A Schedule K-1 is the tax form that tells you your share of income, losses, deductions, and credits from a partnership, S corporation, or trust you have an interest in. The entity itself doesn’t pay federal income tax on that money; it passes the numbers through to you on the K-1, and you report them on your personal Form 1040. The IRS receives a copy of every K-1 issued, so the figures on your return need to line up with what the entity reported. Mismatches often produce a CP2000 notice proposing changes to your tax bill.1Internal Revenue Service. Understanding Your CP2000 Series Notice
Who Sends a K-1 and Why
K-1s come from entities that don’t pay their own federal income tax. The tax responsibility passes through to the owners or beneficiaries, and the K-1 is how each person learns what to report. Three types of entities issue them.
- Partnerships and multi-member LLCs file Form 1065 and send each partner a K-1. Most LLCs with more than one owner are taxed as partnerships by default.2Internal Revenue Service. About Form 1065, U.S. Return of Partnership Income
- S corporations file Form 1120-S, and each shareholder gets a K-1 for their portion of income and losses.3Internal Revenue Service. About Form 1120-S, U.S. Income Tax Return for an S Corporation
- Estates and trusts file Form 1041, with a K-1 to each beneficiary for their share of distributed income.4Internal Revenue Service. About Form 1041, U.S. Income Tax Return for Estates and Trusts
The three versions look similar but aren’t identical. A partnership K-1 includes self-employment earnings and guaranteed payments. An S corporation K-1 doesn’t; shareholders pay payroll tax through their W-2 wages instead. A trust K-1 uses categories built around distributions to beneficiaries rather than business operations.
How the Form Is Laid Out
Every K-1 has three parts. The first two identify who’s involved. The third holds the numbers you actually copy onto your return.
Part I names the entity and lists its Employer Identification Number. The IRS uses that EIN to tie the entity’s return to your K-1, so this part is the link between the two filings.5Internal Revenue Service. Partners Instructions for Schedule K-1 (Form 1065)
Part II identifies you: name, address, taxpayer identification number. On a partnership K-1, Part II also shows your ownership percentage and whether you’re a general or limited partner. If the “Final K-1” box is checked, your interest ended during the year. That could mean you sold your stake, the partnership dissolved, or the trust closed. A final K-1 typically triggers a gain or loss calculation based on your adjusted basis, and you may need to report the disposition on Form 8949 and Schedule D.
Part III is the working section: a series of numbered boxes, each carrying a specific type of income, deduction, or credit. Do not add the boxes together. Each one flows to a different line or schedule on your 1040, and mixing them creates the wrong total. Many boxes also carry a letter code pointing to an attached statement with more detail (Box 20 on the partnership K-1 is a common example).6Internal Revenue Service. Instructions for Form 1065 (2025) Always check whether your K-1 came with supplemental pages. Skipping the attached statements is one of the most common preparation mistakes.
The Boxes That Matter Most
The character of each box determines how it gets taxed. These are the ones you’re most likely to see.
Box 1: Ordinary Business Income or Loss
Box 1 is your share of the entity’s operating profit or loss from its trade or business. Whether you materially participate matters here.7Internal Revenue Service. 2025 Partners Instructions for Schedule K-1 (Form 1065) If you do, the income is non-passive and can offset losses from other active sources. If you don’t, it’s passive, subject to the limitation rules below. Box 1 is also the starting point for the Qualified Business Income deduction.
Box 2: Net Rental Real Estate Income or Loss
Box 2 reports your share of the entity’s rental real estate activities. Rental income is almost always passive, which means you generally can’t use a rental loss to offset salary or other active income. One exception: if you actively participate in managing the property and your modified adjusted gross income is under $150,000, you can deduct up to $25,000 of rental losses against non-passive income. That allowance starts phasing out at $100,000 of modified AGI.8Internal Revenue Service. Publication 925 (2025), Passive Activity and At-Risk Rules A separate rule lets taxpayers who qualify as real estate professionals treat rental activities as non-passive, with no $25,000 cap.
