Schedule K-1: your guide to basis, liabilities and more
Interpreting partnership reporting often involves navigating code references with limited context and little practical explanation. When precision is critical and time is limited, relying on assumptions can compromise the accuracy of your work.
A clear grasp of what each entry represents allows you to correctly apply items such as basis adjustments, credits and deductions that directly impact the return.
Below, you’ll find a few of the top questions from a recent webinar on the topic and their corresponding answers. If you choose to attend the on-demand version of this webinar, you can access the full recording and the entire list of Q&As.
Q: Where is the partner’s basis shown on the Schedule K-1 (Form 1065)?
A: A partner’s outside basis is actually not shown as a total on the K-1 since it is comprised of capital contributions, yearly increases and decreases based on income and distributions, and liabilities assumed by the partner. Although the capital account is listed, and liabilities are listed separately, the total number is found, as best practice, on a basis schedule kept by the partner (or their tax preparer).
Q: What is the significance of recourse liability information reported on Schedule K-1 (Form 1065), Line K1?
A: Since liabilities assumed by a partner are treated as additions to outside basis, these boxes determine how much partnership debt a partner may include in that outside basis. Different types of partners may assume different types of debt. This, in turn, affects the ability to deduct losses, receive tax-free distributions and recognize gain or loss on disposition of the interest.
Q: Where is the foreign tax entered for claiming the foreign tax credit?
A: For informational purposes only, the foreign tax paid goes in Box 21 as a general number but the Schedule K-3, Partner’s Share of Income, Deductions, Credits, etc. – International, breaks down the foreign taxed income by source, which is a prerequisite for claiming the foreign tax credit on an individual level. The Schedule K-3 information is used to complete Form 1116, Foreign Tax Credit (Individual, Estate, or Trust).
Q: What is the difference between a general partner and limited partner?
A: This issue is currently being clarified in the courts, as there is a basic understanding of a limited partner as an investor with no management duties. As such, their income is exempt from self-employment (SE) tax. Limited partners may be named “limited” by state practices, but if they engage in management and operations decisions on a daily basis, their Box 1 income will be subject to SE tax. Soroban Capital Partners, LP (2023), and Denham Capital Management, LP (T.C. Memo. 2024-114) are court cases to refer to. Their focus is a functional analysis of duties that actually sets true status.
To learn more about Schedule K-1 1065 instructions, you can watch our on-demand webinar. NATP members can attend for free, depending on membership level! If you’re not an NATP member and want to learn more, join our completely free 30-day trial.