What Is Schedule K-1? Who Gets It and How to Use It

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Schedule K-1 is the IRS form that reports your share of a pass-through entity’s income, losses, deductions and credits for the year. Partnerships (including most multi-member LLCs), S corporations, and trusts and estates issue it. The entity pays no federal income tax on that income, so the K-1 tells each partner, shareholder or beneficiary what to report on their own return, whether or not they received any cash. If you received one, you don’t file it with your return. You use its figures to complete your Form 1040 and related schedules, and you keep the K-1 with your records.

Why pass-through entities issue K-1s

A regular C corporation pays corporate income tax on its profits, and shareholders pay tax again on dividends. A partnership or S corporation generally pays no federal income tax at the entity level. Its income, gains, losses, deductions and credits flow through to the owners, who report them on their individual returns. Trusts and estates work similarly for income distributed to beneficiaries.

The entity still files an annual return. It prepares a K-1 for each partner, shareholder or beneficiary, files copies with the IRS as part of that return, and sends each person their copy. The IRS can then match what the entity allocated to what each recipient reports.

A K-1 does a job similar to Form 1099: both report investment income such as interest and dividends. Which one you get depends on how the investment is structured. A corporate stock or a standard mutual fund produces a 1099. An interest in a partnership, including a publicly traded MLP, a real estate limited partnership (RELP) or an ETF organized as a partnership (common among commodity funds), produces a K-1.

The three types of Schedule K-1

Schedule K-1 (Form 1065): partnerships

Partnerships file Form 1065, U.S. Return of Partnership Income, and attach a K-1 for every partner. LLCs with two or more members are taxed as partnerships by default and use this form unless they elect to be taxed as a corporation. This version carries the most detail, including the partner’s capital account and share of partnership liabilities.

Schedule K-1 (Form 1120-S): S corporations

S corporations file Form 1120-S, U.S. Income Tax Return for an S Corporation, and issue a K-1 to each shareholder showing their pro rata share of income, losses, deductions and credits.

Schedule K-1 (Form 1041): trusts and estates

Trusts and estates file Form 1041, U.S. Income Tax Return for Estates and Trusts. Beneficiaries receive a K-1 showing the distributed income they must report. Income the trust or estate keeps is generally taxed to the trust or estate, not the beneficiary.

Who gets a K-1

You are likely to receive a Schedule K-1 if you are:

• A shareholder in an S corporation
• A partner or member in a general partnership, a limited liability partnership (LLP) or an LLC taxed as a partnership
• An investor in a limited partnership (LP) or master limited partnership (MLP)
• An investor in an ETF structured as a partnership
• A beneficiary of a trust or estate that distributed income to you

Startup equity holders. Most venture-backed startups are C corporations, which never issue K-1s: shareholders get a 1099 if dividends are paid, and employees report option and stock income through their W-2. Only startups organized as LLCs taxed as partnerships, or as S corporations, issue K-1s, and only to actual owners. Holding unexercised options in an LLC generally does not make you a partner, but exercising them and becoming a member does. Profits interests granted to employees of an LLC usually make the holder a partner who receives a K-1 from the start.

What a K-1 reports

The partnership K-1 has three parts. Part I identifies the partnership: its name, employer identification number and IRS filing center. Part II covers you as a partner: your identifying number, whether you are a general or limited partner, your profit, loss and capital percentages, your share of partnership liabilities, and your capital account analysis. Part III lists your share of the year’s income, deductions, credits and other items, using numbered boxes and letter codes. The S corporation and trust versions follow the same idea with fewer partner-specific details.

How the partnership agreement shapes your K-1

A partnership has at least one general partner who runs the business and is personally liable for its obligations. Limited partners’ liability is generally capped at the capital they contributed. The partnership agreement sets how profits and losses are divided, and the K-1 follows those terms. Your allocation is not always equal to your ownership percentage: an agreement can give one partner a larger share of profits, or a priority return, before the rest is split.

Basis and the capital account

The entity reports information you need to track your basis, your tax investment in the interest. Basis goes up with capital contributions and your share of income. It goes down with your share of losses and with distributions.

Hypothetical example: a partner contributes $50,000 in cash and $30,000 of equipment, and is allocated $10,000 of income for the year. Before any distributions, basis is $90,000 ($50,000 + $30,000 + $10,000). If the partner withdraws $20,000, basis falls to $70,000.

Basis has three practical effects:

1. Distributions are generally tax-free up to your basis. Cash distributed beyond your basis is generally treated as taxable gain.
2. Deductible losses are limited to basis. Losses above it are suspended and carried forward until you have enough basis. At-risk and passive activity rules can limit them further.
3. Gain or loss on a sale of your interest is measured against your basis.

