Understanding Schedule K-1

What is Schedule K-1?

Schedule K-1 is an IRS form that provides information you need to complete your tax return when you receive income, losses, or dividends as a shareholder in an S corporation or partner in a business. You will also use Schedule K-1 if you are a beneficiary of an estate or trust.

Schedule K-1 forms are complex. Unlike a W-2 or Form 1099-NEC, they report many different types of income and deductions. You enter the information on many different forms in your tax return.

You do not file Schedule K-1 with the IRS. Instead, the entity that provides you with income files it with the IRS and gives you a copy, so you have the information you need to prepare your own tax return.

Types of Schedule K-1

There are three types of Schedule K-1s. Which version you receive depends on the type of entity paying you income. The names come from the IRS forms the entities use to file their own tax returns:

1. Schedule K-1 (1120S) reports income you receive from an S corporation
2. Schedule K-1 (1065) reports income you receive from a partnership
3. Schedule K-1 (1041) reports income you receive from an estate or trust

If you’re not sure which applies to you, you may want to ask the people paying you.

What is Schedule K-1 from Form 1120-S?

Schedule K-1 (1120S) is a Schedule K-1 for shareholders of S corporations, which are specific types of small businesses that pass their taxable income, losses, deductions, and credits directly to shareholders. S corporations do not pay corporate taxes, but their shareholders split the corporation’s tax liabilities.

For example, if you are a shareholder of an S corporation that sells a business asset and creates a capital gain, your portion of the capital gain appears on your Schedule K-1. You report it as a capital gain on your tax return.

If you are a shareholder in an S corporation and also work for it, or just work for it, you should also receive a Form W-2 that reports the income you received as pay for the job you do for the company.

All of the information on your Schedule K-1 (1120S) first appears on the S corporation’s tax return and the Schedule K. This means the corporation has to complete their return to calculate your Schedule K-1.

Parts I and II: Information about the S corporation and shareholder

In Part I of your Schedule K-1 (1120S), you will find the S corporation's name, address, and employer identification number (EIN), plus the IRS center where they filed their Form 1120S and the total number of shares in the corporation. 

Part II shows your tax identification number (TIN), name, address, and ownership percentage. Your current-year ownership percentage affects the items in Part III, as well as other tax law provisions.

• Line H shows the number of shares you owned as of the beginning and end of the tax year.
• Line I is needed if you, as a shareholder, made any loans to the S corporation. Line I reports the beginning and ending balances for the tax year. This figure is crucial for calculating your debt basis and is also used to help determine the basis (original value) of your shares.

Part III: Shareholder’s share of income, deductions, credits, and other items

Here’s a brief guide to the information in Part III of Schedule K-1 (1120S). You or your tax preparer must transfer this information to the appropriate lines and corresponding schedules of your tax return, including your Schedule E Page 2, other forms your tax situation may require, and your Form 1040. 

This is complicated and important. Jackson Hewitt Tax Pros are familiar with these forms and know what to do with all the information they include.

• Boxes 1 through 3: You need to report these in the appropriate place on Schedule E. If the income or loss is considered passive, use Form 8582 to determine what you are allowed to claim for the year.
• Box 4: You can report this interest income directly on Line 2b of Form 1040, if your total interest income from all sources is less than $1,500. If specific exceptions apply and/or you have more than $1,500 in interest income from all sources, report the interest on Schedule B first.
• Boxes 5a and 5b: Ordinary and qualified dividends you may also need to report on a Schedule B.
• Box 6: For any royalties you receive from the corporation.
• Boxes 7 through 9: These cover net short-term and long-term capital gains, as well as items pertaining to more complex investments like gains on collectibles and real estate. Report them in their appropriate places on Form 8949 and/or Schedule D.
• Box 10: Here’s where the S-corp reports other income and losses not covered above. There are 8 different codes primarily related to investment income. For example, Code A is for other portfolio income and loss. You need to report this income where appropriate, such as Schedule D for Section 1256 contracts and straddles and Schedule E for mining income recapture.
• Box 11: This is where you’ll find deductions for assets that were expensed instead of depreciated (Section 179 deductions). You need to report your personal share of this deduction on Schedule E.
• Box 12: This is for other deductions that may not be strictly business expenses, such as charitable contributions. Codes A through H items are charitable contributions and go on Schedule A. The remaining items, codes I through S, belong in different places on your return, depending on the specific code.
• Box 13: Business tax credits that have been allocated to shareholders appear here, and you need to report them on Form 3800. These credits include the work opportunity credit, commercial electric vehicle credit, and research and development credit.
• Box 14: If the S corporation paid foreign income taxes, the business either sent a Schedule K-3 with the breakdown and checked the box here or left the box blank and attached a statement to the K-1. This information goes on your Form 1116 or Schedule A as appropriate.
• Box 15: This box reports alternative minimum tax (AMT) items. If you are subject to AMT, you need to use this information to calculate your AMT on Form 6251.
• Box 16: Items that affect your shareholder basis, such as distributions you’ve taken or loans you made that have been repaid, show up here. Shareholder basis is essentially how much of the corporation you own based on how much you have invested in it. It should be adjusted annually, and you should keep a record of how it changes over time.
• Box 17: This is for items that do not fit in any of the above categories.

