Shareholder's Share of Income, Deductions, Credits, etc. (Sch K-1); (Sch K-1 Worksheet)

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Department of the Treasury

;APP&CVEB WITH CHANGES

Internal Revenue Service

A

Shareholder's 'lnstr~~ctions
for Schedule K-1
(Form 1 120s)
Shareholder's Share of Income, Deductions, Credits, etc.
(For Shareholder's Use Only)
Sect~onreferences are to the Internal
same way that the corporatlon treated
Revenue Code unless otherwise noted. c7 the items on its return.

Purpose of Schedule K-I
The corporation uses Schedule K-1 to
report your share of the corporation's
income (reduced by any tax the
corporation paid on the income),
deductions, credits, etc. Keep it for
your records. Do not file it wrth your
tax return. The corporation has filed a
copy with the IRS.
You are liable for tax on your share
of the corporation's income, whether
or ovt distributed. Include your share
on your tax return if a return is
required. Use these instructtons to
help you report the items shown on
Schedule K-1 on your tax return.

The amount of loss and deduction
that you may claim on your tax return
may be less than the amount
reported on Schedule K- 1 . It is the
shareholder's responsibility to
consider and apply any appllcabre
limitations. See Limitations on
Losses, Deductions, and Credrls
beginning on page 2 for more
information.
Schedule K - l does not show
actual dividend distributions the
corporation made to you. The
corporation must report such
amounts totaling $1 0 or more for the
calendar year on Form 1099-DtV,
Dtvidends and Dlslributions.

Inconsistent Treatment
of items
Generally, you must report corporate
items shown on your Schedule K-I
(and any attached schedules) the

11the treatment on your original or
amended return is inconsistent with
the corporation's treatment, or if the
corporation has not filed a return, file
Form 8082, Notice of Inconsistent
Treatment or Administrative
Adiustment Request (AAR), with your
original or amended return to identity
and explain any inconsistency (or to
note that a corporate return has not
been tiled).
If you are required to file Form
8082, but fail to do so, you may be
subject to the accuracy-related
penalty. This penalty is in addition l o
any tax that results from making your
amount or treatment of the item
consistent with that shown on the
corporation's return. Any deficiency
that results from mak~ngthe amounts
consistent may be assessed
immediately.

Errors
If you believe the coporallon has
made an error on your Schedule K-1,
notify the corporation and ask for a
corrected Schedule K-1 . Do not
change any items on your copy of
Schedule K - I . Be sure that the
corporatlon sends a copy of the
corrected Schedule K-1 to the IRS. If
you are unable to reach agreement
with the corporalion regarding the
inconsistency, you must file Form
8082.
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International Boycotts
Every corporation that had operations
in, or related to, a boycott~ngcountry,
company, or a national of a country,
must file Form 5713, International
Boycott Report
If the corporatron cooperaled with
an international boycott. it must grve
you a copy of its Form 57 13. You
must file your own Form 571 3 to
Ca!, No. 1 152 10

report the corporation's activities and
any other boycott operations that you
may have. You may lose certain tax
benefits if the corporation participated
in, or cooperated with, an
international boycott. See Fom 5713
and its instructions for details.

Elections
Generally, the corporation decides
how to iigure taxable income from its
operations. However, cenain
elections are made by you separately
on your income tax return and not by
the corporation. These elections are
made under the following code

sections.
Section 59(e) (deduction of certain
qualified expenditures ratably over
the period of time specifled in that
section). For details, see the
instructions for code I In box 12.
Section 263A(d) (preproductive
expenses). See the instructions for
code L in box 12.
Section 61 7 (deduction and
recapture of certain mining

attributable to that change ratably
over 4 tax years, see Rev. Proc.
2003-79, 2003-45 I.R.B. 1036. tf YOU
made the eiection, you must file Form
8082 with your income tax return for
each of the 4 tax years. File Form
8082 for this purpose in accordance
with Rev. Proc. 2003-79instead of
the Form 8082 instructions.