Box 4: Guaranteed Payments
Guaranteed payments appear only on partnership K-1s. They’re fixed payments for your services or the use of your capital, made regardless of whether the partnership turned a profit.6Internal Revenue Service. Instructions for Form 1065 (2025) Guaranteed payments for services are always subject to self-employment tax. That distinguishes them from Box 1 income, where self-employment tax depends on whether you’re a general or limited partner.
Health insurance premiums the partnership pays on your behalf also count as guaranteed payments. The partnership deducts them; you include them in gross income on Schedule E; and if you qualify, you can then deduct 100 percent as an adjustment to income on your 1040, effectively zeroing out the tax hit. You lose the deduction for any month you’re eligible for a subsidized health plan through your or your spouse’s employer.9Internal Revenue Service. Publication 541, Partnerships
Boxes 5 and 6: Interest and Dividends
These report your share of the entity’s portfolio income. Interest (Box 5) and dividends (Box 6) are never subject to self-employment tax, whatever your role in the business. They flow to Schedule B and then to the front of your 1040.10Internal Revenue Service. Schedule B (Form 1040) 2025 Watch for the qualified dividend breakdown: qualified dividends get taxed at the lower long-term capital gains rates (0, 15, or 20 percent), while non-qualified dividends are taxed at your ordinary income rate.
Box 14: Self-Employment Earnings
On a partnership K-1, Box 14 shows your net earnings subject to self-employment tax. It’s typically your Box 1 ordinary income plus guaranteed payments for services from Box 4. Box 14 feeds directly into Schedule SE on your 1040. Limited partners generally don’t see a self-employment figure here because their income isn’t considered earned through personal effort. S corporation K-1s don’t have this line at all.
Where the Numbers Land on Your 1040
A K-1 feels overwhelming because its boxes scatter across multiple schedules. The routing:
- Schedule E, Part II takes ordinary business income or loss (Box 1) and rental income or loss (Box 2). Each K-1 gets its own line, showing the entity’s name, EIN, and your income or loss.11Internal Revenue Service. About Schedule E (Form 1040), Supplemental Income and Loss
- Schedule B takes interest (Box 5) and dividends (Box 6), combined with any other interest and dividends you have.10Internal Revenue Service. Schedule B (Form 1040) 2025
- Schedule D takes capital gains and losses, including from the sale of partnership or S corporation assets. The K-1 will identify each gain as short-term or long-term.12Internal Revenue Service. 2025 Instructions for Schedule D (Form 1040)
- Schedule SE takes the Box 14 self-employment earnings from a partnership K-1.13Internal Revenue Service. About Schedule SE (Form 1040), Self-Employment Tax
Guaranteed payments from Box 4 also go on Schedule E as ordinary income, and separately hit Schedule SE because they’re always subject to self-employment tax.
Extra Taxes K-1 Income Can Trigger
Self-employment tax is the combined Social Security and Medicare tax that self-employed individuals pay. The total rate is 15.3 percent: 12.4 percent for Social Security on earnings up to $184,500 in 2026, and 2.9 percent for Medicare on all earnings with no cap.14Social Security Administration. Contribution and Benefit Base You calculate it on Schedule SE using your Box 14 figure. You get to deduct half of the self-employment tax as an adjustment to income, which lowers your adjusted gross income.
K-1 income that counts as investment income (interest, dividends, capital gains, and rental income from passive activities) may also be subject to a 3.8 percent Net Investment Income Tax. It applies to the lesser of your net investment income or the amount your modified adjusted gross income exceeds the threshold for your filing status: $200,000 single, $250,000 married filing jointly, $125,000 married filing separately.15Internal Revenue Service. Net Investment Income Tax These thresholds are not indexed for inflation. Income from a business you materially participate in generally isn’t investment income for this tax, but passive K-1 income usually is.
