To report a Schedule K-1 on your tax return, take each numbered box and move it to the schedule or form that matches the type of income: ordinary business income and rental income go on Schedule E, Part II; interest and dividends go on Schedule B; capital gains, including Section 1231 gains, go on Schedule D; Section 179 runs through Form 4562; foreign taxes flow through Form 1116; and self-employment earnings from a partnership K-1 land on Schedule SE. You do not attach the K-1 itself to your Form 1040. The IRS already has a copy from the entity and will match your figures against theirs, so the numbers on your return need to line up with the numbers on the K-1.
Which K-1 You’re Holding
Three entities issue K-1s, and the box numbering differs among them.
- A partnership files Form 1065 and sends each partner a K-1 for their share of income, losses, deductions, and credits. You owe tax on your allocated share whether or not any cash was distributed.1Internal Revenue Service. About Form 1065, U.S. Return of Partnership Income
- An S corporation files Form 1120-S and issues a K-1 to each shareholder. The box numbers differ from the partnership version.2Internal Revenue Service. About Form 1120-S, U.S. Income Tax Return for an S Corporation
- An estate or trust files Form 1041 and sends a K-1 to each beneficiary showing distributed or required-to-be-distributed income, deductions, and credits.3Internal Revenue Service. Instructions for Schedule K-1 (Form 1041) for a Beneficiary Filing Form 1040 or 1040-SR (2025)
Partnership K-1s carry the most complexity because partner basis includes entity-level debt and the form covers self-employment earnings and guaranteed payments. S corp K-1s are narrower: shareholders generally cannot count corporate debt in basis, and there is no self-employment component. Estate and trust K-1s have the fewest boxes.
Where Each Box Goes
The K-1 is dense with numbered boxes and letter codes, but a handful of boxes drive most individual returns. The box numbers below refer to the partnership K-1 unless noted.
Box 1 — Ordinary Business Income or Loss
This is the entity’s net operating profit or loss from its regular business. It goes on Schedule E, Part II, with a separate line per entity and columns splitting passive from non-passive amounts.4Internal Revenue Service. Schedule E (Form 1040) – Supplemental Income and Loss (2025) Whether the income is passive or non-passive depends on whether you materially participate. Before entering a loss here, run the three limitation tests below.
Box 2 — Rental Real Estate Income or Loss
Rental income and loss also go on Schedule E, Part II. Rental activity is passive by default under Section 469 no matter how many hours you spend on it, with two exceptions covered in the loss section.5Office of the Law Revision Counsel. 26 U.S. Code 469 – Passive Activity Losses and Credits Limited
Box 4 — Guaranteed Payments (Partnerships Only)
Guaranteed payments are amounts the partnership agreed to pay you regardless of profitability, similar to a salary. They are ordinary income and are subject to self-employment tax.6Internal Revenue Service. Partner’s Instructions for Schedule K-1 (Form 1065) (2025) S corporations don’t use guaranteed payments; shareholder-employees take W-2 wages instead.
Boxes 5 and 6 — Interest and Dividends
Box 5 interest and Box 6a ordinary dividends flow to Schedule B and combine with your other investment income. Qualified dividends in Box 6b flow through to the qualified dividends line on Form 1040 and are taxed at long-term capital gains rates.6Internal Revenue Service. Partner’s Instructions for Schedule K-1 (Form 1065) (2025)
Section 1231 Gains and Losses — Box 10 (Partnership) or Box 9 (S Corp)
Gains and losses from business property held more than a year go on Schedule D, combined with your personal investment gains and losses.7Internal Revenue Service. Shareholder’s Instructions for Schedule K-1 (Form 1120-S) (2025) Section 1231 gains are taxed as long-term capital gains; Section 1231 losses are ordinary, which makes them more valuable against other income.
Section 179 Deduction — Box 12 (Partnership) or Box 11 (S Corp)
Do not take this deduction at face value. It runs through Form 4562, Part I, on your personal return, where it is subject to your own business income limitation from all sources before the allowed amount flows back to Schedule E.8Internal Revenue Service. Instructions for Form 4562 (2025) For 2026, the maximum deduction is $2,560,000, phasing out beginning at $4,090,000 in total equipment placed in service.
