Schedule K-1

A K-1 is issued by passthrough entities (partnerships, S-corps, trusts) to allocate their income to owners. The owner reports the K-1 amounts on their personal tax return.

Three flavors exist: Form 1065 K-1 (partnerships and multi-member LLCs), 1120-S K-1 (S-corps), and 1041 K-1 (estates and trusts). The three schemas look similar but differ in load-bearing ways: partnership K-1s track basis and at-risk through separate boxes; S-corp K-1s pre-allocate strictly by ownership percentage; trust K-1s can carry Distributable Net Income to beneficiaries or trap it at the trust.

K-1 income is taxable to the owner whether or not the entity actually distributed cash, a common surprise known as 'phantom income.' Partners at a growing partnership often owe tax on $100k+ of allocated income while receiving only a small tax distribution — the answer is to negotiate mandatory tax distributions in the partnership agreement, not to pray about it later.

The often-ignored parts are the footnotes and the state K-1 supplements. Box 20 codes on a partnership K-1 signal QBI, foreign-source income, at-risk items, and passive-activity adjustments — each requiring its own line on the personal return. State K-1s parallel the federal but usually with different apportionment; a partner in a multi-state partnership can end up filing 5-10 state non-resident returns from a single K-1.

For basis and at-risk workpapers, the K-1 is the input but not the record. Owners must maintain their own tax basis in the partnership (or stock basis + debt basis in an S-corp) — the entity's records don't track it correctly for partial-year admissions, redemptions, and inherited interests. Missing basis is the fastest way to overclaim (or lose) suspended losses on a disposition.