A [**GLOSSARY TERM Partnership] is an unincorporated business venture with 2 or more partners; it is a "pass-through" entity, meaning it doesn't pay its own tax, but instead reports income that partners put on their personal income tax returns. Partnerships file a Form 1065 and then Schedule K-1s for each partner are generated out of that tax return. Each line amount on Schedule K-1 (Form 1065) is reportable somewhere else on a tax return assuming that neither the [**NEW GLOSSARY TERM basis limitation] nor the [**GLOSSARY TERM at-risk limitation] will affect the deductible losses.
An [**GLOSSARY TERM S Corporation] differs from a partnership in that it is incorporated, but in many other respects, it is similar to a partnership. It generally doesn't pay its own tax, but passes through income and deductions to the shareholders via Schedule K-1 (Form 1120S). Traditional corporations (sometimes called C Corporations) are different from S Corporations, among other things, in that C Corporations pay their own tax - they do not issue K-1s to shareholders.
The Schedule K-1 is a reporting document, like a W-2 or 1099-INT. It generally will show investment income, like interest, dividends and capital gains/losses as well as passive income like rents or nonpassive business income. You also may see some deductions and credits on this form. Some of the entries are merely carried over to a particular form, but others may be carried to different places depending on what they represent. TaxCut will ask questions in the interview to be sure these items go to the right place on your tax return.
Income (or loss) is classified as either [**GLOSSARY TERM passive income] or nonpassive income. Most of the income on a K-1 is passive for many taxpayers. The classification is important because it will determine where any income (or loss) is reported on the taxpayer’s return. There are restrictions on taking passive losses against ordinary income - these are called the [**GLOSSARY TERM passive loss rules]. The general rule is that passive losses can only offset passive income.
Passive income is income derived from a passive activity. There are two types of passive activities. A trade or business activity in which the taxpayer does not [**GLOSSARY TERM materially participate] during the year is one type of passive activity. Rental activities, regardless of whether a taxpayer materially participates or not, are the other type of passive activity. However, if a taxpayer is a [**NEW GLOSSARY TERM real estate professional], income derived from rental activities is nonpassive.
Whatever type of income you have from your K-1, TaxCut will guide you through the entry of your data. Just visit the Partnerships and S Corps (K-1) topic by using Take Me To.. You'll find it under the Business, Rental, Partnership, Farm and Royalty heading in the Income section.