder’s tax return.

Tracking basis is important for two reasons. First, it limits the amount of corporate losses and deductions you can claim. If your share of the loss exceeds your basis, the excess is suspended and carried forward to future years. Second, basis determines the tax treatment of distributions. Distributions are generally a tax-free return of investment up to the amount of your basis, while any excess is treated as a taxable capital gain.