To report the ordinary business income or loss from a K-1, take the Box 1 amount from your Schedule K-1 and enter it on Schedule E of your Form 1040: Part II if the K-1 came from a partnership or multi-member LLC (Form 1065), Part III if it came from an S-corporation (Form 1120-S). From Schedule E the total flows to Schedule 1 and onto your 1040, where it’s taxed at your ordinary income rates.1Internal Revenue Service. About Schedule E (Form 1040), Supplemental Income and Loss Whether that Box 1 figure also triggers self-employment tax, qualifies for the 20% QBI deduction, or (if it’s a loss) is actually deductible this year depends on your entity type, your role in the business, and your basis.
Enter the Figure Exactly as the K-1 Shows It
The IRS runs K-1 data through its Automated Underreporter system, which matches what the entity reported about you against what you reported on your 1040.2Internal Revenue Service. Automated Underreporter (AUR) PIA Enter the Box 1 number as it appears, even if you believe it’s wrong. Changing it on your return guarantees a mismatch notice. If the K-1 is genuinely incorrect, the fix belongs on the entity’s side, not yours (see below).
Box 1 is the entity’s net ordinary operating profit or loss, allocated to your ownership share. It does not include portfolio income (interest, dividends, capital gains), Section 179 expense, charitable contributions, foreign taxes, or guaranteed payments to partners. Those appear in other boxes because each one carries its own treatment on your personal return.3Internal Revenue Service. Partners Instructions for Schedule K-1 (Form 1065) (2025) If Box 1 looks small compared to how the business performed, the rest of the K-1 is where the other numbers landed.
Whether Box 1 Triggers Self-Employment Tax
This is the first question that changes real dollars, and it turns entirely on who you are in the entity.
If you’re a general partner or an actively participating member of a non-corporate LLC, your full Box 1 share is generally subject to self-employment tax at the combined 15.3% rate: 12.4% for Social Security up to the annual wage base ($184,500 for 2026) and 2.9% for Medicare on all of it.4Internal Revenue Service. Self-Employment Tax (Social Security and Medicare Taxes)5Social Security Administration. Contribution and Benefit Base An additional 0.9% Medicare surtax applies once your combined earnings cross $200,000 ($250,000 for joint filers). You compute this on Schedule SE.
Limited partners generally owe no SE tax on their Box 1 share. They do owe SE tax on any guaranteed payments for services reported in Box 4.6Internal Revenue Service. Partners Instructions for Schedule K-1 (Form 1065)
S-corporation shareholders owe no SE tax on Box 1 at all. The trade-off is that any shareholder performing substantial services must first receive reasonable W-2 wages from the corporation, with payroll taxes already withheld on those wages.7Internal Revenue Service. S Corporation Employees, Shareholders and Corporate Officers What’s left after those wages is what shows up in Box 1 and passes through free of SE tax.
The QBI Deduction on Your Box 1 Amount
Box 1 is the starting point for the Section 199A Qualified Business Income deduction, worth up to 20% of qualified business income. Legislation signed in July 2025 made the deduction permanent, so it continues to apply for 2026 and beyond.
Your QBI isn’t identical to Box 1. Partners must subtract any guaranteed payments for services, which don’t count as QBI. S-corporation shareholders must exclude the W-2 wages they received from the entity.8Internal Revenue Service. Calculation of Plan Compensation for Partnerships
Below the taxable-income thresholds (roughly $201,750 for most filers and $403,500 for joint filers in 2026), the deduction is simply 20% of your QBI. Above those thresholds, a W-2 wage and qualified property limitation phases in; the full limitation applies at roughly $276,750 for most filers and $553,500 for joint filers. Owners of specified service businesses (health, law, accounting, consulting, athletics, financial services) lose the deduction entirely at the top of the phase-in range.
If Box 1 Is a Loss: The Four Limitations
You can’t just drop a loss onto Schedule E and deduct it. Four tests apply in sequence, and a loss has to clear all of them in order before it reduces your taxable income.9Internal Revenue Service. S Corporation Stock and Debt Basis
1. Basis
You cannot deduct a loss that exceeds your adjusted basis in the entity. Basis works differently in each entity type.
