To report K-1 income on your Form 1040, match each numbered box on the Schedule K-1 to the schedule it belongs on — ordinary business income to Schedule E, interest and dividends to Schedule B, capital gains to Schedule D through Form 8949, self-employment earnings to Schedule SE — then let those schedules feed Schedule 1, Schedule 2, or Schedule 3 of your 1040. The entity itself generally pays no federal income tax; you owe tax on your allocated share whether or not any cash was distributed.1Internal Revenue Service. Partner’s Instructions for Schedule K-1 (Form 1065) The exact box numbers depend on which K-1 you hold, so start there.
Figure Out Which K-1 You Have
Three versions of Schedule K-1 exist, and box 5 on one is not box 5 on another.
- Schedule K-1 (Form 1065) comes from partnerships, including multi-member LLCs taxed as partnerships.2Internal Revenue Service. Partner’s Instructions for Schedule K-1 (Form 1065)
- Schedule K-1 (Form 1120-S) comes from S corporations. Interest income sits in Box 4 instead of Box 5, and short-term capital gains in Box 7 instead of Box 8.3Internal Revenue Service. Schedule K-1 (Form 1120-S)
- Schedule K-1 (Form 1041) comes from estates and trusts. The layout is shorter but may include AMT adjustments.4Internal Revenue Service. Schedule K-1 (Form 1041)
The form you hold also controls your basis rules, which decides how much loss you can actually deduct. A partner’s basis includes a share of partnership liabilities. An S corporation shareholder’s basis includes only stock basis and amounts personally loaned to the company; the company’s own bank debt does not count.5Internal Revenue Service. S Corporation Stock and Debt Basis
Ordinary Business Income Goes on Schedule E
Box 1 on both the partnership and S corporation K-1 reports your share of ordinary business income or loss.2Internal Revenue Service. Partner’s Instructions for Schedule K-1 (Form 1065) Enter the amount on Schedule E, Part II, line 28, in the column that fits your entity type (passive or nonpassive, partnership or S corporation). Schedule E totals then move to Schedule 1 of Form 1040.
If Box 1 is positive and you materially participated, you are done with that line. If Box 1 is a loss, the amount has to pass four separate limitations before any of it reduces your tax.
Basis Limitation
You cannot deduct a loss larger than your adjusted basis in the entity. Losses that exceed basis are suspended and carry forward indefinitely, becoming deductible when your basis rises through new contributions, additional loans, or future allocated income.
At-Risk Limitation
Even with enough basis, your deductible loss is capped at the amount you could actually lose economically — cash and property contributed plus debt for which you are personally liable. Nonrecourse financing generally does not count. Blocked losses carry forward.
Passive Activity Rules
A passive activity is one you did not materially participate in during the year. The IRS lists seven material participation tests in Publication 925; the most frequently cited is more than 500 hours of work in the activity.6Internal Revenue Service. Publication 925 – Passive Activity and At-Risk Rules Passive losses can only offset passive income. Excess passive losses are suspended until you generate passive income or dispose of your entire interest in the activity. Report the calculation on Form 8582.7Internal Revenue Service. Instructions for Form 8582 – Passive Activity Loss Limitations
Rental real estate has a special rule. If you actively participate, you can deduct up to $25,000 of rental losses against nonpassive income. That allowance phases out by $1 for every $2 of AGI above $100,000 and disappears at $150,000. Married filing separately gets $12,500 with a $50,000 floor.8Office of the Law Revision Counsel. 26 USC 469 – Passive Activity Losses and Credits Limited
Excess Business Loss
For 2025, aggregate business losses above $313,000 ($626,000 joint) are reclassified as a net operating loss carryforward rather than a current deduction. The limitation is computed on Form 461, and the thresholds adjust each year.9Internal Revenue Service. Instructions for Form 461 – Limitation on Business Losses
Interest, Dividends, Capital Gains, and Rentals
Portfolio and rental items skip the loss gauntlet and go to the schedule for that income type. Box numbers depend on your K-1.
Interest and Dividends → Schedule B
Interest (Box 5 on the 1065 K-1, Box 4 on the 1120-S K-1) and ordinary dividends (Box 6a on the 1065, Box 5a on the 1120-S) go on Schedule B. You must file Schedule B if total interest or ordinary dividends exceed $1,500 for the year.10Internal Revenue Service. Instructions for Schedule B (Form 1040) Qualified dividends, broken out separately on the K-1, carry over to the qualified dividends line and are taxed at long-term capital gains rates.
Capital Gains → Form 8949 and Schedule D
Short-term and long-term capital gains and losses flow through Form 8949 to Schedule D.11Internal Revenue Service. Instructions for Form 8949 Collectibles gains (taxed at up to 28%) and unrecaptured Section 1250 gain from depreciated real estate (taxed at up to 25%) each have their own line on Schedule D.12Internal Revenue Service. Instructions for Schedule D (Form 1040) – Capital Gains and Losses
Rental Real Estate and Royalties → Schedule E
Net rental real estate income or loss (Box 2 on both the partnership and S corporation K-1) and royalty income (Box 7 on the partnership K-1) go on Schedule E. Rental losses run through the passive activity rules, including the $25,000 active participation exception described above.
Investment Interest Expense → Schedule A
Investment interest expense reported on the K-1 (Box 13, Code H on the partnership K-1) is an itemized deduction on Schedule A, not a Schedule E item. The deduction is capped at your net investment income for the year; any excess carries forward. Compute it on Form 4952.
