This article focuses solely on the entry of the Income (or Loss) items which are found on Lines 1 through 11 of the Schedule K-1 (Form 1065) Partner's Share of Income, Deductions, Credits, etc. For additional information regarding the requirements for Schedule K-1 (Form 1065), see: Partner's Instructions for Schedule K-1 (Form 1065).
To enter the income items from a K-1 (Form 1065) in TaxSlayer Pro from the Main Menu of the Tax Return (Form 1040) select:
- Income
- 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 screen.
The K-1 1065 Edit Screen has two distinct sections entitled Heading Information and Income, Deductions, Credits, and Other Items. After entering all of the information required on the K-1 Heading Information screen, select OK to proceed to the next section.
The K-1 1065 Edit Screen in the tax program has an entry for each box found on the Schedule K-1 (Form 1065) that the taxpayer received. A description of the income items contained in boxes 1 through 11, including each of the Codes for Other Income (Loss) that can be entered in Box 11 can be found below. The amounts shown in boxes 1 through 11 reflect the taxpayer's share of income items from the partnership. These amounts do not take into consideration the following limitations: the adjusted basis of the partnership interest; the amount for which the taxpayer is at risk; or the passive activity limitations. See: KB Article on Adjusted Basis Worksheet and Publication 925 - Passive Activity and At-Risk Rules.
Line 1 - Ordinary Income/Loss from Trade or Business Activities - Ordinary business income (loss) reported in Box 1 of the K-1 is entered as either Non-Passive Income/Loss or as Passive Income/Loss. Several factors determine whether the income is considered Passive or Non-Passive, including whether the taxpayer was a general or limited partner in the entity and their actual participation in the underlying partnership. See: Publication 925 - Passive Activity and At-Risk Rules.
If the income (loss) is entered as Non-Passive Income/Loss it will carry to the Schedule E (Form 1040), Line 28 column (k) for income or Line 28 column (i) for any loss. If the income (loss) is entered as Passive Income/Loss, it will carry to Worksheet 3 of Form 8582 – Passive Activity Loss Limitations, where any losses may be limited and any income may be offset by other passive losses that the taxpayer has. If the loss is allowed, it will then flow through to Schedule E (Form 1040).
If the Publicly Traded Partnership (PTP) box is checked on Line D of Part I of the Schedule K-1, a net passive loss from a publicly traded partnership will not be deducted from other passive income on the 1040 and this amount will not carry to either Schedule E (Form 1040) or Form 8582. Instead, a passive loss from a publicly traded partnership is suspended and it has to be carried forward to be applied against passive income from the same publicly traded partnership in later years. TaxSlayer Pro produces a PTP K-1 Worksheet which will show any suspended passive loss from a publicly traded partnership. The amount from the PTP K-1 Worksheet does not pull forward from the prior year return. See: Line M information in Schedule K-1 (Form 1065) - Heading Information and Partner's Instructions for Schedule K-1 (Form 1065).
In addition to being the entry field for Ordinary Income (Loss) from Trade or Business Activities that is reported on Box 1 of the K-1, this field is used to make other entries that are reported to the taxpayer on a Schedule K-1 (Form 1065) which should flow through to Schedule E, Line 28 or to Worksheet 3 of Form 8582. Accordingly, when an item needs to be reported on Schedule E, Line 28, column (k) or when an item needs to be reported on Line 28 column (g) for certain loss items or deduction items (these items will be subject to the passive activities limitations of Form 8582), it will be entered in this input line. When reporting such an item on Schedule E, Line 28, column (g) or column (k), a separate K-1 entry can be created instead of combining amounts to enter in the field. By creating separate K-1 entries, each item will be reported on a separate line of Line 28, Schedule E and not as a net amount. This will permit you to identify the source of the separate item on Line 28 of Schedule E.
Line 2 - Net Income/Loss from Rental Real Estate Activities - Net income (loss) from rental activities is reported in Box 2 of the K-1. When opening this field, three options for entering the Box 2 amount are available. Generally, the income (loss) reported in Box 2 is a passive activity amount unless the taxpayer is a real estate professional and can meet the criteria of materially participating in the activity. If the taxpayer is such a real estate professional the amount from Box 2 is not a passive activity and should be entered as Material Participation Income/Loss. For all other taxpayers the amount in Box 2 is a passive activity and as such would normally would be entered as either Active Income/Loss or as Non-Active Income/Loss.
Whether the amount in Box 2 is considered active or non-active is dependent on whether the taxpayer is an active participant in the rental activity. A taxpayer is not considered to actively participate in a rental real estate activity if, at any time during the tax year, the taxpayer's interest (including their spouse's interest) in the activity was less than 10% (by value) of all interests in the activity. Active participation is a less stringent requirement than material participation. A taxpayer may be treated as actively participating if they participated, for example, in making management decisions or arranging for others to provide services (such as repairs) in a significant and bona fide sense. Management decisions that are considered active participation include approving new tenants, deciding rental terms, approving capital or repair expenditures, and other similar decisions. To determine if the taxpayer is actively participating in the rental activity, see: Partner's Instructions for Schedule K-1 (Form 1065); Instructions for Form 8582 - Passive Activity Loss Limitations.