What is Schedule K-1 for Form 1065?

Schedule K-1 (1065) is a Schedule K-1 for members of a business partnership. For IRS purposes, a partnership is a relationship where two or more people contribute money, property, labor or skill to the business, and share the profits and losses of the business. It is a legal relationship, not an informal collaboration.

When you are a member of a partnership, Schedule K-1 (1065) reports your share of the partnership’s income, deductions, credits, and other tax-related information. Like in an S-corp, the partnership itself does not pay taxes. Instead, the money and tax obligations passed through to the partners, who report them on their personal income tax returns. Your K-1 (1065) includes the income from the partnership you are liable for on your own tax return.

If you are a general partner—that is, a working owner—the IRS considers it a form of self-employment. You will not get a W-2 from the business, and you must report your self-employment or farming income on Schedule SE to calculate what you owe in Social Security and Medicare taxes.

All of the information on your Schedule K-1 (1065) first appears on the partnership’s tax return. That’s because the partnership has to do its own taxes to calculate your share of the items on Schedule K-1.

Parts I and II: Information about the partnership and partners

In Part I of your Schedule K-1 (1065), you will find the partnership's name, address, and EIN, plus the IRS center where they filed their Form 1065.

Part II shows your TIN, name, address, and ownership percentage. Your ownership percentage affects the items in Part III, as well as other tax law provisions.

Part III: Partners share of income, deductions, credits, and other items

Here’s a brief guide to the information in Part III of Schedule K-1 (1065). You or your tax preparer must transfer this information to the appropriate lines and corresponding schedules of your tax return, including your Schedule E Page 2, Schedule SE, other forms your tax situation may require, and your Form 1040.

This is complicated and important. Jackson Hewitt Tax Pros are familiar with these forms and know what to do with all the information they include.

• Boxes 1 through 3: You need to report these in the appropriate place on Schedule E. If the income or loss is considered passive, use Form 8582 to determine what you are allowed to claim for the year.
• Box 4a, b, and c: This shows your guaranteed payments—income you received regardless of how much income the partnership had for the year.
• Box 5: You can report this interest income directly on Line 2b of Form 1040, if your total interest income from all sources is less than $1,500. If certain conditions apply and/or you have more than $1,500 in interest income from all sources, report the interest on Schedule B first.
• Boxes 6a and 6b: Ordinary and qualified dividends you may also need to report on a Schedule B. Box 6c reports dividend equivalents, a very specific type of income often related to restricted stock units.
• Box 7: For any royalties you receive from the corporation.
• Boxes 8 through 10: These cover net short-term and long-term capital gains, as well as items pertaining to more complex investments like gains on collectibles and real estate. Report them in their appropriate places on Form 8949 and/or Schedule D.
• Box 11: Here’s where the partnership reports other income and losses not covered above. There are 8 different codes primarily related to investment income. For example, Code A is for other portfolio income and loss. You need to report this income where appropriate, such as Schedule D for Section 1256 contracts and straddles and Schedule E for mining income recapture.
• Box 12: This is where you’ll find deductions for assets that were expensed instead of depreciated (Section 179 deductions). You need to report your personal share of this deduction on Schedule E.
• Box 13: This is for other deductions that may not be strictly business expenses, such as charitable contributions. Codes A through H items are charitable contributions and go on Schedule A. The remaining items, codes I through S, belong in different places on your return, depending on the specific code.
• Box 14: Reports various types of self-employment earnings and losses. Report this on Schedule SE.
• Box 15: This is your share of certain business tax credits that you must report at the personal level on Form 3800. The credits include the work opportunity credit, commercial electric vehicle credit, and research and development credit.
• Box 16: If the partnership paid foreign income taxes and provided the K-3 showing a breakdown, this box will be checked. If the partnership doesn’t provide a K-3, the box remains unchecked, and a statement is attached. This information is entered on Form 1116 or Schedule A as appropriate.
• Box 17: This box reports AMT items. If you are subject to AMT, you need to use this information to calculate your AMT on Form 6251.
• Box 18: Reports any tax-exempt income and nondeductible expenses. You or your tax prepare should increase your basis by the amount of tax-exempt interest (Code A) and other tax-exempt income (Code B). Decrease your basis by the amount of nondeductible expenses (Code C).
• Box 19: Here you’ll find distribution items that are ordinary income reported on the tax return and those that affect your basis, such as distributions you’ve taken. The basis should be adjusted annually with a record of the basis and any unallowed deductions carried over.
• Box 20: Reports items that do not fit in any of the above categories. The items come with explanatory codes, such as Code A for other types of investment income. The codes can help determine how to handle the items.
• Boxes 21-23: If either of these boxes are checked, see the information below. The at-risk rules are very complex so you should see a Tax Pro if you need help with this.