Self-Employment Tax on Schedule SE
Whether K-1 income triggers self-employment tax depends on the entity.
If you are a general partner or an LLC member participating in management, your share of self-employment earnings from Box 14, Code A on the 1065 K-1 goes on Schedule SE. The computed tax moves to Schedule 2, and a deduction for half of it appears on Schedule 1, line 15, reducing your AGI.13Internal Revenue Service. Schedule SE (Form 1040) – Self-Employment Tax Limited partners are generally exempt from SE tax on their distributive share under IRC 1402(a)(13), but guaranteed payments for services remain subject to SE tax regardless of partner status.14Internal Revenue Service. Self-Employment Tax for Partners – IRS Practice Unit If you are an LLC member involved in operations, assume SE tax applies.
S corporation shareholders do not pay SE tax on K-1 income. Shareholder-employees take a W-2 salary subject to payroll tax, and the IRS expects that salary to be reasonable compensation for the services performed. A shareholder-employee who owns more than 2% must include S corporation-paid health insurance premiums in W-2 Box 1 wages (not subject to Social Security or Medicare), and can then claim the self-employed health insurance deduction on Schedule 1 if the coverage was established through the S corporation.15Internal Revenue Service. S Corporation Compensation and Medical Insurance Issues
Qualified Business Income Deduction
Ordinary business income from a trade or business (not rental or portfolio income) may qualify for the Section 199A deduction of up to 20%. The deduction is taken on your personal return, not the entity’s.16Internal Revenue Service. Instructions for Form 8995 – Qualified Business Income Deduction Simplified Computation
Your K-1 may include a statement titled “QBI/Qualified PTP Items Subject to Taxpayer-Specific Determinations.” Do not treat the full amount as QBI automatically. Income suspended by the passive activity rules or disallowed under basis limits is not QBI until the year it becomes deductible.16Internal Revenue Service. Instructions for Form 8995 – Qualified Business Income Deduction Simplified Computation
Use Form 8995 if your taxable income before the deduction is below $197,300 (single) or $394,600 (joint) for 2025. Above those thresholds, use Form 8995-A, which brings in W-2 wage and property-basis limits. Specified service businesses (law, accounting, consulting, and others) face further restrictions once income enters the phase-out range.
Net Investment Income Tax on Form 8960
An additional 3.8% tax applies to net investment income when modified AGI exceeds $200,000 (single), $250,000 (joint), or $125,000 (married filing separately). These thresholds are not indexed for inflation.17Internal Revenue Service. Questions and Answers on the Net Investment Income Tax
K-1 items caught by the NIIT include interest, dividends, capital gains, rental income, royalties, and income from any business you did not materially participate in. Gains from selling a partnership or S corporation interest also count to the extent you were a passive owner. Ordinary business income from an activity you materially participated in is generally outside the NIIT. The tax is calculated on Form 8960 and reported on Schedule 2.
Schedule K-3 and AMT Adjustments
If the entity has foreign-source income, foreign taxes, or international transactions, you will likely receive a Schedule K-3 with your K-1. The K-3 provides the detail you need for Form 1116 and other international forms.18Internal Revenue Service. Instructions for Schedule K-3 (Form 1065)
Foreign taxes paid can be claimed either as a credit on Form 1116 or as an itemized deduction on Schedule A.19Internal Revenue Service. Instructions for Form 1116 A simplified election lets you skip Form 1116 when all foreign income is passive and total foreign tax is $300 or less ($600 joint).
K-1 items that affect the alternative minimum tax — depreciation differences, passive activity adjustments, incentive stock option income — are reported on Form 6251.20Internal Revenue Service. Form 6251 – Alternative Minimum Tax – Individuals
Where It All Lands on Form 1040
Once the supporting schedules are done, three summary schedules collect the amounts.
- Schedule 1 picks up Schedule E business and rental income, the half-of-SE-tax deduction, the self-employed health insurance deduction, and the QBI deduction, feeding into AGI and taxable income on Form 1040.
- Schedule 2 collects self-employment tax from Schedule SE and net investment income tax from Form 8960, adding them to your total tax.
- Schedule 3 collects credits such as the foreign tax credit from Form 1116.
Capital gains and losses from Schedule D appear directly on Form 1040. Interest and dividends from Schedule B appear on the interest and dividend lines of Form 1040.
If Your K-1 Arrives Late or Not at All
Partnerships and S corporations file by March 15, estates and trusts by April 15, and many extend. If April arrives without your K-1, file Form 4868 to extend your 1040 to October 15. The extension gives you more time to file but not to pay, so estimate and remit what you expect to owe. Build the estimate from prior-year K-1s, interim statements from the entity, or any preliminary numbers it has shared.
When the K-1 does arrive, report items consistently with the entity. If you believe the entity made an error or you never receive a K-1 at all, file Form 8082 to notify the IRS that your reporting differs from what the entity filed.21Internal Revenue Service. Instructions for Form 8082 – Notice of Inconsistent Treatment or Administrative Adjustment Request (AAR)
Track Your Suspended Losses
Any loss blocked by the basis, at-risk, passive activity, or excess business loss rules carries forward and becomes deductible in a later year when the limitation eases. Those carryforwards are easy to lose when you change preparers or tax software, and losing them is expensive. Keep your K-1s and all related worksheets for as long as you hold the investment, plus three years after the return on which the final loss is claimed.