To enter a K-1 (Form 1065) in the tax program from the Main Menu of the Tax Return (Form 1040) select:
- Income Menu
- Rents, Royalties, Entities (Sch E, K-1, 4835, 8582)
- K-1 Input - Select New and double-click Form 1065 K-1 Partnership which will take you to the K-1 Heading Information Entry menu. All information in this menu must be entered to continue.
The last menu item, whether any Gain/Loss from the disposition of the partnership, can be toggled to be carried to Form 4797 or Schedule D of the 1040, See Line K below.
After entering all required information, select OK. The K-1 1065 Edit Screen has two distinct sections entitled "Heading Information" and "Income, Deductions, Credits, and Other Items".
See below for basic information on each line of the Heading Information section of the Schedule K-1 1065 Edit Menu. For additional information regarding the requirements for Schedule K-1 (Form 1065) see: Partner's Instructions for Schedule K-1 (Form 1065).
Lines A-D – Contain the basic information about the taxpayer and the partnership that was entered in the Heading Information Menu. These entries will appear on the taxpayer’s 1040 on Schedule E, Line 28 and the Partnership name with appear on supplemental schedules and worksheets that are generated as a result of the entries made on this Schedule K-1 1065 Edit Menu. The owner of the K-1 can be toggled between Taxpayer, Spouse and Joint.
Line E –Is All Investment at Risk? - This is a YES or NO response based on whether the partner is at-risk for the activities of the partnership. This is a determination that must be made by the preparer and the taxpayer based on whether the investment that the taxpayer has made in the underlying entity is at risk.
Generally the ability to deduct a loss that is generated by a business activity is limited to the investment that the taxpayer has in the partnership. This limitation is what the partner has ‘at-risk’ in the partnership. This at-risk investment consists of the funds and/or the adjusted basis of any property that was contributed to the partnership, as well as any amounts that were borrowed for use in the partnership (if the taxpayer is personally liable for repayment). In Part II of the Schedule K-1 (1065) item K should show the taxpayer’s share of the partnership's nonrecourse liabilities, partnership-level qualified nonrecourse financing, and other recourse liabilities as of the end of the partnership's tax year. If the Taxpayer terminated their interest in the partnership during the tax year, item K should show the share that existed immediately before the total disposition. A partner's “recourse liability” is any partnership liability for which a partner is personally liable. See: Pub 925 - Passive Activities and At-Risk Rules.
A ‘NO’ response to this question will be reported on the taxpayer’s 1040 on Schedule E, Line 27, and on Schedule E, Line 28(f). It will also generate a Form 6198 entry menu upon exiting the K-1 Edit Menu if an activity loss is reported on the K-1. Complete Form 6198 to determine the amount of the loss that can be deducted. See: Instructions for 6198 At-Risk Limitations.
Line F –Has Entire Interest in Investment Been Disposed Of? -This is a YES or NO response based on whether the taxpayer has sold or otherwise disposed of the investment. Answering YES to this question will automatically transfer certain entries to either Form 4797 or Schedule D, depending upon the election made by the taxpayer.
NOTE: If the taxpayer has prior year passive losses which were not allowed due to the passive loss limitations, disposing of the investment may permit the taxpayer to reclassify the prior year passive losses to a non-passive allowed loss in the year of disposal. Such reclassified losses should be entered on Line 1 as a Non-Passive Ordinary Loss from Trade or Business Activity. The taxpayer may want to make this entry by creating a separate K-1 entry. Thus, the non-passive allowed loss in the year of disposal will be reported on a separate line of Line 28, Schedule E and not as a net amount with other entries from this entity. This will permit you to identify the source of the separate item on Line 28 of Schedule E. See: Instructions for Form 8582 - Passive Activity Loss Limitations.
Line G –Is Partnership Foreign? - This is a YES or NO response based on whether the partnership is foreign. A foreign partnership is a partnership that is not created or organized in the United States or under the law of the United States or of any state. See IRS Notice 2010-41 for information on when a domestic partnership will be classified as foreign. A ‘YES’ response to this question will be reported on the taxpayer’s 1040 on Schedule E, Line 28(c).
