This is the statement a partnership issues to each partner setting out their share of what the partnership earned, spent and distributed.
Partners tend to read the income figure and stop there. The boxes that matter more over time are the ones that carry forward, because they decide what a partner can actually use in a later year and they are not maintained by anybody else.
This covers when you should expect it, what the key boxes mean, how basis and the at-risk and passive rules interact with what you can claim, and what to do when the statement arrives late or looks wrong.
Schedule K-1 (Form 1065) is the statement a partnership issues to each partner after the close of the tax year. It reports the partner's distributive share of the partnership's income, deductions, credits, and other items. Partners use their K-1 to complete their personal tax returns, the K-1 is not filed with your return but its contents flow to multiple schedules on Form 1040.
When You Receive Your K-1
Partnerships are required to issue K-1s by the due date of Form 1065, March 15 (or the 15th day of the third month after the partnership's fiscal year ends). Extensions push the K-1 deadline to September 15. If you receive your K-1 late, you may need to file an extension (Form 4868) for your personal return.
Partners read the income figure and stop. The boxes that matter more are the ones that carry forward: basis, at-risk amounts and suspended losses. Those decide what you can actually use in a later year, and nobody maintains that history for you.
Ankit Sarawagi, CPA, CA, MBA · LinkedInKey Boxes on Schedule K-1 (Form 1065)
| Box | What It Reports / Where It Goes on 1040 |
|---|---|
| Box 1, Ordinary business income (loss) | Schedule E, Part II. Passive or non-passive depending on material participation. |
| Box 2, Net rental real estate income (loss) | Schedule E, Part II. Generally passive. |
| Box 3, Other net rental income (loss) | Schedule E, Part II. |
| Box 4, Guaranteed payments for services | Schedule E (services) or Schedule SE if self-employment. Usually in Box 14 also. |
| Box 5, Interest income | Schedule B. May also trigger net investment income tax. |
| Box 6a, Ordinary dividends | Schedule B. |
| Box 6b, Qualified dividends | Schedule B, and also reported on Form 1040 at preferential rate. |
| Box 7, Royalties | Schedule E, Part I, column (c). |
| Box 9a, Net long-term capital gain (loss) | Schedule D. |
| Box 9b, Collectibles (28%) gain (loss) | Schedule D. |
| Box 9c, Unrecaptured Section 1250 gain | Schedule D worksheet. |
| Box 11, Other income (loss) | Various schedules depending on code (A=Other portfolio income, C=Section 1256 contracts, etc.) |
| Box 12, Section 179 deduction | Form 4562. Subject to at-risk and basis limitations. |
| Box 13, Other deductions | Various. Code W = other deductions; attach statement. |
| Box 14, Self-employment earnings (loss) | Schedule SE. Box 14, code A = net earnings from self-employment. |
| Box 15, Credits | Form 3800 (general business credit) or specific credit forms. |
| Box 17, AMT items | Form 6251 (alternative minimum tax). |
| Box 19, Distributions | Not taxable unless they exceed your outside basis. |
| Box 20, Other information | Many codes. Code Z = Section 199A info for QBI deduction; Code AH = additional info. |
Partner's Outside Basis
Your outside basis is your tax investment in the partnership interest. It starts with your initial contribution, increases with your share of income and additional contributions, and decreases with distributions and your share of losses. You cannot deduct losses beyond your outside basis, suspended losses carry forward.
Pro Tip: Track your outside basis every year, not just when you sell. Many partners discover a basis shortage only when they face a large loss and cannot deduct it. Consider asking the partnership for a basis schedule.
At-Risk Rules
Section 465 limits your loss deductions to the amount you are 'at risk', generally, your cash investment plus any recourse debt for which you are personally liable. Non-recourse debt (except qualified nonrecourse financing for real estate) does not increase your at-risk amount.
Passive Activity Rules
K-1 losses are passive if you do not materially participate in the partnership's business. Material participation is tested against seven IRS tests, the most common being: (1) you participated more than 500 hours, or (2) your participation was substantially all of the participation by all individuals. Passive losses can only offset passive income (with limited exceptions).
Section 199A Qualified Business Income (QBI) Deduction
If the partnership conducts a qualified trade or business, Box 20 (Code Z) will show your share of qualified business income, W-2 wages, and unadjusted basis of qualified property. Use this information to complete Form 8995 or 8995-A for the 20% QBI deduction (subject to income thresholds and service business limitations).
Common K-1 Errors
- Entering Box 1 income on Schedule C instead of Schedule E (triggers incorrect self-employment tax)
- Forgetting to report Box 14 (self-employment) on Schedule SE
- Double-counting Box 6a dividends, both reported on Schedule B and visible on Schedule E
- Ignoring Box 20, Code Z, skipping the QBI deduction can be costly
- Not tracking basis, leading to inability to deduct legitimate losses
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Frequently Asked Questions
Do I owe taxes on K-1 income even if I received no cash?
Yes. You are taxed on your distributive share of partnership income whether or not it was distributed. This is the 'phantom income' issue common in real estate partnerships.
Is K-1 income from a partnership subject to self-employment tax?
Ordinary income in Box 1 is subject to SE tax only for general partners or LLC members who are treated as general partners (actively managing). Limited partners generally do not pay SE tax on Box 1.
What do I do if I get a corrected K-1 after filing my return?
File an amended return (Form 1040-X) if the correction changes your tax liability. Keep the corrected K-1 with your records.
Can I deduct a K-1 loss from passive activities against my wages?
No. Passive losses can only offset passive income. Excess passive losses are suspended and carry forward.
What is a tiered K-1?
If a partnership owns an interest in another partnership, the upper-tier partnership receives a K-1 from the lower-tier, and that information flows through to each partner's K-1. This creates complexity in tracking character of income and basis.
Written by
Ankit Sarawagi, CPA, CA, MBA
Ankit leads the finance team at Profitjets, where he has worked with 500+ businesses across the US on bookkeeping, tax and CFO-level strategy. He writes about the habits that keep small business books accurate all year. Connect on LinkedIn
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