How to Fill Out a Schedule K-1 Tax Form

A Schedule K-1 is a tax document issued by pass-through business entities to their owners or beneficiaries. These businesses, which include partnerships, S corporations, estates, and trusts, do not pay income tax at the entity level. Instead, they “pass through” their financial results—such as income, losses, deductions, and credits—to the individual owners. Each owner then reports their allocated share of these items on their personal tax return.

If you are an investor in a partnership, a shareholder in an S corporation, or a beneficiary of a trust, you will receive a Schedule K-1. This form details your specific portion of the entity’s financial activity for the year. The form allows the IRS to track how the entity’s financial results are distributed and reported among its stakeholders.

Understanding Your Schedule K-1 Form

There are three versions of the Schedule K-1, each corresponding to the type of entity issuing it. Form 1065 is for partners in a partnership, Form 1120-S is for shareholders of an S corporation, and Form 1041 is for beneficiaries of an estate or trust. While they share a similar purpose and layout, the specific tax rules for each can differ.

Each K-1 is structured into three parts. Part I provides information about the entity, such as its name and Employer Identification Number (EIN). Part II contains information about you, the recipient. Verify that your personal details and your ownership percentage or share of profit and loss in Part II are accurate.

Part III is the core of the form, detailing your share of the entity’s income, deductions, and credits. For a partnership K-1 (Form 1065), Box 1 shows your share of ordinary business income or loss. Box 2 reports net rental real estate income or loss, and Box 5 contains interest income. These amounts are your portion of the total figures generated by the business.

Other boxes in Part III provide more specific information. For instance, Box 9 on a partnership K-1 details capital gains and losses, broken down by short-term and long-term. Box 13 reports various deductions, identified by codes. Common codes include ‘A’ for cash charitable contributions and ‘H’ for investment interest expense.

Box 20 on Form 1065 and Box 17 on Form 1120-S are for “Other Information” and can contain a wide range of data points identified by codes. For example, information for the Qualified Business Income (QBI) deduction is reported with code ‘Z’ on a partnership K-1 and with code ‘V’ on an S corporation K-1. The K-1 should come with attached statements that explain these codes.

The K-1 for S corporation shareholders (Form 1120-S) is similar, with Box 1 showing ordinary business income and other boxes for interest income and dividends. The K-1 for beneficiaries of an estate or trust (Form 1041) is more focused on investment and distributable income, with boxes for interest, dividends, and capital gains.

Transferring K-1 Information to Your Personal Tax Return

After reviewing your K-1, you must transfer the figures to the correct locations on your personal tax return, primarily Form 1040 and its supporting schedules. You do not file the K-1 with your return, but you must use its data to complete your filing. The instructions provided with the K-1 serve as a roadmap for this process.

Ordinary business income or loss from a partnership or S corporation is reported on Schedule E, Part II. This schedule is used for supplemental income and loss. Depending on whether your involvement in the business is considered passive or non-passive, the amount may flow to a different column on Schedule E.

Portfolio income items have their own designated forms. Interest income is transferred to Schedule B, Part I. Similarly, ordinary dividends are reported on Schedule B, Part II. Capital gains and losses are carried over to Schedule D, the form for capital gains and losses.

Deductions and credits also have specific destinations. Charitable contributions are reported on Schedule A, provided you are itemizing deductions. The Qualified Business Income (QBI) information is used to complete Form 8995 or 8995-A to calculate your deduction. Any foreign taxes paid are used to complete Form 1116 to claim a foreign tax credit.

The K-1 from an estate or trust (Form 1041) follows a similar logic. Interest income and dividend income flow to Schedule B, and capital gains are reported on Schedule D. Any directly apportioned deductions, such as depreciation, would be entered on the appropriate line of Schedule E.

Key Tax Concepts for K-1 Recipients

Reporting the numbers from a Schedule K-1 is more than a simple data transfer exercise; several underlying tax concepts govern whether you can deduct losses or how you treat the income reported. The first of these is basis. Your basis is your economic investment in the entity, which includes cash and property you contributed, increased by income allocated to you, and decreased by distributions and losses allocated to you. You cannot deduct losses from the entity that exceed your calculated basis.

A related but separate concept is the at-risk limitation, which is calculated on Form 6198. These rules state that you can only deduct losses up to the amount you are personally “at risk” of losing in the activity. Your at-risk amount includes the money and property you contributed and certain debts for which you are personally liable. It does not include nonrecourse loans, where you have no personal assets at stake.

The third limitation involves passive activities, which are governed by the rules on Form 8582. A passive activity is a trade or business in which you do not “materially participate,” meaning you are not involved in the operations on a regular, continuous, and substantial basis. Losses from passive activities can only be used to offset income from other passive activities. They cannot be used to reduce non-passive income like wages or portfolio income.

These three limitations—basis, at-risk, and passive activity—are applied sequentially. A loss must first be allowable under the basis rules, then the at-risk rules, and finally the passive activity rules. Any loss that is disallowed by one of these limitations is not permanently lost. Instead, it is suspended and carried forward to future years, where it can be deducted if you have sufficient basis, at-risk amounts, or passive income.

Handling K-1 Distributions and Corrections

A common point of confusion is the difference between the income reported in Part III and the cash distributions reported elsewhere, such as in Box 19 on Form 1065. You are taxed on your share of the entity’s income regardless of whether you actually received that money in cash. The income in Part III is your allocated portion of the entity’s profits for the year, which increases your investment basis.

Distributions, on the other hand, are actual payments of cash or property made to you by the entity. These distributions are often treated as a non-taxable return of your investment and reduce your basis in the entity. A distribution only becomes taxable if the cash you receive exceeds your entire basis in the partnership or S corporation.

Receiving a Schedule K-1 late is a frequent issue since many pass-through entities file for extensions. If you have not received your K-1 and the filing deadline is approaching, you should file for an extension for your personal return using Form 4868. This gives you an automatic six-month extension to file, providing more time for the K-1 to arrive.

If you receive a K-1 that you believe contains an error, do not alter the form yourself or file your return with the incorrect data. The first step is to contact the preparer for the entity, explain the potential error, and request a corrected Schedule K-1. If a corrected version is issued, the entity must send a copy to both you and the IRS. If you and the entity disagree on an item’s treatment, you may need to file Form 8082, Notice of Inconsistent Treatment, with your tax return to disclose the discrepancy.