A Schedule K-1 tax form is the document a partnership, S corporation, trust, or estate sends you each year to report your share of its income, losses, deductions, and credits. The entity itself generally doesn’t pay federal income tax on that activity. You do, on your personal return, using the numbers on the K-1.
If one showed up in your mail or inbox, the practical question is what to do with it. The short version: the K-1 tells you which boxes have numbers, and the instructions tell you which lines of your Form 1040 those numbers belong on. The longer version depends on what kind of entity sent it and what’s in the boxes.
Who Sends a K-1
Three kinds of entities issue K-1s. A partnership files Form 1065 and sends each partner a K-1 (Form 1065).1Office of the Law Revision Counsel. 26 USC 701 – Partners, Not Partnership, Subject to Tax An S corporation files Form 1120-S and sends each shareholder a K-1 (Form 1120-S) showing their pro-rata share.2Office of the Law Revision Counsel. 26 USC 6037 – Return of S Corporation A trust or estate files Form 1041 and sends a K-1 (Form 1041) to beneficiaries allocated income for the year.3Office of the Law Revision Counsel. 26 USC 6034A – Information to Beneficiaries of Estates and Trusts
LLCs come up often because their tax treatment isn’t obvious from the name. A multi-member LLC defaults to partnership treatment and issues K-1s. A single-member LLC is disregarded and issues none. An LLC that elects S corporation status issues K-1s to its shareholders; one that elects C corporation status doesn’t, because C corporations pay their own tax.4Internal Revenue Service. LLC Filing as a Corporation or Partnership
One structure worth flagging: a publicly traded partnership. Its interests trade like stock, but it still sends you a K-1 rather than a 1099. Losses from a publicly traded partnership are walled off; you can only use them against income from that same partnership, not against other passive income and not against other publicly traded partnerships.5Office of the Law Revision Counsel. 26 USC 469 – Passive Activity Losses and Credits Limited
What the Form Shows
Every K-1 has three parts. Part I identifies the entity: name, address, and EIN. Part II identifies you: your name, taxpayer ID, and ownership percentage at the start and end of the year. On a partnership K-1, Part II also tracks your capital account, from opening balance through contributions, withdrawals, and closing balance.6Internal Revenue Service. Partner’s Instructions for Schedule K-1 (Form 1065)
Part III is where the numbers you actually report live. It splits your share of the entity’s activity by category: ordinary business income or loss, net rental real estate income, guaranteed payments, interest, dividends, royalties, capital gains, and more. Each item sits in its own box because each one flows to a different place on your personal return.7Internal Revenue Service. Instructions for Form 1065 – Schedules K and K-1 Part III also carries deductions and credits that pass through to you, including Section 179 expense, charitable contributions the entity made, and various tax credits. The entity doesn’t claim these itself; you do.6Internal Revenue Service. Partner’s Instructions for Schedule K-1 (Form 1065)
How to Report K-1 Income on Your Return
Most K-1 income and loss lands on Schedule E of your Form 1040. Schedule E splits amounts into passive and nonpassive columns, which controls how the income is taxed and whether losses can be deducted. Ordinary business income from a partnership where you materially participate is nonpassive; income from a limited stake where you’re a silent investor is passive.8Internal Revenue Service. 2025 Partner’s Instructions for Schedule K-1 (Form 1065)
Not every box goes to Schedule E. Interest and dividends flow to Schedule B. Capital gains go to Form 8949 and Schedule D. Self-employment income from a general partnership flows to Schedule SE. The K-1 instructions include a box-by-box routing chart that maps each entry to the specific form and line it belongs on.6Internal Revenue Service. Partner’s Instructions for Schedule K-1 (Form 1065)
One thing catches people off guard the first time: you owe tax on your share of the entity’s profit even if the entity never sent you a check. Tax professionals call this phantom income, and it’s common with partnerships that reinvest earnings. The IRS doesn’t care whether the cash reached your bank account. If the K-1 shows income, you owe tax on it.
The IRS matches what the entity reports against what you report. If your figures don’t line up with the entity’s return, expect an automated notice. An accuracy-related penalty of 20 percent of the resulting underpayment can apply, on top of interest that currently runs at 7 percent annually.9Office of the Law Revision Counsel. 26 USC 6662 – Imposition of Accuracy-Related Penalty on Underpayments
When Should It Arrive
Partnerships and S corporations must file their returns and furnish K-1s by the 15th day of the third month after their tax year ends. For calendar-year entities that’s normally March 15, though in 2026 the deadline shifts to Monday, March 16, because March 15 is a Sunday. Trusts and estates work on the individual timeline of April 15.
That window is tight, and entities often extend. A K-1 from an extended return might not arrive until September. Even entities that file on time sometimes deliver K-1s in late March, leaving barely two weeks before your own return is due.
