Schedule K-1: Your Share of Somebody Else’s Return

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A Schedule K-1 is the slip a partnership, an S corporation, or a trust or estate sends each of its owners or beneficiaries to say: here is your share of what we did this year. The entity files its own return — Form 1065, Form 1120-S or Form 1041 — and generally pays no income tax itself. The tax is paid by the people who get the K-1s, on their own Form 1040, each on their piece. This page explains how to read one and what to do with it. The companion page, Schedule K-1 box by box, walks through the three kinds line by line.

The Shopping Cart

The IRS calls it: separately stated items, Sections 702 and 1366

Think of the K-1 as a shopping cart you are wheeling out of one store. The store is the entity — the partnership, the S corporation, the trust. Everything in the cart came from that one store, but the items came from different departments, and at the register each one rings up at its own price.

That is the whole reason the form has so many boxes. If the entity could simply hand you one net number, it would. It can’t, because a dollar of long-term capital gain is taxed at 15% and a dollar of ordinary business income at up to 37% plus, for a partner, 15.3% self-employment tax, and a charitable contribution counts only if you itemize. So each item keeps its character on the way through — the Code calls these separately stated items — and lands on the line of your 1040 where that kind of income or deduction goes. The K-1 shows your part of the entity’s activities: your share of each department’s total, not a share of the cash.

Your share is set by the entity’s own rules: a partnership agreement (which can allocate different items differently), an S corporation’s stock ownership (strictly pro rata, per share per day), or a trust’s distributions (what was paid out, up to the trust’s income). The percentage on the K-1 is the entity’s statement of that share.

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The Three Kinds

The IRS calls it: Schedule K-1 (Form 1065), Schedule K-1 (Form 1120-S), Schedule K-1 (Form 1041)

The three look alike and are read differently. The form number in the top-left corner is the first thing to check.

Each kind is covered box by box on the companion page. Our pages on partnerships, S corporations and trusts cover the entities themselves.

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Income Is Not Cash

The IRS calls it: pass-through taxation

The question we hear most: “The K-1 says $40,000 but I only got $12,000. Why am I taxed on $40,000?” Because the entity doesn’t pay income tax, someone has to, and the law says it is the owners, on their shares, in the year the entity earned it. Whether the money was distributed, reinvested in inventory, used to pay down the bank, or left in the checking account doesn’t change your share of the income. The reverse is also true: a distribution of cash the entity earned in an earlier year is not income again. You already paid tax on it; the distribution is tax-free up to your basis.

This is why owners of partnerships and S corporations should expect the entity to distribute at least enough to cover the tax on the K-1 — a “tax distribution” — and why a K-1 with big income and no cash is a conversation to have with the other owners, not with the IRS.

A trust K-1 works the other way around: it reports the income because it was distributed (or required to be). Income the trustee kept is taxed on the trust’s own return at trust rates, which reach 37% at about $16,000.

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When It Arrives, and Which Year

The IRS calls it: the entity’s due date, and Sections 652(c) and 662(c)

Entity	Return due	Extended to	You report it on
Partnership (1065)	March 15	September 15	Your return for the year the partnership’s year ends
S corporation (1120-S)	March 15	September 15	Same
Trust or estate (1041)	April 15 (calendar year)	September 30	Your return for the calendar year in which the trust’s or estate’s year ends

A K-1 that is late is not your fault, but it is your problem: your return is not complete without it. When we know a K-1 is coming — a family partnership, a rental LLC, a parent’s estate — we extend your return in March rather than file and amend. An estate often picks a fiscal year, so a K-1 for the year ending, say, June 30, 2026 is reported on your 2026 return, even though some of that income was earned in 2025.

A final K-1 (box checked at the top) means the entity closed or your interest ended; a final-year trust K-1 carries out things an ongoing one can’t, including capital losses and excess deductions. An amended K-1 means you amend too.