If the income (loss) is entered as Material Participation Income/Loss, it will automatically carry to the Schedule E (Form 1040), line 28, column (k) for income or Line 28, column (i) for any loss.
If the income (loss) is entered as Non-Active Income/Loss, it will automatically carry to Worksheet 3 of Form 8582 and is subject to the passive income limitations. Any Non-Active Income will flow through Form 8582 to Schedule E (Form 1040), unless a passive loss carryover or a passive loss from another activity exists (which may otherwise reduce or eliminate this income). Any Non-Active Loss will not flow through Form 8582 to Schedule E (Form 1040). Instead, any Non-Active Loss will only be applied against passive income in the current or future tax years. Instructions for Form 8582 - Passive Activity Loss Limitations.
If the income (loss) is entered as Active Income/Loss, it will automatically carry to the Worksheet 1 of Form 8582 and is subject to the Rental Real Estate Activities with Active Participation Special Allowance. In this instance, the taxpayer may, subject to certain income restrictions, be permitted to deduct up to $25,000 of the loss. Instructions for Form 8582 - Passive Activity Loss Limitations.
Line 3 - Net Income/Loss from Other Rental Activities - The amount reported in Box 3 is a passive activity amount for all taxpayers. The amount entered will automatically carry to the Worksheet 3 of Form 8582 and is subject to the passive income limitations. Any income will flow through Form 8582 to Schedule E (Form 1040), unless a passive loss carryover or a passive loss from another activity exists, which may otherwise reduce or eliminate this income. Any loss will not flow through Form 8582 to the 1040. Instead, any loss will only be applied against passive income in the current or future tax years. Instructions for Form 8582 - Passive Activity Loss Limitations.
If the Publicly Traded Partnership (PTP) box is checked on Line D of Part I of the Schedule K-1, a net passive loss from a publicly traded partnership will not be deducted from other passive income on the 1040 and this amount will not carry to either Schedule E or Form 8582. Instead, the passive loss from a publicly traded partnership is suspended and has to be carried forward to be applied against passive income from the same publicly traded partnership in later years. TaxSlayer Pro produces a PTP K-1 Worksheet which will show any suspended passive loss from the publicly traded partnership. See: Line M information in Schedule K-1 (Form 1065) - Heading Information.
Line 4a - Guaranteed Payment for Services - Amounts reported in Box 4 are considered not passive income and are considered active income for the taxpayer. Amounts contained in Box 4a will be reported on Schedule E (Form 1040), line 28, column (k) on a separate line with a description indicating it is a guaranteed payment for services. A Guaranteed Payment for Services is considered to be self-employment income and would not be consider as part of the Qualified Business Income reported by the entity in Box 20Z..
Line 4b - Guaranteed Payment for Capital - Amounts reported in Box 4b are considered not passive income and are considered active income for the taxpayer. Amounts contained in Box 4b will be reported on Schedule E (Form 1040), line 28, column (k) on a separate line with a description indicating it is a guaranteed payment for capital. A Guaranteed Payment for Capital is generally not considered to be self-employment income and should not be consider as part of the Qualified Business Income reported by the entity in Box 20Z
Line 4c - Total Guaranteed Payments - Amounts reported in Box 4c is the total of any amounts reported in Box 4a and Box 4b.
Line 5 - Interest - Amounts reported in Box 5 are not considered passive income. Amounts entered on this line will automatically flow to Line 2b of Form 1040.
Line 6A - Ordinary Dividends - Amounts reported in Box 6a are not considered passive income. Amounts entered on this line will automatically flow to Line 3b of Form 1040.
Line 6B - Qualified Dividends - Amounts reported in Box 6b are not considered passive income. Amounts entered on this line will automatically flow to Line 3a of Form 1040.
Line 6C - Dividend Equivalents - Amounts reported in Box 6c are not reported on the Form 1040 and are not carried by the tax program to any form. This amount is provided by the partnership as information to any partner that is not a U.S taxpayer or resident alien, and any amounts reported here may be treated as U.S source dividends. Any amount entered on this line has not been included as ordinary dividends in Box 6a.
Line 7 - Royalties - Amounts reported in Box 7 are not considered passive income. Amounts entered on this line will automatically flow to Schedule E (Form 1040), Line 4.
Line 8 - Net Short-Term Capital Gain/Loss - Amounts reported in Box 8 are not considered passive income. Amounts entered on this line will automatically flow to Schedule D (Form 1040), Line 5.