Additional Information
For more ~nlormationon the
treatment of S corporation income,
deductions, credits, etc., see Pub.
535. Business Expenses; Pub. 550,
Investment income and Expenses;

Basis is not increased by
rncome from discharge of your
indebtedness in the S
corporation (nor by any amount
included in income with respect to
qualified zone academy, clean
renewable energy, or gulf tax credit

and Pub. 925, Passive Activity and
At-Risk Rules.
To get forms and publications, see
the instructions for your tax return or
visit the IRS website at www.irs.gov.

Limitations on Losses,
Deductions, and Credits

bonds).
2. Basis is decreased by property
distributions (including cash) made by
the corporation (excluding dividend
distributions reported on For
1099-DIV and distributions i
of basis) reported On
box 16, code 0.

There are three potential limitations
on corporate losses that you can .
deduct on your return. These
limitations and the order in which you
must apply them are as follows: the
basis rules, the at-risk limitations, and
the passive activity limitafions. Each
ot these limitations is discussed
below.
Other limitations may apply to
specific deductions (for example, the
section 179 expense deduction).
Generally, specific limitations apply
before the basis, at-risk, and passive
loss limitations.

nondeductible expenses
depletion deduction for
gas property held by

Worksheet far Flguring a Shareholder's
Stock Basis

Basis Rules

1

Generally, !he deduction for your
share of aggregate losses and
deductions reported on Schedule K-1
is limited to the basis of your stock
(determined with regard to
distributions received during the tax
year) and loans from you to the
corporation. The basis of your stock
is figured at year-end. Any losses and
deductions not atlowed this year
because of the basis limit can be
carried foward indefinitely and
deducted in a later year subject to the
basis limit for that year.
You are responsible for keeping
the information needed lo figure the
basis of your stock in the corporation.
Schedule K-1 provides information to
help you figure your stock basis at the
end of each corporate tax year. The
basis of your stock (generally, its
cost) is adjusted as follows and,
except as noted, in the order listed. In
addition, basis may be adjusted
under other provis~onsof the Internal
Revenue Code. You can use the
Worksheet for Figuring a
Shareholder'sStock Basis to figure
your aggregate stock basis.
1 . Basis is increased by (a) all
income (including tax-exempt
income)reported OR Schedule K-1
and (b) the excess of the deduction
for depletion (other than oil and gas
depletion) over the basis of the
properiy subject to depletion.
You must report the taxable
income on your refurn (if you
are required fo file one) fur it
to increase your basts.

the

the property's adjusted basis exceeds
that deduction.
4. Basis is decreased by alt
deductible losses and deductions
reported on Schedule K-1 adjusted, if
the corporation made a charitable
contribution of property, by
subtracting the property's fair market
value and adding the property's
adjusted basis.
You may eloct lo decrease your
basis under
prior to decreasing
your basis under (3)on page 2.If you
make this election, any amount
described under (3) that exceeds the
basis of your stock and debt owed to
you by the corporation is treated as
an amount descrrbed under (3) for the
following tax year.

Keep for Your Records

?. Your stock basis at the beginning of the year . . . . .
2. Money and your adjusted basis in property contributed to

the corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3. Your share of the corporation's income (including
tax-exernpl ~ncome)reduced by any amount included in

income with respect to qualified zone academy, clean
renewabte energy, or gulf tax credit bonds . . . . . . . . . . . . .

1

. 4. Other increases to basis, including your share of the excess
of the deductions for depletion (other than ail and gas
depletion) over the basis of the property subject to depletion
Decreases:

5. Dislnbutions of money and the fair market value of property
(excluding dividend distributions reportable on Form
1099-0lV and distributions in excess of basts) . . . . . . . . . .