Self-Employment Earnings — Box 14, Code A (Partnership Only)
General partners use this figure to complete Schedule SE. See the self-employment section below for what to subtract before entering it.6Internal Revenue Service. Partner’s Instructions for Schedule K-1 (Form 1065) (2025)
Excess Business Interest Expense — Box 13, Code K
If this box has a number, you file Form 8990. Business interest is limited to your business interest income plus 30% of adjusted taxable income; disallowed interest carries forward.9eCFR. 26 CFR 1.163(j)-3 – Relationship of the Section 163(j) Limitation
Distributions — Box 19 (Partnership) or Box 16 (S Corp)
Cash or property distributions are generally not taxable so long as they don’t exceed your basis in the entity. Anything above basis is a taxable capital gain, which is why basis tracking matters.
Foreign Taxes — Box 21 (Partnership) and Schedule K-3
Foreign taxes paid by the entity feed Form 1116, where you calculate the foreign tax credit against your U.S. tax liability up to the foreign-sourced income limit. S corporations report most of the international detail on Schedule K-3, which you’ll need to complete Form 1116.7Internal Revenue Service. Shareholder’s Instructions for Schedule K-1 (Form 1120-S) (2025)
Self-Employment Tax on Partner K-1s
This is the item that surprises first-time partners. As a general partner, your share of ordinary partnership income is typically subject to self-employment tax on top of income tax. The self-employment tax rate is 15.3%, made up of 12.4% for Social Security up to the annual wage base and 2.9% for Medicare with no cap, plus an additional 0.9% Medicare surtax on self-employment income above $200,000 ($250,000 for joint filers).10Internal Revenue Service. Self-Employment Tax (Social Security and Medicare Taxes)
Before you enter the Box 14 amount on Schedule SE, reduce it by any Section 179 deduction you claimed, unreimbursed partnership expenses, and depletion on oil and gas properties. Do not reduce it by the self-employed health insurance deduction. S corporation shareholders do not owe self-employment tax on K-1 income; their compensation runs through W-2 wages with payroll taxes withheld at the corporate level.
Three Tests Before You Can Deduct a K-1 Loss
A loss on your K-1 does not automatically reduce your tax bill. It must clear three separate limits, applied in this order. A loss that fails any test is suspended and carried forward.
Basis Limitation
You cannot deduct losses beyond your tax basis in the entity. Basis starts with what you contributed, increases with your share of income and additional contributions, and decreases with distributions and losses. For partners, basis also includes your share of partnership liabilities, which can meaningfully expand the losses you can deduct. For S corporation shareholders, corporate-level debt does not add to basis; only your stock investment and any direct loans you personally made to the corporation count.
S corporation shareholders who claim a loss, take a distribution, dispose of stock, or receive a loan repayment must file Form 7203 with their personal return.11Internal Revenue Service. Instructions for Form 7203 Partnerships have no equivalent mandatory IRS form, but the K-1 instructions include a basis worksheet.
At-Risk Limitation
Losses that clear basis next face the at-risk rules under Section 465. Your at-risk amount is the money you could actually lose: cash contributed, property contributed, and debt for which you are personally liable. Nonrecourse loans generally don’t count, with a main exception for qualified nonrecourse financing secured by real estate.12Internal Revenue Service. Publication 925 (2025), Passive Activity and At-Risk Rules Losses above your at-risk amount are suspended and carry forward until the amount rises.