If yours hasn’t arrived and April 15 is close, file Form 4868 for an automatic six-month personal extension, which pushes your filing deadline to October 15. The extension gives you more time to file. It does not give you more time to pay. Estimated tax is still due by April 15, and underpayments accrue interest and possible penalties.10Internal Revenue Service. Get an Extension to File Your Tax Return
If you’ve already filed and then a K-1 arrives that changes your numbers, you’ll need Form 1040-X to amend. Processing typically runs 8 to 12 weeks, sometimes longer.11Internal Revenue Service. Topic No. 308, Amended Returns
What to Do If the K-1 Is Wrong
Start by asking the entity for a corrected K-1. If they won’t issue one and you still disagree with what’s reported, you don’t have to file using numbers you think are wrong. You can file with the figures you believe are correct and attach Form 8082 to notify the IRS that you’re reporting inconsistently with the entity.12Internal Revenue Service. Instructions for Form 8082
Skipping Form 8082 is risky. Report inconsistent numbers without notifying the IRS and the agency can immediately assess any resulting deficiency along with late-payment penalties, skipping the normal dispute process. Filing Form 8082 preserves your right to contest.
Losses on a K-1 Aren’t Automatically Deductible
If your K-1 shows a loss, three separate limits stand between that number and your taxable income. You have to clear all three.
Basis
You can only deduct losses up to your adjusted basis in the entity. For a partnership, basis generally begins with what you invested, rises with your share of profits and additional contributions, and falls with distributions and losses already claimed. Losses that exceed basis are suspended and carry forward until you have enough basis to absorb them.13Internal Revenue Service. New Limits on Partners’ Shares of Partnership Losses Frequently Asked Questions
S corporation shareholders have two kinds of basis: stock basis and debt basis. Once stock basis is used up, you can deduct additional losses to the extent you’ve personally loaned money to the corporation. Guaranteeing someone else’s loan doesn’t count; the money has to come from you. Losses beyond both stock and debt basis carry forward, but if you sell your stock before using them, they’re gone.14Internal Revenue Service. S Corporation Stock and Debt Basis S corporation shareholders who claim losses, receive non-dividend distributions, or dispose of stock must file Form 7203 to document their basis.15Internal Revenue Service. Instructions for Form 7203
At-Risk
The at-risk rules limit your deductible loss to what you could actually lose economically. Nonrecourse debt that you’re not personally on the hook for generally doesn’t add to your at-risk amount, with some exceptions for qualified real estate financing. If you have amounts not at risk in a loss-generating activity, Form 6198 calculates how much of the loss you can actually take.
Passive Activity
If you don’t materially participate in the business, the loss is passive and can only offset other passive income. It can’t shelter salary, freelance earnings, or investment returns. Rental real estate gets a partial exception: with active participation you can deduct up to $25,000 of rental losses against nonpassive income, though that allowance phases out as adjusted gross income approaches $150,000.5Office of the Law Revision Counsel. 26 USC 469 – Passive Activity Losses and Credits Limited Unused passive losses carry forward and fully unlock when you sell your entire interest in the activity in a taxable transaction.
Self-Employment Tax on Partnership K-1s
Partnership income and S corporation income part ways sharply on self-employment tax. General partners owe self-employment tax on their entire distributive share of ordinary business income plus any guaranteed payments. The rate is 15.3 percent, covering Social Security at 12.4 percent and Medicare at 2.9 percent, because partners are treated as self-employed rather than employees.16Internal Revenue Service. Entities 1
Limited partners owe self-employment tax only on guaranteed payments for services they actually perform, not on their distributive share.16Internal Revenue Service. Entities 1 Whether an LLC member is treated as general or limited for this purpose remains unsettled for many structures.
S corporation K-1 income carries no self-employment tax at all. The tradeoff is that any shareholder who works in the business must take a reasonable salary reported on a W-2, and that salary is subject to payroll taxes. The IRS watches closely for shareholders who keep salary artificially low and take large distributions instead.
The Qualified Business Income Deduction
If your K-1 reports qualified business income from a partnership, S corporation, or sole proprietorship held through a trust, the Section 199A deduction may let you deduct up to 23 percent of that income starting in 2026. The deduction was originally set to expire after 2025 but was made permanent by the One Big Beautiful Bill Act, signed in July 2025, which also raised it from the original 20 percent.
On a partnership K-1, the Section 199A information appears in Box 20, Code Z. That code carries your share of qualified business income, the W-2 wages the business paid, and the unadjusted basis of its qualified property. You need all three figures to run the calculation.6Internal Revenue Service. Partner’s Instructions for Schedule K-1 (Form 1065)
Higher earners lose part or all of the deduction. For 2026, the phase-out begins at $201,750 of taxable income for single filers and $403,500 for joint filers, with the wage and capital limits fully in force above $276,750 (single) or $553,500 (joint). Specified service businesses, including law, medicine, accounting, consulting, financial services, and athletics, lose the deduction entirely once income crosses the upper threshold. The K-1 gives you the raw inputs; the math happens on Form 8995 or 8995-A.
State Taxes on K-1 Income
K-1 income doesn’t stop at the federal return. If the entity operates in a state with an income tax, you may owe tax there even as a nonresident. Many states let partnerships file composite returns for their nonresident partners, bundling everyone’s state tax into one payment; whether that’s optional or required varies by state.
Some states also charge minimum annual taxes or franchise fees on pass-through entities regardless of profit, which can reduce what flows to you on the K-1. These are the entity’s obligation rather than yours directly, but they’re worth understanding if you’re weighing the true cost of a pass-through investment.