IRS Schedule — S-Corp Shareholder Income
Schedule K-1 (Form 1120-S) — Shareholder's Share of Income, Deductions, Credits
Schedule K-1 (Form 1120-S) reports each S-Corp shareholder's pro-rata share of the corporation's income, deductions, and credits. Unlike partnership K-1s, S-Corp K-1 income is generally not subject to self-employment tax. For tax professionals, the S-Corp K-1 is central to the reasonable compensation analysis — the split between W-2 wages (subject to FICA) and K-1 distributions (not subject to FICA) is one of the most important tax planning decisions for business owner clients.
Key Rules and Authority
| Rule | Detail |
|---|---|
| Ordinary Income (Box 1) | Not subject to SE tax |
| W-2 Wages | Required — reasonable compensation |
| Basis Limitation | Losses limited to stock + debt basis |
| QBI Deduction | §199A — up to 23% of QBI |
| Distribution Tax Treatment | Tax-free to extent of AAA |
| Built-In Gains Tax | §1374 — applies within 5 years of S election |
S-Corp K-1 vs. Partnership K-1 — Key Differences
| Feature | S-Corp K-1 (1120-S) | Partnership K-1 (1065) |
|---|---|---|
| SE tax on income | No — income not subject to SE tax | Yes — for general partners (Box 14) |
| Required compensation | Yes — reasonable W-2 wages required | Guaranteed payments (optional) |
| Basis includes entity debt? | No — only direct loans to S-Corp | Yes — includes share of partnership debt |
| Loss limitation | Stock basis + direct debt basis | Outside basis (includes debt share) |
| Distributions | Tax-free to extent of AAA | Tax-free to extent of basis |
Frequently Asked Questions
My client's S-Corp K-1 shows a loss but they can't deduct it. What are the options?
S-Corp losses are limited to the shareholder's stock basis plus the basis of any direct loans made to the corporation. If the loss exceeds basis, it is suspended and carried forward until the shareholder has sufficient basis to absorb it. To increase basis and unlock suspended losses, the shareholder can: (1) contribute additional capital to the S-Corp; (2) make a direct loan to the S-Corp (not a guarantee of a third-party loan — that does not create basis); or (3) wait for the S-Corp to generate income in future years, which increases basis. The shareholder cannot increase basis by having the S-Corp borrow from a bank — only direct shareholder loans create debt basis.
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