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When the Number Is a Loss

The IRS calls it: Sections 704(d) and 1366(d), 465, and 469

A loss on a K-1 is deductible only if it gets through three gates, in this order, and a loss that fails one stops there and waits:

1. Basis. You can’t deduct more than you have invested. For a partner that is money and property put in, plus prior undistributed income, plus your share of the partnership’s debt. For an S corporation shareholder it is what you paid for the stock plus prior income, plus loans you personally made to the company — a bank loan you guaranteed does not count. Form 7203 does this computation for S corporations; a partner keeps a worksheet and the K-1’s Item L capital account is the starting point.
2. At-risk. Roughly basis without the debt you are not personally on the hook for. Form 6198.
3. Passive activity. If you don’t materially participate — an investor, a silent partner, most rental owners — the loss offsets only other passive income. Form 8582. Rental losses get the $25,000 allowance if you actively participate and your income is under $100,000, phased out by $150,000.

And since 2018 a fourth, the excess business loss limit (Form 461), caps total business losses against other income at $256,000 single / $512,000 joint for 2026 (Rev. Proc. 2025-32, under the reset base year in P.L. 119-21) (verify against the final Form 461 instructions). Suspended losses carry forward and are released when basis is restored, when you have passive income, or when you sell the whole interest. The full mechanics are on our partnership and S corporation pages.

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The Boxes That Cause the Calls

The IRS calls it: the codes

• Distributions (1065 box 19; 1120-S box 16 code D). Not income. Reduce your basis; the excess over basis is capital gain. A partner who received property rather than cash files Form 7217 (verify).
• Section 199A information (1065 box 20 code Z; 1120-S box 17 code V; 1041 box 14 code I). The numbers for the 20% qualified business income deduction: QBI, W-2 wages, property basis. The entity must supply them; if the box says “see statement,” we need the statement.
• Self-employment earnings (1065 box 14). What goes on Schedule SE. General partners and LLC members who work in the business have it; limited partners generally don’t. There is no such box on an S corporation K-1 because the owner was paid on a W-2.
• Guaranteed payments (1065 box 4). The partner’s fixed pay, ordinary income plus SE tax, and taxable whether or not the partnership made money.
• Tax-exempt income and nondeductible expenses (1065 box 18; 1120-S box 16 codes A–C). Not on your return, but they move your basis.
• Schedule K-3 (1065 box 16; 1120-S box 14 checkbox). The foreign-items schedule, often 20 pages that say nothing applies. Needed only if you claim a foreign tax credit or have foreign activity; entities may skip it if no partner asks.
• The state pages. Behind the federal K-1 is usually a state K-1 for each state the entity operates in, showing your share of income sourced there and any tax paid on your behalf.
• Excess deductions on termination (1041 box 11 code A). In an estate’s final year, its administration expenses pass to you and are deductible above the line, one of the few things from a 1041 that reduces income without itemizing.

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Colorado

The IRS calls it: nothing; this is the state side

Colorado starts from federal taxable income, so what is on the K-1 is in your Colorado return automatically. Two things to look for in the K-1 package:

• The SALT parity (pass-through entity) tax. Since 2022 a Colorado partnership or S corporation can elect to pay the 4.40% Colorado tax at the entity level, which makes it a deductible business expense instead of a capped Schedule A deduction. Your Colorado K-1 then shows a credit for your share, which goes on your DR 0104 and usually produces a refund of state tax you never paid personally. The federal box 1 is lower by the tax the entity paid.
• Other states’ tax. A partnership with property or sales in another state may owe that state’s tax on your share, paid through a composite return or withholding. Colorado gives you a credit for income tax paid to another state on the same income (DR 0104CR); the amount is on the entity’s state K-1 or in the package.

Colorado also requires nonresident owners of Colorado entities to be covered by withholding, a composite return, or a signed agreement to file — so if you live elsewhere and get a Colorado K-1, expect a line for it.

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Questions we get

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What to bring

• Every K-1, with all of its pages — the statements behind “see attached” and the state K-1s are where the work is
• Last year’s K-1 from the same entity, and last year’s Form 7203 or basis worksheet if you have one
• What you put into the entity, and loans you personally made to it, with the paperwork
• How many hours a year you work in the business, if any — the passive rules turn on it
• Any Schedule K-3 you were sent, and a note if the entity said it would issue one only on request
• For a trust or estate K-1, the trustee’s cover letter and, in a final year, the statement of excess deductions

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Figures reflect the 2026 tax year as currently published and are rounded for readability. Items marked (verify) are to be confirmed against IRS or Colorado DOR sources before the figures freeze in December. Written October 26, 2026.