Question

Beth received a K-1 from her mother's estate. Beth received passive income of $3,921 on 11/1/2017 from the estate (Doris Freeman Estate). The K-1 received from the partnership also includes Beth's proportionate share of loss from HammerNail LP (a limited partnership interest inherited from her mother) is a passive loss of $3,421. Ignore Form 8582 the limited partnership will provide the form.

How will this information be reported on 2017 Form 1040 or related schedules?

Answer 1

Schedule K-1 (Form 1065) is a document prepared by a partnership as part of the filing of their tax return. After filing Form 1065, each partner is provided a Schedule K-1 by the Partnership. The K-1 reflects a partner’s share of income, deductions, credits and other items that the partner will need to report on their individual tax return (Form 1040).

Most of the items contained on a Schedule K-1 are entered in appropriate line of the taxpayer’s 1040. Some items may have to be entered on other entry menus based on the item and/or the election that the taxpayer makes on how to treat that income, deduction or credit item.

The actual Schedule K-1 consists of three parts:

Part I - Information about the Partnership: This section contains basic information about the partnership such as its Name, Address and the nature of partnership.

Part II - Information about the Partner: This section contains information about the partner and the nature of their partnership share, that is, whether the liability of the partners is limited of unlimited or recourse or non recourse.

Part III - Partner’s Share of Current Year Income, Deductions, Credits, and Other Items: This section is used to report the partner's share.

To enter income under a K-1 (Form 1065) enter it under the Income Menu Rents, Royalties, Entities (SCH E, K-1, 4835, 8582).

To enter Loss under a K-1 (Form 1065) use the code for the type of Loss that is incurred. 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.

If the income (loss) is entered as Non-Passive Income/Loss it will carry to the Schedule E (Form 1040), Line 28 column (j) for income or Line 28 column (h) 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).