Schedule K-1 (Form 1120-S): Boxes, Basis, and QBI Deduction

Schedule K-1 of Form 1120-S is the tax document an S corporation gives each shareholder to report that shareholder’s share of the company’s income, losses, deductions, and credits for the year. The corporation itself doesn’t pay federal income tax on those amounts; they flow through to you and get reported on your personal Form 1040.¹ Your job is to move each line on the K-1 to the right place on your return, respect the limits that apply, and keep track of your basis in the stock.

What Each Box Reports

The K-1 breaks the corporation’s results into categories because different kinds of income and deductions are taxed differently on your return. The boxes that matter most for a typical shareholder:

Box 1, Ordinary business income or loss. Your share of the company’s net operating profit or loss. Whether it’s active or passive on your return depends on whether you materially participated in the business.¹
Box 2, Net rental real estate income or loss. Broken out separately because rental income is generally passive, with a narrow exception for real estate professionals who materially participate.
Box 4, Interest income. Your share of interest the corporation earned.
Box 5a, Ordinary dividends. Dividends the corporation received on its own investments, passed through to you.
Boxes 7 and 8a, Capital gains. Short-term gains in Box 7 and long-term gains in Box 8a keep their character, so long-term gains stay taxed at long-term rates on your return.
Box 16, Items affecting shareholder basis. This is where distributions (Code D), tax-exempt income (Code A), and nondeductible expenses (Code C) appear. They don’t all go straight onto your 1040, but they change your stock basis, which matters for future years.
Box 17, Other information. This is where the corporation typically provides the numbers you need to figure the qualified business income deduction.

Allocations are made daily according to your ownership percentage. If you owned 25% of the shares all year, you get 25% of each line item. If your ownership changed during the year, the split is prorated day by day.²

Where the Numbers Go on Your Form 1040

Each box has a specific destination. Box 1 ordinary business income or loss goes on Schedule E (Form 1040), Part II, line 28. If you materially participated, it goes in the nonpassive column; if not, it goes in the passive column and may be limited on Form 8582.¹

Box 4 interest income goes on Form 1040, line 2b. Box 5a ordinary dividends go on line 3b. Box 7 short-term capital gains land on Schedule D, line 5. Box 8a long-term capital gains go on Schedule D, line 12. The character survives the trip: a long-term gain reported on your K-1 stays long-term on your Schedule D.

When You Should Receive the K-1

The corporation has to give you the K-1 by the same date its Form 1120-S is due, which is the 15th day of the third month after the tax year ends. For a calendar-year S corporation filing for 2025, that’s March 16, 2026, because March 15 falls on a Sunday.³ For the 2026 tax year, K-1s are due March 15, 2027.

If the corporation files Form 7004, it gets an automatic six-month extension to September 15, and the K-1 delivery deadline moves with it.⁴ If your K-1 is late and you can’t file by April 15, file Form 4868 to extend your own return so you don’t rack up personal late-filing penalties.

The Qualified Business Income Deduction

Box 1 income may qualify for a deduction worth up to 20% of your qualified business income under Section 199A.⁵ The One Big Beautiful Bill Act, signed in July 2025, made this deduction permanent. You claim it on Form 8995 or Form 8995-A, and it reduces taxable income without reducing your adjusted gross income.

Below the income thresholds, the deduction is the lesser of 20% of your QBI or 20% of your taxable income before the deduction. For 2026, phase-outs for specified service businesses begin when taxable income exceeds $201,750 (single) or $403,500 (married filing jointly). Above those thresholds, wage and capital limitations can reduce or wipe out the deduction. The information you need to run the calculation typically appears in Box 17 of the K-1.

Tracking Your Stock and Debt Basis

You have to track your own basis. The corporation won’t do it for you.⁶ Basis represents your after-tax investment in the company. It goes up when you contribute capital and when income is allocated to you. It goes down when you take distributions, when losses flow through, and when nondeductible expenses are allocated to you.

Two things depend on basis. First, under Section 1366(d), you can only deduct losses up to your combined stock basis and the basis of any loans you personally made to the corporation.⁷ Losses that exceed your basis aren’t gone; they carry forward indefinitely until you have enough basis to absorb them.

