K-1 - Partnerships and S Corporations
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 Schedule K-1 is a reporting document, like a W-2 or Form 1099-INT. It usually shows items like:
- Investment income, like:
- Capital gains / losses
- Passive income, like:
- Nonpassive business income
Schedules K-1 might also show some deductions and credits.
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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