Line 9A - Net Long-Term Capital Gain/Loss - Amounts reported in Box 9a are not considered passive income. Amounts entered on this line will automatically flow to Schedule D (Form 1040), Line 12.
Line 9B - Collectible (28%) Rate Gain/Loss - Amounts reported in Box 9b are not considered passive income. Amounts entered on this line will automatically flow to a 28% Rate Gain Worksheet and then to Schedule D (Form 1040), Line 18.
Line 9C - Unrecaptured Section 1250 Gain - Amounts reported in Box 9c are not considered passive income. Amounts entered on this line will automatically flow to an Unrecaptured Section 1250 Gain Worksheet and then to Schedule D (Form 1040), Line 19.
Line 10 - Net Gain/Loss under Section 1231 - Enter the amount reported in Box 10 of the K-1. When exiting this field, a question asking "Is the Net Section 1231 Gain or Loss from a Passive Activity?' will be displayed on the screen. How this question is answered will affect the treatment that the Gain/Loss will receive.
If the amount is a gain (or a non-passive loss), it will automatically be reported on line 2, column (g), of Form 4797, Sales of Business Property. See: Instructions for Form 4797. If the amount is a loss from a passive activity, the loss will automatically carry to the Worksheet 3 of Form 8582 and is subject to the passive income limitations. See: Instructions for Form 8582 - Passive Activity Loss Limitations.
If the Publicly Traded Partnership (PTP) box is checked on Line D of Part I of the Schedule K-1, a net passive loss from a publicly traded partnership will not be deducted from other passive income on the 1040 and this amount will not carry to Form 4797 or Form 8582. Instead, the passive loss from a publicly traded partnership is suspended and has to be carried forward to be applied against passive income from the same publicly traded partnership in later years. TaxSlayer Pro produces a PTP K-1 Worksheet which will show any suspended passive loss from the publicly traded partnership. See: Line M information in Schedule K-1 (Form 1065) - Heading Information.
Line 11A - Other Portfolio Income (Loss) - Any entry in Box 11, Code A will occur if the partnership reports portfolio income other than interest, ordinary dividend, royalty, and capital gain (loss) income. The partnership should provide the taxpayer a statement informing the taxpayer of the type of portfolio income that is being reported.
Typically, only real estate mortgage investment conduits (REMIC) reports income (loss) on Line 11A. When the user opens this entry field they receive a menu that will allow the user to report the portfolio items that come from a REMIC. These items are REMIC Income (net loss) which will automatically carry to Schedule E (Form 1040), line 38, column (e); 'Excess Inclusion' which will automatically carry to Schedule E (Form 1040), line 38, column (c); and 'Section 212 expenses' which will automatically carry to Schedule E (Form 1040), line 38, column (d).
Line 11B - Involuntary Conversions - The amount reported in Box 11, Code B represents the net gain (loss) from involuntary conversions due to casualty or theft. This amount will not carry to any form or schedule in the program. The taxpayer should receive instructions from the partnership needed to complete Form 4684.
Line 11C - Section 1256 Contract & Straddles - The partnership will report any net gain or loss from section 1256 contracts in Box 11, Code C. The program will automatically pull this amount to Part I of Form 6781.
Line 11D - Mining Exploration Costs Recapture - The partnership will provide the taxpayer a statement that shows the information needed to recapture certain mining exploration costs. This amount will not carry to any form or schedule in the program. Each partner, not the partnership, elects whether to capitalize or to deduct that partner's share of exploration costs. See: Publication 535 - Business Expenses.
Line 11E - Cancellation of Debt - The amount in Box 11, Code E represents the taxpayer's portion of partnership debt that was cancelled. Generally, this cancellation of debt amount is included in the taxpayer's gross income and this amount will automatically be carried to Form 1040, Schedule 1, Line 21. Thereafter, a taxpayer may elect to apply any portion of the cancellation of debt amount excluded from gross income to the reduction of the basis of depreciable property if the indebtedness was indebtedness (other than qualified farm indebtedness) that (a) is incurred or assumed in connection with real property used in a trade or business, and (b) is secured by that real property. See: Instructions for Form 982 to determine if the taxpayer's cancellation of debt amount in Box 11 can be excluded from gross income.
Line 11F - Other Income (Loss) - Amounts reported in Box 11, Code F are other items of income, gain, or loss not included in Boxes 1 through 10 or reported in Box 11 using codes A through E. Any entry in this box will not automatically pull to the Form 1040. The taxpayer should receive instructions from the partnership needed to address the items contained in this box.
Note: This is a guide on entering the Income (Loss) items from Schedule K-1 (Form 1065) into the tax program. This is not intended as tax advice.
Additional Information:
Partner's Instructions for Schedule K-1 (Form 1065)
Schedule K-1 (Form 1065) - Overview
Schedule K-1 (Form 1065) - Heading Information
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