6. Enter: (a) your share of the corporation's nondeductible
expenses and lhe depletion deduction for any oil and gas
property held by the corpomt~on(but only to the extent your
share ot the property's adjusted basis exceeds the
depletion deduction) or (b) if the election under Regulat~ons
section 1.I 367-1(g) applms, your share of the corporation's
deductions and losses (include your entlre share of the
section 179 expense deduction even if your allowable
section 179 expense deduction is smaller) adjusted, if the
corporation made a charitable contribution ot property, by
subtraciing your share of the far market value of the
contributed property and adding your share of the
property's adjusted basis . . . . . . . . . . . . . . . . . . . . . . . . .
7. If the election under Regulations seclion 1.1367-1(g)
applies, enter the amount from 6Ia) above. Otherwise enter
the amount from 6(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8. Enter the smaller of (a) the excess of the amount you are
owed for loans you made to the corporation over your basis
in Rose loans or (b) the sum of lines 1 through 7. This
amount increases your loan basis . . . . . . . . . . . . . . . . . .

1

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9. Your stock basis in the corporation at end of year. Combine
lrnes I through B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Instructions for Schedule K-1 (Form l120S)

To make the election, attach a
statement to your timely filed original
or amended return that states you
agree to the carryover rule of
Regulations section 1.I 367-1(g) and
the name of the S corporation to
which the rule applies. Once made,
the election applies to the year for
which it is made and all future tax
years for that S corporation, unless
the IRS agrees to revoke your
election.
The basis of each share 01 stock is
increased or decreased (but not
below zero) based on its pro rata
share of the above adjustments. If the
total decreases in basis attributable to
a share exceed that share's basis,
the excess reduces (but not below
zero) the remaining bases of all other
shares of stock in proponion lo the
remaining basis of each of those
shares.
Basls of loans. The basis of your
loans to the corporation is generally
the balance the corporation owes
you. adjusted for any reductions and
restoralions of loan basis (see the
instructions for box 16, code E). Any
amounts described in (3) and (4) on
page 2 not used to offset amounts in
(1) on page 2, or reduce your stock
basis, are used to reduce your loan
basis (to the extent of such basis
prior to such reduction).

a

When determtning your basis
in loans to the corporation,

remember that
Distriburions do not reduce loan
basis, and
Loans that a shareholder
guarantees or co-signs are not part of
a shareholder's loan basis.
See section 1367 and its
regulations for more details.
Worksheet instructions. For lines
6 and 7, do not enter more than the
aggregate sum of the preceding lines.
Any excess of the amounts that
would otherwise be entered on lines 6
and 7 without regard to this limit over
the amounts actually entered on
those lines is a reduction to your
basis, if any, in loans you made to the
corporation (to the extent of such
basis). Any portion of the excess not
used to reduce your basis in stcck
and loans is not deductible in the
current year and is carried over lo
next year and subject to that year's
basis limit. See the preceding
instructions for more details.

At-Risk Limitations
Generally, you will have to complete
Form 6198, At-Risk Limitations, to
Instructions lor Schedule K-I (Form 1 121

figure your altawable loss, ii you
have:
A loss or other deduction from any
actfvity carried on by the corporation
as a trade or business or for the
production of income, and
Amounts in the activity for which
you are not at risk.

at-risk rules generally limit the
amount of loss and other deductions
that you can claim to the amount you
could actually lose (your economic
loss) in the activitv. These losses and
deductions include a loss on the
disposition of assets and the section
179 expense deduction. However, if
you acquired your stock before 1987,
the at-risk rules do not apply to losses
from an activity of holding real
property placed in service before
1987 by the corporation. The activity
of holding mineral property does not
qualify for this exception. The
corporation should identify on an
attachment to Schedule K-1 any
losses that are not subject to the
at-risk limitations.
Generally, you are not at risk for
amounts such as the following.
The basis of your stock in the
corporation or the basis of your loans
to the corporation if the cash or other
properly used to purchase the stock
or make the loans was from a source
(a) covered by nonrecourse
indebtedness (except for certain
qualified nonrecourse financing, as
defined in section 465(b)(6)); (b)
protected against loss by a
guarantee, stop-loss agreement, or
other similar arrangement: or (c) that
is covered by indebtedness from a
person who has an interesl in the
activity or from a person related to a
person (except you) having such an
interest, other than a creditor.
Any cash or property contributed to
a corporate activity, or your interest in
the corporate activity, that is (a)
covered by nonrecourse
indebtedness (except for certain
qualified nonrecourse financing, as
defined in sectlon 465(b)(6)); (b)
protected against toss by a
guarantee, stop-loss agreement, or
other similar arrangement; or (c)that
is covered by indebtedness from a
person who has an interest in the
activity or from a person related to a
person (except you) havlng such an
interest, Olher than a creditor.