A partner’s basis includes contributed cash and property plus the partner’s share of partnership liabilities, including (in some cases) nonrecourse debt. That liability share can create meaningful basis.
An S-corporation shareholder’s basis comes from stock purchases, capital contributions, and loans the shareholder personally makes to the corporation.10Office of the Law Revision Counsel. 26 U.S. Code 1366 – Pass-Thru of Items to Shareholders Corporate borrowing does not give shareholders basis, even when they personally guarantee it. Only a direct shareholder loan to the corporation counts. This is where many S-corp owners get stuck expecting to deduct a loss they can’t.
Any loss that exceeds your basis is suspended and carries forward indefinitely. More capital contributed or (for partners) additional entity liabilities can restore basis in a later year and release the loss. S-corporation shareholders must file Form 7203 in any year they claim a loss, receive a non-dividend distribution, or dispose of stock.11Internal Revenue Service. Instructions for Form 7203
One trap for S-corp owners: if you sell all your stock while losses are still suspended at the basis level, those losses disappear permanently. They don’t release on disposition the way passive losses do.9Internal Revenue Service. S Corporation Stock and Debt Basis
2. At-Risk
Losses that survive basis next have to clear the at-risk rules. Your at-risk amount generally covers cash and property you contributed plus any debt for which you’re personally liable. Nonrecourse financing you have no personal obligation to repay is excluded. For most small-business owners the at-risk amount tracks basis closely; the gap matters when the entity carries significant nonrecourse debt. Blocked losses carry forward until you add to your at-risk amount.
3. Passive Activity
A loss that clears basis and at-risk still has to be classified. If you don’t materially participate in the business, the loss is passive and can only offset passive income. It can’t offset wages, interest, or other non-passive earnings.12Internal Revenue Service. Publication 925 (2025), Passive Activity and At-Risk Rules
The IRS gives you seven material-participation tests. Passing any one is enough. The two most used:
- You participated for more than 500 hours during the tax year.
- Your participation was substantially all the participation by anyone in the activity, including non-owners.
Other tests cover situations like working more than 100 hours when no one else worked more, or materially participating in five of the previous ten years.12Internal Revenue Service. Publication 925 (2025), Passive Activity and At-Risk Rules
Suspended passive losses carry forward indefinitely and are fully released when you dispose of your entire interest in the activity in a taxable transaction where all gain or loss is recognized.13Office of the Law Revision Counsel. 26 U.S. Code 469 – Passive Activity Losses and Credits Limited At that point they convert to non-passive losses that can offset any income. A sale to a related party doesn’t trigger the release.
4. Excess Business Loss
One cap remains. If total business losses across all your activities exceed total business income by more than a threshold, the excess is disallowed for the current year and becomes a net operating loss carried forward. The threshold is inflation-adjusted and published in the instructions for Form 461.14Internal Revenue Service. Instructions for Form 461 For 2025 it was $313,000 for single filers and $626,000 for joint filers; the 2026 amount may differ following recent legislation.
When the K-1 Itself Is Wrong
Don’t adjust the number on your return. Contact the entity’s tax preparer and ask for a corrected K-1. For partnerships not under the centralized audit rules, the entity re-files Form 1065 with the “Amended Return” box checked, attaches corrected K-1s, and includes a statement describing what changed.15Internal Revenue Service. Guidance for Amended Partnership Returns Once you have the corrected K-1, amend your own return on Form 1040-X. Acting proactively is faster than waiting for the IRS matching system to issue a CP2000 notice.
Track Your Basis Every Year
The IRS doesn’t track basis for you. The entity reports income, losses, and distributions on the K-1, but calculating and carrying forward your basis is your job, and the basis test above depends on it.
S-corporation shareholders have a formal tool. Form 7203 is required in any year you claim a loss, receive a distribution that could exceed stock basis, dispose of stock, or receive a loan repayment from the corporation.11Internal Revenue Service. Instructions for Form 7203 Filling it in each year, even when not required, keeps your records clean. Partners have no equivalent mandatory form but should maintain the same kind of year-by-year worksheet, especially given the added complexity of liability-based basis adjustments.
An understated basis can lead you to report phantom gain on a distribution or sale. An overstated basis means losses you weren’t entitled to deduct, which draws an accuracy penalty if the IRS catches it later.