What is Schedule K-1 for Form 1041?

Schedule K-1 (1041) is Schedule K-1 for beneficiaries of trusts and estates. Trusts and estates require their own fiduciary tax returns and may need to pay taxes at the entity level. That’s why the 1041 version of Schedule K-1 is so different from the partnership and S corporation versions of Schedule K-1.

If you receive a Schedule K-1 (1041) and do not treat the items the same way on your tax return as the trust or estate did on their tax return, you may need to file Form 8082 or face a steep penalty.

Parts I and II: Information about the estate or trust and the beneficiary

In Part I of your Schedule K-1 (1041), you will find the estate or trust’s name, address, and EIN, along with whether Form 1041-T was filed, and when. If the estate or trust is closing or dissolving, Box E indicates this is its last Form 1041.

Part II shows your TIN, name, and address. Box H indicates whether you are a U.S. taxpayer (domestic) or foreign.

Part III: Beneficiary’s share of income, deductions, credits, and other items

Here’s a brief guide to the information in Part III of Schedule K-1 (1041). You or your tax preparer must transfer this information to the appropriate lines and corresponding schedules of your tax return, including your Schedule B, D, and/or E.

This is complicated and important. Jackson Hewitt Tax Pros are familiar with these forms and know what to do with all the information they include.

• Box 1: You can report this interest income directly on Line 2b of Form 1040, if your total interest income from all sources is less than $1,500. If certain conditions apply and/or you have more than $1,500 in interest income from all sources, report the interest on Schedule B first.
• Boxes 2a and 2b: The ordinary and qualified dividends that appear here may also require filing Schedules B and D, as qualified dividends are taxed at capital gains rates.
• Boxes 3 through 4c: These cover net short-term and long-term capital gains, as well as items pertaining to more complex investments like gains on collectibles and real estate. Report them in their appropriate places on Form 8949 and/or Schedule D.
• Box 5: Reports other portfolio and nonbusiness income, such as royalties and income from annuities that is not subject to passive activity rules. If there is also income in respect of a decedent (IRD) that does not appear in any of the above boxes, it is in Box 5.
• Boxes 6 through 8: All beneficiaries should receive a separate Schedule K-1 for income that appears here. Your schedule will report your share of the estate or trust’s income or loss from business and rental activity. These items may be subject to passive income limitations.
• Box 9: These deductions account for your share of amortization, depreciation, or depletion related to the estate or trust’s income or loss in Boxes 5 through 8.
• Box 10: This is for the portion of the estate tax attributed to IRD distributed to you as the beneficiary. You report it on Schedule A, Line 16.
• Box 11: Reports any excess deductions related to the termination of the estate or trust if it is closing or dissolving (67(e) expenses signified by Code A). You can take this amount as an adjustment on your Schedule 1, as a write-in on Line 22 labeled "ED67(e)." Other net operating loss carryovers may also appear in Box 11, with codes to indicate what they are.
• Box 12: Reports several AMT adjustments, if you pay the AMT.
• Box 13. Contains your share of tax credits and related recaptures. You use Form 3800 to claim them with your tax return, but some of them also require additional forms. They are primarily business credits, such as the employee retention credit.
• Box 14: Contains miscellaneous items with their own codes, such as Code F for farming income and Code H for your share of net investment income tax.

All three versions of Schedule K-1 are packed full of important information. They’re also dense and can be hard to understand. It can take a lot of tax knowledge to transfer the information accurately to your tax return. The Tax Pros at Jackson Hewitt know how to do it right.

About the Author

Mark Steber is Senior Vice President and Chief Tax Information Officer for Jackson Hewitt. With over 30 years of experience, he oversees tax service delivery, quality assurance and tax law adherence. Mark is Jackson Hewitt’s national spokesperson and liaison to the Internal Revenue Service and other government authorities. He is a Certified Public Accountant (CPA), holds registrations in Alabama and Georgia, and is an expert on consumer income taxes including electronic tax and tax data protection.

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