Any loss from a section 465
activity not allowed for this tax year
will be treated as a deduction
allmable to the actlv~tyin the next tax
year.

You should get a separate
statement of income, expenses, etc.,
for each activity from the corporation.

Passive Activity Limitations
Section 469 provides rules that limit
the deduction of certain losses and
credits. These rules apply to
shareholders who:
Are individuals, estates, or trusts,

,

and
Have a passive activity loss or

,

credit for the tax year,
Generally, passive activities
include:
1. Trade or business activities in
which you did not materially
participate and
2. Activities that meet the
definition of rental activities under
Temporary Regulations section
1.469-1 T(e)(3) and Regulations
section 1.469-1(e)(3).

Passive activities do not include:
1. Trade or business activities in
which you materially participated.
2. Rental real estate activities in
which you materially participated if
you were a real estate prolessional
for the tax year. You were a real
estate professional only if you met
both of the following conditions.
a. More than half of the personal
services you performed in trades or
businesses were performed in real
property trades or businesses in
which you materially participated and
b. You performed more than 750
hours of services in real property
trades'or businesses in which you
materially participated.
For purposes of this rule, each
interest in rental real estate is a
separate activity, unless you elect to
treat all interests in rental real estate
as one activity. For details on making
this election, see the Instructions for
Schedule E (Form 1040).
If you are married filing jointly,
either you or your spouse must
separately meet both of the above
conditions, without taking into
account sewices performed by the
other spouse.
A real property trade or business is
any real property development,
redevelopment, construction,
reconstruction, acquisition,
conversion, rental, operation,
management, leasing, or brokerage
trade or business. Services you
performed as an employee are not
treated as performed in a real
property trade or business unless you
owned more than 5% of the stmk (or

C??
more than 5% of the capital or profits
interest) in the employer.
3. The rental of a dwelling unit any
shareholder used for personal
purposes during the year for more
days or lo%of
than the greater of
the number of days that the residence
was rented at fair rental value.
4. Activities of trading personal
propew
the
of Owners Of
interests in the activities.

If you have a passive activity loss
or credit, use Form 8582, Passive
Act~vitytoss Limitations. to figure
your allowable passive losses, and
Form 8582-CR,Passive Activity
Credit Limitations, to figure your
allowable passive credits. See the
instructions for these forms for
details.
If the corporation had more than
one activity, it will attach a statement
to your Schedule K-1 that identifies
each activity (trade or business
activity, rental real estate activity,
rental activity other than rental real
estate, etc.) and specifies the income
(loss), deductions, and credits from
each activity.
Material participation. You must
determine taf if you materially

each rental real estate adiviw held
through the corporation. All
determinations of material
participation are based on your
participation duringthe corporation's
tax year.
Material participation standards for
shareholders who are individuals are
listed below. Special rules apply to
certain retired or disabled fanners
and to the surviving spouses of
farmers. See the Instructions for
Form 8582 for details.
Individuals. If you are an
individual, you materially participated
in an activity only if one or more of
the following apply.
1. You participated in the activity
tor more than 500 hours during the
tax year.
2. Your participation in lhe activity
for the !ax year constituted
subslantialty all the participation in
the act~vityof all individuals (including
individuals who are not owners of
interests in (he activity).
3, You participated in the activity
for more than 100 h w r s during the
tax year, and your participation in the
activity for the tax year was not less
than the participation in the activity of

any other individual (including
individuals who were not owners of
interests in the activity) for the tax
year.
4. The activity was a significant
parlcipation activity for the tax year,
in all significant
and you
participation activities (including
,divities outside the
during the year for more man 500
hours. A significant participation
activity is any trade or business
activity in which you participaled for
more than 100 hours during the year
and in which you did not materially
participate under any af the material
participation tests (other than this
test).
5. You materially participated in
the activity for any 5 tax years
(whether or not consecutive) during
the 10 tax years that immediately
precede the tax year.
6. The activity was a personal
service activity and you materially
partjcipated in the activity for any 3
tax years (whether or not
consecutive) preceding the tax year.
A personal service activity involves
the performance of personal services
in the fields of health, law,
engineering, architecture, accounting,
actuarial science, performing arts,
consulting, or any other trade or
business in which capital is not a
mafena, imome-produoing factor,
7. Based on all the facts and
c~rcumstances.you participated in the
activity on a regular, continuous, and
substantial basis during the tax year,

