What Is a K-1 Example and How Does It Break Down Income?

Tax forms can be complicated, and Schedule K-1 is no exception. This document reports income, deductions, and other tax-related items for individuals involved in partnerships, S corporations, estates, or trusts. Unlike a W-2 or 1099, a K-1 breaks earnings into different categories that affect taxation.

Because different types of income are taxed differently, understanding a K-1 is essential for accurate filing. Small differences in classification can impact tax rates and deductions.

Structure of a Typical K-1

A Schedule K-1 details an individual’s share of income, deductions, and other tax-related items from a pass-through entity. It includes sections identifying the taxpayer, the issuing entity, and the financial details that must be reported on a personal tax return.

The top portion lists the entity’s name, address, and Employer Identification Number (EIN), along with the recipient’s name, Social Security Number (SSN), and ownership percentage. This percentage determines how much of the entity’s income or losses are allocated to the individual.

The form also reports the taxpayer’s share of liabilities, which is particularly relevant for partnerships. Recourse and nonrecourse liabilities are listed separately, as they impact the ability to deduct losses. Recourse debt, where the taxpayer is personally liable, allows for greater loss deductions than nonrecourse debt, which is only secured by the entity’s assets.

Types of Allocated Income

A Schedule K-1 categorizes income into different types, each with its own tax treatment. These classifications determine how earnings are reported and what tax rates apply. Some income is taxed at ordinary rates, while other types qualify for preferential treatment or are subject to additional taxes.

Ordinary Earnings

Ordinary business income represents the taxpayer’s share of the entity’s net profit or loss. This income is taxed at the individual’s marginal rate, which in 2024 ranges from 10% to 37%. Unlike wages reported on a W-2, this income is not subject to automatic withholding, meaning recipients may need to make estimated tax payments throughout the year to avoid penalties under IRS rules.

For instance, if a partner owns 25% of a business generating $400,000 in net income, their K-1 will report $100,000 in ordinary business income. This amount is included on their personal tax return (Form 1040, Schedule E) and is subject to self-employment tax if the entity is a partnership. The self-employment tax rate for 2024 is 15.3% on net earnings up to $168,600, with a 2.9% Medicare tax applying to amounts above this threshold.

Rental and Real Estate Income

Income from rental properties held within a partnership or S corporation is reported separately. This income is generally considered passive, meaning it is not subject to self-employment tax. However, it may be subject to the 3.8% Net Investment Income Tax (NIIT) if the taxpayer’s modified adjusted gross income exceeds $200,000 for single filers or $250,000 for married couples filing jointly.

Depreciation deductions can significantly reduce taxable rental income. For example, if a partnership owns a commercial building with a cost basis of $1 million, it can claim annual depreciation of approximately $25,641 using the 39-year straight-line method under MACRS. If a partner has a 10% ownership stake, their K-1 will report $2,564 in depreciation deductions, reducing their taxable rental income.

Investment Gains

A K-1 may also report capital gains and losses from asset sales. These gains are categorized as short-term (held for one year or less) or long-term (held for more than one year), with different tax rates applying. Short-term gains are taxed at ordinary income rates, while long-term gains benefit from lower rates of 0%, 15%, or 20%, depending on income level.

For example, if a partnership sells stock for a $50,000 gain after holding it for three years, and a partner has a 20% ownership interest, their K-1 will report a $10,000 long-term capital gain. This amount is reported on Schedule D of their personal tax return. If their total taxable income is $100,000, they would owe 15% in capital gains tax, or $1,500, on this amount.

Investment income may also include dividends and interest. Qualified dividends, which meet IRS holding period requirements, are taxed at the same favorable rates as long-term capital gains, while ordinary dividends and interest are taxed at regular income rates.

Deduction Categories

A Schedule K-1 doesn’t just report income—it also allocates deductions that can reduce taxable liability. These deductions vary based on the entity’s activities and the taxpayer’s level of involvement. Some deductions offset ordinary income, while others provide specific tax benefits.

Business-Related Deductions

Certain expenses incurred by a partnership or S corporation can be passed through as deductions. These include operating costs such as rent, utilities, and employee wages. One significant deduction is the Section 179 expense, which allows businesses to immediately deduct the cost of qualifying equipment rather than depreciating it over time. For 2024, the maximum Section 179 deduction is $1.22 million, with a phase-out beginning at $3.05 million in total equipment purchases.

Another common deduction is the Qualified Business Income (QBI) deduction under Section 199A, which allows eligible taxpayers to deduct up to 20% of their pass-through income. However, this deduction is subject to limitations based on taxable income and the type of business. If taxable income exceeds $232,100 (single) or $464,200 (married filing jointly), the deduction may be reduced or eliminated for certain service-based businesses like law firms and medical practices.

Self-Employment Items

For individuals receiving K-1 income from a partnership, self-employment tax is a major factor. Unlike S corporation shareholders, who typically receive wages subject to payroll tax, general partners must pay self-employment tax on their share of business income. This tax consists of a 12.4% Social Security portion (on earnings up to $168,600 in 2024) and a 2.9% Medicare portion, with an additional 0.9% Medicare surtax applying to earnings above $200,000 for single filers or $250,000 for joint filers.

To mitigate this tax burden, partners can deduct 50% of their self-employment tax as an adjustment to income on their personal tax return (Form 1040, Schedule 1). For example, if a partner’s K-1 reports $120,000 in self-employment income, their total self-employment tax would be approximately $18,360. They could then deduct $9,180, reducing their taxable income.

Special Credits

Some K-1 recipients may qualify for tax credits that directly reduce their tax liability. Unlike deductions, which lower taxable income, credits provide a dollar-for-dollar reduction in taxes owed. One example is the Research & Development (R&D) Tax Credit under Section 41, which benefits businesses engaged in qualified research activities. If a partnership qualifies for a $50,000 R&D credit, and a partner has a 10% ownership stake, their K-1 would allocate a $5,000 credit to their personal return.

Another common credit is the Foreign Tax Credit (FTC), which applies when a pass-through entity pays taxes to a foreign government. This credit prevents double taxation by allowing U.S. taxpayers to offset their domestic tax liability. If an S corporation pays $20,000 in foreign taxes and a shareholder owns 25% of the company, their K-1 would report a $5,000 foreign tax credit, which they can claim on Form 1116.

Example Lines and Codes

A Schedule K-1 contains multiple lines and codes that direct taxpayers on where to report specific amounts. Each item corresponds to an IRS tax form and determines how income, deductions, and credits are applied. Understanding these codes is necessary for correct tax filing and to avoid potential IRS scrutiny.

For instance, Line 11 reports “Other Income (Loss),” often including Code A for undistributed capital gains, which must be recorded on Schedule D. Similarly, Line 13 frequently features Code W, indicating Section 754 depreciation adjustments. Line 20 covers Alternative Minimum Tax (AMT) items, with Code A signaling tax preference items that may increase AMT liability. Taxpayers subject to AMT must complete Form 6251 to determine whether additional tax is owed.