The QBI Deduction From K-1 Income
The Qualified Business Income deduction lets you deduct up to 20 percent of your qualified business income from a pass-through entity. Box 1 is the main input. For 2026, the calculation is simple if your total taxable income is below $201,750 (single) or $403,500 (married filing jointly): deduct 20 percent of your qualified business income.
Above those thresholds, the deduction phases down based on the W-2 wages the business paid and the cost basis of its depreciable property. The phase-in completes at $276,750 single or $553,500 married filing jointly, where the wage-and-property limits apply in full. If you’re in a “specified service” business like law, medicine, or consulting, the deduction disappears entirely once your income clears the upper threshold. Your K-1 or its attached statements will usually provide the QBI amount, W-2 wage information, and unadjusted basis figures you need. Each K-1 gets calculated separately before you combine them on your return.
Why a K-1 Loss Might Not Become a Deduction
A loss on your K-1 doesn’t automatically flow through as a deduction. It has to clear three gates, in order, and getting this wrong is where most K-1 mistakes happen.
First is basis. Your basis is roughly what you’ve put into the entity: your initial contribution, plus income allocated to you, minus distributions and previously deducted losses. A loss that exceeds your adjusted basis is suspended and carries forward until you have basis to absorb it. Partnership interests get basis from your share of partnership liabilities. S corporation shareholders don’t, but they do get basis from loans they personally make to the corporation.
Second is the at-risk rule. Even with enough basis, losses are limited to what you’re economically at risk of losing: cash contributed, property pledged, and money you’ve borrowed for the activity where you’re personally liable. Non-recourse borrowing from someone with an interest in the activity generally doesn’t count. If your loss exceeds the at-risk amount, you file Form 6198 and suspend the excess.16Internal Revenue Service. Instructions for Form 6198, At-Risk Limitations
Third is the passive activity rule. If the activity is passive to you (you don’t materially participate), the loss can only offset other passive income. Excess passive losses carry forward until you generate passive income or dispose of your entire interest in the activity.8Internal Revenue Service. Publication 925 (2025), Passive Activity and At-Risk Rules Selling your entire interest unlocks all the suspended losses in the year of sale.
Publicly traded partnerships get their own tighter rule. Losses from a PTP can only offset income from that same PTP, not other passive activities and not other PTPs. Suspended PTP losses carry forward until that PTP produces income or you sell out.
When It Arrives, and What to Do If It’s Late or Wrong
Partnerships and S corporations must file their returns and send K-1s by March 15 for calendar-year entities. Both can get an automatic six-month extension by filing Form 7004, pushing the deadline to September 15.17Internal Revenue Service. Publication 509 (2026), Tax Calendars Your K-1 may not show up until months after your personal return’s April deadline.
If it hasn’t arrived by mid-April, you have two practical choices. File Form 4868 to extend your 1040 to October 15 and wait. Or file on time using estimates and amend later on Form 1040-X if the final K-1 differs. Extending is usually cheaper and cleaner than amending.
Entities that miss the deadline face penalties per K-1 that escalate with delay. For 2026: $60 if corrected within 30 days, $130 if corrected by August 1, $340 if not corrected by then, and $680 for intentional disregard.18Internal Revenue Service. Information Return Penalties
If you receive a corrected K-1 after filing, you generally need to file Form 1040-X. To claim a refund from the correction, you have three years from the date you filed the original return or two years from the date you paid the tax, whichever is later.19Internal Revenue Service. Topic No. 308, Amended Returns
Sometimes you’ll receive a K-1 you believe is wrong. The IRS requires you to either report items consistently with how the entity reported them or file Form 8082 to notify the IRS of the inconsistency.20Internal Revenue Service. Instructions for Form 8082, Notice of Inconsistent Treatment or Administrative Adjustment Request Reporting different numbers without Form 8082 invites a CP2000 notice, because the IRS will see the mismatch. File Form 8082 as well if the entity never provided a K-1 and you’re reporting items from your own records. Attach it to your 1040.