Line H –Actively Managed Passive Loss Carryover – It is in this field that any actively managed passive carryover loss is reported. The amount entered in this field should correspond to what the taxpayer reported on last year’s 1040 on Form 8582, Worksheet 5 as unallowed loss for this K-1 entity. Any amount entered in this field will then carry to the 1040, Form 8582, Worksheet 1 where it will be subjected to the passive activity loss limitations.
Line I –Other Passive Loss Carryover? – It is in this field that a passive loss carryover for an activity that is not actively managed is reported. The amount entered in this field should correspond to what the taxpayer reported on last year’s 1040 on Form 8582, Worksheet 5 as unallowed loss for this K-1 entity. Any amount entered in this field will then carry to the 1040, Form 8582, Worksheet 1 where it will be subjected to the passive activity loss limitations. If the taxpayer has disposed of their interest in this investment during the tax year, see the Note at Line F for treatment of any prior year passive losses which were not allowed due to passive loss limitations.
Line J –Disposition Gain/Loss - In the event that the interest in the partnership has been disposed of by the taxpayer and Line F has been answered YES, there may be a gain or loss from the sale of their interest in the partnership. This gain or loss is entered in this field and it will automatically carry as gross proceeds (for a Gain) or cost basis (for a Loss) to Form 4797 or Schedule D of the 1040 depending upon the treatment that the taxpayer has elected and is entitled to receive.
Line K –Where Do You want to Carry Gain/Loss? – Select to carry the gain or loss from the disposition of the partnership to Form 4797 or Schedule D. Any gain that is entered on Line J will automatically carry as gross proceeds to Form 4797, line 2(d); or Form 8949, Line 1(d) which will then carry to Schedule D (Form 1040) as a long term transaction. Any loss that is entered on Line J will automatically carry as the cost basis to Form 4797, line 2(f); or Form 8949, Line 1(e) which will then carry to Schedule D (Form 1040) as a long term transaction. To edit and complete this transaction, go to the Form 4797 menu or Schedule D whichever is selected.
The program defaults to Form 4797, Sale of Business Property. However, the taxpayer may, depending upon their ownership interest, be required to report the sale of this partnership interest on Schedule D - Capital Gains and Losses. See: Instructions for Form 4797 - Sales of Business Property and Instructions for Schedule D - Capital Gains and Losses to determine the correct treatment for the disposition of the partnership interest.
Line L –K-1 from a Publicly Traded Partnership? - This is a YES or NO response based on whether the partnership is a Publicly Traded Partnership. This information is reflected on Box D of Part I of the Schedule K-1 (Form 1065). Publicly traded partnerships are given different treatment as compared to other partnership interests.
Line M –PTP Prior Year Unallowed Loss - On this line, the prior year unallowed loss for the publicly traded partnership is entered. If last year's 1040 tax return was done in TaxSlayer Pro, the amount to be entered in this field does not pull from the previous year's return but should correspond to what the taxpayer had on the Statement of Publicly Trade Partnerships as unallowed loss to carryover for this K-1 entity. It is noted that the passive activity limitations are applied separately for items (other than the low-income housing credit and the rehabilitation credit) from each publicly traded partnership. Thus, a net passive loss from a publicly traded partnership should not be deducted from other passive income on the 1040. Instead, a passive loss from a publicly traded partnership is suspended and carried forward to be applied against passive income from the same publicly traded partnership in later years. If the partner's entire interest in the publicly traded partnership is completely disposed of, any unused losses are allowed in full in the year of disposition. If you have selected YES on Line F, any prior year loss from this publicly traded partnership will carry to the 1040, Schedule E, Line 28(f). See: Partner's Instructions for Schedule K-1 (Form 1065).
Note: This is a guide on entering Schedule K-1 (Form 1065) into the tax program. This is not intended as tax advice.
Additional Resources:
Partner's Instructions for Schedule K-1 (Form 1065)
Schedule K-1 (Form 1065) - Overview
Schedule K-1 (Form 1065) - Income (Loss) Items
Schedule K-1 (Form 1065) - Deductions
Schedule K-1 (Form 1065) - Self-Employment Earnings (Loss)
Schedule K-1 (Form 1065) - Credits & Foreign Transaction Items
Schedule K-1 (Form 1065) - Alternative Minimum Tax (AMT) Items
Schedule K-1 (Form 1065) - Tax Exempt Income, Non-Deductible Expenses, Distributions & Other Items