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K-1 - Partnerships and S Corporations

Partnerships
A partnership is an unincorporated business venture with two or more partners. It’s a pass-through entity, so it doesn't pay its own tax. Instead, it reports income and certain deductions to partners. The partners report the items on their personal returns.

Partnerships file a Form 1065, and each partner receives a Schedule K-1 from that return. Each partner then reports the information from the Schedule K-1 on his or her individual return.

A partner might be able to deduct a loss from a partnership. To do so, the deductible losses can’t be affected by either of these:

  • Basis limitation
  • At-risk limitation

S corporations and C corporations
An S corporation usually doesn't pay its own tax. It passes income and deductions to the shareholders. S corporations are required to file Form 1120S, which will generate a Schedule K-1 for each owner. The individual owner then uses the Schedule K-1 to complete his or her individual return.

C corporations differ from S corporations in that:

  • C corporations pay their own corporate level tax on Form 1120.
  • The individual shareholders will be taxed again on their personal return when dividends are issued to them.
  • C corporations don’t issue K-1s to shareholders. Instead, they'll issue a Form 1099-DIV when dividends are paid.

The K-1
The Schedule K-1 is a reporting document, like a W-2 or Form 1099-INT. It usually shows items like:

  • Investment income, like:
    • Interest
    • Dividends
    • Capital gains / losses
  • Passive income, like:
    • Rents
    • Nonpassive business income

Schedules K-1 might also show some deductions and credits.

Passive income
Income or loss is classified as passive income or nonpassive income. These classifications determine where you report your income or loss.

Passive-loss rules keep you from taking passive losses against ordinary income. Passive loss can only be used to offset passive income.

Passive income comes from a passive activity. There are two types of passive activities:

  • Trade or business activities -- You don’t materially participate in these during the year.
  • Rental activities -- It doesn't matter if you materially participate. Income from rental activities is nonpassive if both of these apply:
    • You’re a real-estate professional.
    • You meet certain other requirements.

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