Key Takeaways
- Schedule K-1 reports each partner's distributive share of income, deductions, credits.
- Separately stated items have special tax treatment at the partner level.
- Ordinary business income is on Line 1; separately stated items elsewhere.
- General partners' distributive share is subject to self-employment tax.
- Box 20 (Code Z) reports QBI for the §199A deduction.
- Guaranteed payments are NOT QBI.
Schedule K-1: Partner's Share
Why This Matters for the Exam
Schedule K-1 is how partnership items flow to partners. The exam tests separately stated items, SE tax treatment, and QBI reporting.
Expect at least 3-4 questions on Schedule K-1.
What Is Schedule K-1?
Schedule K-1 (Form 1065) reports each partner's share of:
| Item | How Reported |
|---|---|
| Ordinary business income | Flow to partner's return |
| Separately stated items | Character preserved |
| Credits | Applied at partner level |
| Tax basis adjustments | Track outside basis |
Separately Stated Items
Certain items must be separately stated to preserve special tax treatment:
| Item | Why Separate |
|---|---|
| Capital gains/losses | Preferential rates (0/15/20%) |
| Section 1231 gains | Special netting rules |
| Charitable contributions | AGI limitations |
| Section 179 deduction | Dollar and investment limits |
| Foreign taxes | Foreign tax credit |
| Investment interest | Investment income limit |
Key K-1 Boxes
| Box | Item |
|---|---|
| 1 | Ordinary business income (loss) |
| 4 | Guaranteed payments |
| 5 | Interest income |
| 8a | Net ST capital gain (loss) |
| 9a | Net LT capital gain (loss) |
| 10 | Net §1231 gain (loss) |
| 12 | Section 179 deduction |
| 13 | Charitable contributions |
| 16 | Foreign taxes |
| 20 | Other info (QBI, etc.) |
Self-Employment Tax Treatment
| Partner Type | SE Tax on Distributive Share? |
|---|---|
| General partner | Yes |
| Limited partner | No (with exceptions) |
| Guaranteed payments (services) | Yes (all partners) |
| Guaranteed payments (capital) | No |
QBI Reporting (Box 20, Code Z)
The 20% QBI deduction (§199A) is permanent. Partnerships report QBI in Box 20, Code Z.
| Tax Year 2024 Thresholds | Amount |
|---|---|
| Single | $191,950 |
| MFJ | $383,900 |
| Above thresholds | W-2 wage/UBIA limits apply |
Guaranteed Payments and QBI
| Rule | Effect |
|---|---|
| Guaranteed payments | NOT QBI |
| Effect on partnership | Reduces overall QBI |
| Effect on partner | Ordinary income, no 20% deduction |
Where K-1 Items Go
| Partner Type | Form | Line |
|---|---|---|
| Individual | Schedule E, Page 2 | Part II |
| C Corporation | Form 1120 | Other income |
| S Corporation | Form 1120-S | Pass through again |
Real-World Scenario
Scenario: General partner receives K-1 showing $80,000 ordinary income and $10,000 LTCG. Partner also received $15,000 guaranteed payment.
- Ordinary income: $80,000 (SE tax applies as general partner).
- LTCG: $10,000 (preferential rates, separately stated).
- Guaranteed payment: $15,000 (ordinary income, SE tax, NOT QBI).
- QBI: $80,000 (excludes guaranteed payment).
On the Exam
Expect 3-4 questions on K-1, typically:
- Separate Statement Questions: "Which item is separately stated?"
- SE Tax Questions: "Is general partner's share subject to SE tax?"
- QBI Questions: "Where is QBI reported on K-1?"
The key is to remember: Separately stated = special treatment. General partners = SE tax on ordinary income. QBI in Box 20; guaranteed payments NOT QBI.
Which item would be separately stated on Schedule K-1?
General partner receives K-1 showing $50,000 ordinary income, no cash distributed. SE tax treatment?
Where is QBI reported for §199A deduction?