Work counted toward material
participation. Generally, any work
that you or your spouse d w s in
connection with an activity held
through an S corporation (where you

own your stock at the time the work is
done) is counted toward material
participation. However, work in
connection with the activity is not
counted toward material participation
if e~therof the tollowing applies.
1. The work is not the type of work
that owners of the activity would
usually do and one of the principal
Durposes of the work that you or your
spouse does is to avoid the passive
loss or credit limitations.
2. You do the work in your
capacily as an investor and you are
not directly involved in the day-to-day
operations of the activity. Examples
of work done as an investor that
would not count toward material
panic~pationinclude:

a. Studying and reviewing
financial stalements or reports on
operations of the activity,
b. Preparing or compiling
summaries or analyses of the
finances or operations of the activity
lor your own use, and
c. Monitoring the finances or
operations of the activity in a
nonmanagerial capacity.

Effect of determination. Income
(loss), deductions, and credits from
an activity are nonpassive if you
determine that:
You materially participated in a
trade or business activity of the
corporation, or
You were a real estate professional
(defined on page 3) in a rental real
estate activity of the corporation.
If you determine that you did not
materially padkipate in a trade or
business activity of the corporation, w
if you have income (loss), deductions,
or credits from a rental activity of the
corporation (other than a rental reaf
estate activity in which you materially
participated as a rea! estate
professional), the amounts from that
activity are passive. Report passive
income (losses), deductions, and
credits as follows.
1. If you have an overall gain (lhe
excess of income over deductions
and losses, including any prior year
unallowed loss) from a passive
activity, report the income,
deductions, and losses from the
activity as indicated in these
~nstructions.
2. If you have an overall loss (the
excess of deductions and losses,
including any prior year unallowed
loss, over income] or credits from a
passive activity, report the income,
deductions, losses, and credits from
all passive activities using fhe
Instructions for Form 8582 or Form
8582-CR, to see if your deductions,
losses, and credits are limited under
the passive activity rules.
Special allowance for a rental real
estate activity. I f you actively
participated in a rental real estate
activity. you may be able to deduct up
to $25,000 of the loss from the
activity tram nonpassive income. This
'special allowancen is an exception to
the general rule disallowing losses in
excess of income from passive
act~vities.The special allowance is
not available if you were married, file
a separate return lor the year, and did
not live apart from your spouse a\ all
times during the year.
itructions tor Schedule K-1 (Form 1120s)

Only individuals and qualifying
eslates can actively participate in a
rental real estate activity. Estates
(other than qualifying estates) and
trusts cannot actively participate.
You are not considered to actively
participate in a rental real estate
activity if, at any time during the tax
year, your interest (including your
spouse's interest) in the activity was
less than 1Ooh (by value) of all
interests in the activity.
Active participation is a less
stringent requirement than material
participation. You may be treated as
actively participating if you
participated, for example, in making
management decisions or in
arranging for others to provide
services (such as repairs) in a
significant and bona fide sense.
Management decisions that can
cwnt as active participation include
approving new tenants, deciding
rental terms. approving capital or
repair expenditures, and other similar
decisions.
An estate is a qualifying estate if
the decedent would have satisfied the
active participation requirement for
the activity tor the tax year the
decedent died. A qualifying estate is
treated as actively participating for tax
years ending less than 2 years after
the date of the decedent's death.
Modifled adjusted gross income
limitation. The maximum special
allowance that single individuals and
married individuals filing a joint return
can qualify for is $25,000. The
maximum is $1 2,500 for married
individuals who file separate returns
and who lived apart at all times during
the year. The maximum special
allowance for which an estate can
qualify is $25,000 reduced by the
special allowance for which the
surviving spouse qualifies.
lf your modified adjusted gross
income (defined below) is $100,000
or less ($50,000 or less if married
filing separately), your loss is
deductible up to the maximum special
allowance referred to in the preceding
paragraph. If your modified adjusted
gross income is more than $100,000
(more than 550,000 if married filing
separately), the special ailowance is
limited to 50°& ot the difference
between $150,000 ($75,000 if
married filing separately) and your
modifled adjusted grass income.
When modified adjusted gross
income is $1 50,000 or more ($75,000
or more i f married filing separately),
there is no special allowance.
Instructions for Schedule K-1 (Form 1120

