Schedule K-1: Your Guide to Basis, Liabilities, and More
- Viktoriya Barsukova, EA, MBA
- Sep 3
- 4 min read
By: National Association of Tax Professionals ·
Interpreting partnership reporting often requires navigating code references with limited context and little practical explanation. When precision is critical and time is short, relying on assumptions can compromise the accuracy of your work.
A clear understanding of what each entry represents allows you to correctly apply items such as basis adjustments, credits, and deductions that directly impact the return.
Below are some of the top questions from a recent webinar on Schedule K-1 (Form 1065), along with their answers.
Q: Where is the partner’s basis shown on Schedule K-1 (Form 1065)?
A: A partner’s outside basis is not shown as a total on the K-1. It consists of capital contributions, yearly increases and decreases based on income and distributions, and liabilities assumed by the partner. While the capital account and liabilities are reported separately, the total is best tracked on a basis schedule maintained by the partner or their preparer .
Q: What is the significance of recourse liability information reported on Schedule K-1 (Form 1065), Line K1?
A: Liabilities assumed by a partner increase outside basis. These boxes determine how much partnership debt a partner may include in their outside basis. The type of liability determines deductibility of losses, treatment of distributions, and gain or loss upon disposition .
Q: What is the purpose of Line K2, “Check this box if item K1 includes liability amounts from lower-tier partnerships”?
A: The K2 box is checked when liability amounts flow through from a lower-tier partnership. These amounts must be verified for accuracy, as they affect both at-risk and passive loss limitations. Best practice is not to assume liabilities are recourse without analyzing the true economic risk, especially in complex tiered structures .
Q: Where is information in Box 11, Code A, “Other Portfolio Income (Loss),” reported on Form 1040?
A: Generally, this income is reported on Schedule 1 (Form 1040), Line 8z, as “Other income,” unless it is subject to special reporting rules (e.g., investment income under specific provisions) .
Q: Are amounts reported in Box 11, Code zz (Net long-term capital gain/loss on assets held one to three years) combined with Box 9a (Net long-term capital gain/loss)?
A: Typically not. Code zz is a catch-all code and must include a description in an attached statement. Gains or losses in this box often relate to special tax rules, such as §1061 (carried interest) or §1231 property gains broken down by holding period .
Q: How should Box 13, Code H (Investment interest expense) be reported?
A: Use Form 4952, Investment Interest Expense Deduction, when the expense relates to portfolio investments like stocks, bonds, notes receivable, or partnerships held solely for investment .
Q: Where is foreign tax entered for claiming the foreign tax credit?
A: Box 21 reports the total foreign taxes paid. Schedule K-3 provides the detailed breakdown by source, which is required for completing Form 1116 (Foreign Tax Credit). The K-3 is essential to properly claim the credit .
Q: What is the difference between a general partner and a limited partner?
A: Generally, limited partners are considered passive investors exempt from self-employment (SE) tax. However, if a “limited” partner participates in management decisions or operations, their Box 1 income becomes subject to SE tax. Court rulings, including Soroban Capital Partners, LP (2023) and Denham Capital Management, LP (T.C. Memo. 2024-114), emphasize functional analysis of duties rather than titles .
Q: Can a partner’s capital account be negative while outside basis cannot drop below zero?
A: Yes. For example, distributions exceeding a capital account balance may create a negative capital account. Outside basis, however, is reduced only to zero. Any excess loss is suspended until capital is restored .
Q: If Box L2 is checked, does this mean the Schedule K-1 belongs to a retirement plan and should not be reported on Form 1040?
A: Correct. If the K-1 is owned by a retirement plan, it is reported by the plan custodian, not on the partner’s Form 1040 .
Q: What is the difference between Box 11 Codes M and N?
A: Both codes relate to §1045 (rollover of gain for replacement of qualified small business stock). Code M shows replacement stock purchased by the partnership. Code N shows gain amounts not used for replacement stock, generally taxable unless the partner makes a §1045 election .
Q: For Form 8283, Noncash Charitable Contributions, does the K-1 show the full contribution or the partner’s share?
A: Only the partner’s share is reported in Box 13, Code E .
Q: Is health insurance (Box 13, Code M) also reported under guaranteed payments in Box 4?
A: Yes. It is reported as both a guaranteed payment in Box 4 and a deduction in Box 13, Code M. While this may seem inconsistent, it reconciles on Schedule M-1, where guaranteed payments are added back to book income, except for health insurance .
Bottom Line - Schedule K-1
Schedule K-1 reporting involves much more than simply transferring numbers. Correctly interpreting basis, liabilities, and special codes ensures accurate tax outcomes and prevents costly errors. For deeper learning, you can access the full on-demand webinar through NATP.
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