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USING YOUR K-1: BASIS INFORMATION

March 28, 2008

We discussed yesterday how information flows from a partnership or S corporation to your 1040 via the Schedule K-1. Unfortunately, as elaborate as the K-1 is, it doesn't necessarily have all of the information you need.

When the K-1 shows nothing but income items, reporting the information is usually simple. When the K-1 shows losses, things can get complicated.

There are three limits that apply to the use of K-1 losses, applied in the following order:

1. You can't deduct losses in excess of your basis.
2. Even if you have basis to deduct losses, the basis has to be "at-risk," and
3. Even if the basis is "at-risk," losses that are "passive" might be limited.

Neither the 1065 (partnership) or 1120-S (S corporation) K-1s are well designed to tell you what your basis is. The taxpayer or the tax preparer for the K-1 have to do that, year-by-year.

COMPONENTS OF BASIS

- Your basis starts with your initial investment in your ownership interest.

-It is increased by taxable income and deductible expenses, as reported in lines 1-12 of the 1120-S K-1, or lines 1-13 of the 1065 K-1.

-It is increased by tax-exempt income (like municipal bond income) and reduced by permanently non-deductible expenses (like the 50% non-deductible portion of meals and entertainment expenses); these are reported on line 16 of the 1120S K-1 and line 18 of the 1065 K-1.

- It is increased by capital contributions, which appear nowhere on the 1120S K-1 and on Part I, line L of the 1065 K-1.

- It is reduced by distributions, which are on line 16 of the 1120-S K-1 and Line 18 of the 1065 K-1.

20080328-1.JPG
excerpt form 2007 Form 1065 K-1

You can also get basis for losses in an S corporation by making direct loans to the corporation. Nothing on the S corporation K-1 tells you how much basis you have from loans.

Partners - unlike S corporation owners - can also get basis from loans to the partnership by third parties. This information shows up in Part II, Line K of the 1065 K-1.

20080328-2.JPG

Sometimes, depending on how the partnership K-1 is prepared, you can combine your share of debt with your "ending capital account" on Line L, part II, of the K-1 to determine your basis. This usually only is possible in a simple partnership that has the line L "tax basis" box checked. Otherwise, you need to track your own basis on the side.

Next: Are you "at-risk"?

This is part of our daily series of 2008 filing-season tips that we are running through April 15.

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Comments

Hello!

My husband has a S-corporation. He only made about $7K last year, $1600 vehicle depreciation. He is the only owner.

How do I flow this info from K-1 to his 1040 form?

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