Modified adiusted gross income is

your adjusted gross income figured
without taking into accwnt:
Any passive actlvity loss.
Any rental real estate loss allowed
under section 469 c 7 to real estate
professionals (de ~ n e don page 3).
Any overall loss from a
publicly-traded partnership.
Any taxable swial security or
equivalent railroad retirement
benefits.
Any deductible contributions to an
IRA or certain other qualified
retirement plans under section
The domestic production activities
deduction.
The student loan interest
deduction.
The tuition and fees deduction.
The deduction for one-half ol
self-employment taxes.
The exclusion from income of
interest from Series EE or I U.S.
Savings Bonds used to pay higher
education expenses.
The exclusion of amounts received
under an employer's adoption
assistance program.

+=

a

Commercial revitalization
deduction. The special $25,000
allowance for the commercial
revitalization deduction from rental
real estate activities is not subject to
the active participation rules or
rnoditied adjusted gross income limits
d~scussedabove. See the instructions
lor box 12, code M for more
information.

Special rutes for certain other
activltles. If you have net income
(loss). deductions, or credits from any
activity to which special roles apply,
the corporation will identify the activity
and all arnounls relating to it on
Schedule K - l or on an attachment.
If you have net income subject to
recharacterization under Temporary
Regulations section L469-3TW and
I
,
report
Regulations section .
such amounts according to the
Instructions for Form 8582.

Ifyou have net income (loss),
deductions, or credits from either of
the followrng activities, treat such
amounts as nonpassive and report
them as indicated in these
instructions.
1. The rental of a dwelling unit any
shareholder used for personal
purposes dunng the year for more
than the greater of 14 days or 10% of
the number of days that the residence
was rented at fair rental value.

2. Trading personal property for
the account of owners of interests in
the activity.

Self-charged Interest. The
corporation will report any
"self-charged" interest income or
expense that resulted from loans
between you and the corporation {or
between the corporation and another
S corporation or partnership if both
entities have the same owners with
the same proportional interest in each
entity). If there was more than one
activity, the corporation will provide a
statement allocating the interest
Income or expense with respect to
each activity. The selfcharged
interest rules do not apply to your
interest in the S corporation if the
corporation made an election under
Regulations section 1 469 7
avoid the applicatian&dks.
See the Instructions for Form 8582
for details.

Specific l n s t r u c t p k
Part Ill. Shareholder's
Share of Current Year
Income, Deductions,
Credits, and Other Items
The amounts shown in boxes 1
through 17 reflect your share of
income, loss, deductions, credits.
etc., from corporate business or
rental activities without reference to
limitations on losses, credits, or other
items that may have to be adjusted
because of:
1. The adjusted basis of your
stock and debt in the corporation,
2. The at-risk limitations,
3. The passive activity limitations,
or
4. Any other limitations that must
be taken info account at the
sharehuider level in figuring taxable
income (for example. the section 179
expense limitation).

For information on these
provisions, see Limitations on
Losses, Deductions, and Credits
beginning on page 2.
If you are an individual, and the
above limitations do not apply to the
amounts shown on your Schedule
K-1, take the amounts shown and
report them on the lines of your tax
return as indicated in the summarized
reporttng information shown on page
2 of the Schedule K-1. If any of the
above limitations apply, adjust the