Second, distributions are tax-free only to the extent of your stock basis. Debt basis doesn’t count for this purpose. Anything beyond your stock basis is taxed as a capital gain.⁶

You must file Form 7203 with your Form 1040 if you claim a loss deduction, receive a non-dividend distribution, dispose of stock, or receive a loan repayment from the corporation.⁸ Missing Form 7203 or miscalculating basis is one of the most common S corporation audit triggers.

How Losses Get Limited

A loss on your K-1 has to clear three tests, applied in this order, before it actually reduces your taxable income:

Basis limitation. Losses can’t exceed your combined stock and debt basis. Any excess carries forward until you restore basis.⁷
At-risk limitation. Losses that survive the basis test are limited to the amount you have at risk, generally cash you’ve invested plus amounts you’re personally liable to repay. Calculated on Form 6198.⁹
Passive activity limitation. Losses that survive both prior tests are subject to the passive activity rules if you didn’t materially participate. Passive losses can only offset passive income; the excess waits for future passive income or a full disposition of your interest. Calculated on Form 8582.¹⁰

Each layer has its own carryforward. A loss suspended for lack of basis waits for basis to be restored. A loss suspended at the at-risk stage waits for your at-risk amount to grow. A passive loss waits for passive income or a complete disposition. Skipping a layer or applying them out of order is a common mistake, and the IRS checks.

What Doesn’t Come Through the K-1

S corporations don’t have guaranteed payments; that’s a partnership concept. If you work for an S corporation you own, the company pays you a salary on a W-2, not through the K-1.¹¹ Health insurance premiums the corporation pays for a shareholder who owns more than 2% of the stock also don’t appear on the K-1; they’re added to Box 1 wages on the shareholder’s W-2 and then deducted above the line on the personal return.¹²

Net Investment Income Tax

Higher-income shareholders may owe a 3.8% net investment income tax on certain K-1 items. The NIIT kicks in when modified adjusted gross income exceeds $200,000 for single filers or $250,000 for married filing jointly.¹³ Income from an S corporation where you materially participate is generally exempt. Passive income, rental income, dividends, and interest can all be hit. The calculation goes on Form 8960.

If Your K-1 Is Wrong or Gets Amended

If the corporation discovers an error after issuing your K-1, it must file an amended Form 1120-S and give you a corrected K-1 with the “Amended K-1” box checked and a statement identifying the changed lines, the new amounts, and the reason.¹⁴ If you’ve already filed your personal return, you’ll need to file Form 1040-X to reflect the corrected amounts.

If you think your K-1 is wrong but the corporation won’t correct it, file Form 8082, Notice of Inconsistent Treatment, so the IRS knows your return doesn’t match what the corporation reported.

Schedule K-3 for International Items

If the corporation has foreign-source income, pays foreign taxes, or has activity involving controlled foreign corporations, you may also receive a Schedule K-3 with your K-1. The K-3 provides the detail you need to claim foreign tax credits on Form 1116 or report other international items.¹⁵ Even S corporations with no foreign activity may need to issue a K-3 if a shareholder claims foreign tax credits. Don’t set it aside. The foreign tax credit can meaningfully reduce your bill, but only if you actually file the right forms.

1
Internal Revenue Service. Shareholder’s Instructions for Schedule K-1 (Form 1120-S)
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Internal Revenue Service. Instructions for Form 1120-S (2025) – Specific Instructions (Schedule K-1 Only)
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Internal Revenue Service. Instructions for Form 1120-S (2025)
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Internal Revenue Service. About Form 7004, Application for Automatic Extension of Time To File Certain Business Income Tax, Information, and Other Returns
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Internal Revenue Service. Qualified Business Income Deduction
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Internal Revenue Service. S Corporation Stock and Debt Basis
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Office of the Law Revision Counsel. 26 U.S. Code 1366 – Pass-Thru of Items to Shareholders
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Internal Revenue Service. Instructions for Form 7203 (12/2022)
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Internal Revenue Service. Instructions for Form 6198
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Internal Revenue Service. 2025 Instructions for Form 8582 – Passive Activity Loss Limitations
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Internal Revenue Service. S Corporation Employees, Shareholders and Corporate Officers
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Internal Revenue Service. S Corporation Compensation and Medical Insurance Issues
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Internal Revenue Service. Instructions for Form 8960 (2025)
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Internal Revenue Service. 2025 Instructions for Form 1120-S
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Internal Revenue Service. 2025 Shareholder’s Instructions for Schedule K-3 (Form 1120-S)