IRS Schedule — Partnership Income
Schedule K-1 (Form 1065) — Partner's Share of Income, Deductions, Credits
Schedule K-1 (Form 1065) reports each partner's share of the partnership's income, deductions, credits, and other items. Partners use the K-1 to complete their individual tax returns. For tax professionals, the K-1 is one of the most complex documents in the tax code — it includes ordinary income, guaranteed payments, self-employment income, capital gains, §179 deductions, and dozens of other items that flow through to the partner's return in different ways.
Key Rules and Authority
| Rule | Detail |
|---|---|
| Ordinary Income (Box 1) | Subject to SE tax for general partners |
| Guaranteed Payments (Box 4) | Ordinary income + SE tax |
| Net Rental Income (Box 2) | Passive — not subject to SE tax |
| §179 Deduction (Box 12) | Limited to partner's taxable income |
| QBI Deduction | §199A — up to 23% of QBI |
| Basis Limitation | Losses limited to outside basis |
Key K-1 Boxes and Their Tax Treatment
| Box | Description | Tax Treatment |
|---|---|---|
| 1 | Ordinary business income (loss) | Schedule E, Page 2; SE tax for general partners |
| 2 | Net rental real estate income (loss) | Schedule E, Page 2; passive activity rules apply |
| 4 | Guaranteed payments | Schedule E + Schedule SE; ordinary income |
| 9a | Net long-term capital gain (loss) | Schedule D; preferential rates |
| 12 | Section 179 deduction | Form 4562; limited to partner's taxable income |
| 13 | Other deductions (various codes) | Varies by code |
| 14 | Self-employment earnings | Schedule SE |
| 20 | Other information (QBI, §199A) | Form 8995 or 8995-A |
Frequently Asked Questions
My client received a K-1 showing a large loss. Can they deduct it on their return?
Partnership losses are subject to four sequential limitations: (1) Basis limitation — losses cannot exceed the partner's outside basis in the partnership; (2) At-risk limitation (§465) — losses cannot exceed the amount the partner has at risk; (3) Passive activity limitation (§469) — losses from passive activities can only offset passive income (unless the taxpayer materially participates); and (4) Excess business loss limitation (§461(l)) — aggregate business losses cannot exceed $305,000 (single) or $610,000 (MFJ) in 2026. Disallowed losses carry forward to future years.
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