The capital account analysis in Part II shows your beginning capital, contributions, current-year results, withdrawals and ending capital. That capital account is a starting point, not your basis. Partners’ basis also includes their share of partnership liabilities, which Part II reports separately, and individual items can shift it as well. Tracking basis over the years is your job, not the entity’s.

Types of income on a K-1

A single K-1 can carry many kinds of income, each reported separately because each is taxed differently:

• Ordinary business income or loss from the entity’s operations
• Net rental real estate income and other rental income
• Interest, ordinary dividends and qualified dividends
• Royalties
• Short-term and long-term capital gains or losses
• Guaranteed payments to partners
• Section 179 deductions, charitable contributions and other deductions
• Credits, plus information for items such as the qualified business income deduction and the alternative minimum tax

Guaranteed payments are amounts a partnership pays a partner regardless of profit, usually to compensate a general partner for running the business. They are taxed as ordinary income to the partner. Capital gains keep their short-term or long-term character when they pass through, so the difference between short-term and long-term capital gains applies to K-1 gains as it does to gains in your own brokerage account.

How to use your K-1 on your tax return

1. Confirm the basics. Check your name, taxpayer identification number, ownership percentages and the tax year. If something is wrong, ask the issuer for a corrected K-1, which it also sends to the IRS.
2. Read the recipient instructions. Each version has its own (for example, the Partner’s Instructions for Schedule K-1 (Form 1065)), telling you where each box and code goes.
3. Transfer each item to the right place. Ordinary business income and rental income from partnerships and S corporations generally go on Schedule E, Part II. Interest and dividends go to Schedule B and the Form 1040 lines. Capital gains go to Schedule D. Other items go to specific forms such as Form 8995 for the qualified business income deduction.
4. Apply loss limits. Before deducting a loss, confirm you have enough basis and amount at risk, and check whether the passive activity rules apply.
5. Keep the K-1. You generally don’t attach it to your return unless the form instructions require it. A trust or estate K-1 is attached only when backup withholding is reported in box 13, code B.
6. Update your basis records for next year.

Because K-1 items can create alternative minimum tax adjustments, recipients with significant K-1 income often have a tax professional review the return.

K-1s in retirement accounts. Holding MLP units in an IRA does not remove the K-1. Income from an active business held through a tax-exempt account can be unrelated business taxable income (UBTI). If an IRA’s UBTI exceeds $1,000 in a year, the IRA itself must file Form 990-T and may owe tax.

Is K-1 income earned income?

It depends on your role. For limited partners, passive investors and trust or estate beneficiaries, K-1 income is generally unearned income and not subject to self-employment tax. Limited partners do owe self-employment tax on guaranteed payments for services they perform.

General partners and active members of an LLC taxed as a partnership are treated differently. Their share of ordinary business income, plus any guaranteed payments, is generally earned income subject to self-employment tax, reported on Schedule SE.

S corporation shareholders are the exception among active owners. Their K-1 share of ordinary income is not subject to self-employment tax. Owners who work in the business are supposed to receive reasonable W-2 wages, which carry payroll taxes, and the K-1 reports only the profit beyond that salary.

When K-1s arrive, and what to do if one is late

For partnerships and S corporations, the K-1 deadline matches the entity’s return deadline: the 15th day of the third month after the tax year ends, which is March 15 for a calendar-year entity. Trust and estate K-1s follow the Form 1041 deadline, the 15th day of the fourth month (April 15 for a calendar year).

K-1s still often arrive after those dates. An entity can extend its return by six months, to September 15 for a calendar-year partnership or S corporation, and K-1s typically come out once the return is complete. Partnerships that hold interests in other partnerships may have to wait for their own K-1s before preparing yours.

If your K-1 hasn’t arrived by the April filing deadline, you can file an extension for your individual return. The extension gives you more time to file, but not to pay, so estimate and pay any expected tax by the original deadline. If you have already filed and a K-1 (or a corrected one) shows different figures, you generally need to file an amended return on Form 1040-X.

Schedule K-3: the international companion

Starting with tax years beginning in 2021, partnerships and S corporations with items of international tax relevance may also issue Schedule K-3. It reports details such as foreign-source income, foreign taxes paid and information needed for the foreign tax credit. Investors in MLPs and partnership-structured funds may receive a K-3 alongside the K-1. If you claim a foreign tax credit or have other international reporting obligations, you need the K-3 data to complete those forms.

The Bottom Line

Partners, S corporation shareholders, LLC members and trust or estate beneficiaries all need their K-1 figures to file accurately, even when no cash changed hands. Recipients should track their own basis each year, check loss limits before deducting anything, and plan for late arrivals by extending their return and paying estimated tax on time. Anyone with significant K-1 income or foreign items may benefit from a tax professional's review.