Passive Activity Loss Limitation
The third hurdle, under Section 469, is often the most restrictive. Passive losses can only offset passive income. If you do not materially participate in the activity, the loss can only be deducted against income from other passive activities, with the excess carried forward indefinitely.5Office of the Law Revision Counsel. 26 U.S. Code 469 – Passive Activity Losses and Credits Limited
Material participation means regular, continuous, and substantial involvement. The most common test is logging more than 500 hours in the activity during the year, though six other tests can also qualify you. Limited partners can use only three of the seven tests.12Internal Revenue Service. Publication 925 (2025), Passive Activity and At-Risk Rules
Rentals are passive by default, but two exceptions can free losses:
- The $25,000 active-participation allowance lets you deduct up to $25,000 of rental real estate losses against non-passive income if you actively participated. Active participation is a lower bar than material participation: approving tenants, setting terms, and authorizing repairs qualifies. The allowance phases out by 50 cents for every dollar of modified AGI above $100,000 and disappears at $150,000.13Internal Revenue Service. Instructions for Form 8582 (2025)
- Real estate professional status lets you treat rentals as non-passive if you spend more than 750 hours in real property trades or businesses and that time represents more than half of your working hours for the year. You still must materially participate in each rental activity, though an election to group all rentals as one activity can simplify the test.12Internal Revenue Service. Publication 925 (2025), Passive Activity and At-Risk Rules
When you completely dispose of your entire interest in a passive activity in a taxable transaction, all previously suspended losses from that activity become fully deductible in the year of disposition.14Internal Revenue Service. Topic No. 425, Passive Activities – Losses and Credits Suspended passive activity credits, though, are not released on disposition.
Qualified Business Income Deduction
The Section 199A deduction lets eligible owners of partnerships, S corporations, and sole proprietorships deduct up to 20% of qualified business income.15GovInfo. 26 CFR 1.199A-1 – Operational Rules The deduction, originally set to expire after 2025, was made permanent by the One, Big, Beautiful Bill Act.
Below the income thresholds, you simply take 20% of QBI. Above them, wage and property limitations phase in, and specified service businesses like law, accounting, health care, and consulting face further restrictions that can reduce or eliminate the deduction. For 2026, the thresholds begin at $403,500 for joint filers and $201,750 for single filers. Your K-1 usually includes a statement with the QBI figures needed for the calculation, including the entity’s W-2 wages and the unadjusted basis of qualified property. The final deduction is taken on Form 1040 directly, not on Schedule E. It lowers taxable income but not AGI.
Net Investment Income Tax
K-1 income can trigger the 3.8% net investment income tax if your modified AGI exceeds $200,000 (single) or $250,000 (joint). The surtax applies to the lesser of your net investment income or the amount of MAGI above the threshold, and it is reported on Form 8960.16Internal Revenue Service. Instructions for Form 8960 (2025)
Not everything on the K-1 counts. Income already subject to self-employment tax, such as a general partner’s ordinary business income, is generally excluded. Passive K-1 income from an activity in which you do not materially participate, rental income, interest, dividends, and capital gains from the K-1 are all included. Gains from selling a partnership interest or S corporation stock also count in most cases.
Estimated Tax and What to Do If Your K-1 Is Late
Pass-through income isn’t withheld at the source, so if your K-1 amounts are meaningful, you make quarterly estimated tax payments on Form 1040-ES.17Internal Revenue Service. Businesses 1 – Estimated Tax You avoid the underpayment penalty if you owe less than $1,000 at filing, or paid at least 90% of the current year’s liability, or paid 100% of the prior year’s total tax (110% if your AGI exceeds $150,000).18Internal Revenue Service. Underpayment of Estimated Tax by Individuals Penalty The prior-year safe harbor is helpful when K-1 income swings year to year.
Calendar-year partnerships and S corporations must furnish K-1s by March 15, but many entities file Form 7004 for an automatic six-month extension, which can push your K-1 into September.19Internal Revenue Service. Publication 509 (2026), Tax Calendars20Internal Revenue Service. Instructions for Form 7004 If April 15 arrives without your K-1, file your own extension on Form 4868 to avoid the failure-to-file penalty. Interest still runs on any unpaid balance, so estimate the income from the entity and send a payment with the extension. File your complete return once the K-1 lands.
Some states require pass-through entities to withhold state tax for nonresident owners. If you hold an interest in an entity in a state where you don’t live, check whether withholding was made on your behalf; those amounts should appear on the K-1 or an accompanying state schedule and can be claimed on the corresponding state return.