What Is a Schedule K-1 and How Does It Affect Your Taxes?

This article is based on an episode of Tax Talk Unfiltered, Gelt's podcast, featuring host Spencer Carroll, CPA, with Rachel Richards, CPA, Gelt's Head of Product, and Melanie Chesir, CPA, Senior Tax Manager on Gelt's tax team.

It's the third quarter, and if you're still on extension for your 2025 tax return, there's a good chance you're waiting on a Schedule K-1. They arrive late, they're dense, and it's rarely obvious which of the many numbers on the page you'll actually pay tax on. Here's what a K-1 is, how it's taxed, and how to handle the most common problems it creates.

What is a Schedule K-1?

A Schedule K-1 reports your share of a business's income from a flow-through entity: an S corporation or a partnership. A flow-through entity doesn't pay income tax itself. Instead, all of its income flows through to the owners, who report their share on their own returns.

The business files its own tax return (Form 1065 for partnerships, Form 1120-S for S corps) reporting everything that happened at the entity level. Then each owner receives a K-1 showing their slice. If two partners own a business 50/50, each gets a K-1 reflecting half of the business activity, and that's what goes on their individual return.

Who sends your K-1, and when?

The person responsible for filing the business tax return is responsible for making sure every owner gets a K-1. In practice, that's usually the business's CPA, though for passive investments it often comes from whoever runs the operation, like the general partner.

Your relationship to the business also shapes what to expect:

If you materially participate, meaning it's your S corp, your practice, your main business, you should have a good sense of what's coming. You'll typically also have a W-2 from the business, and your K-1 shows income net of that salary, taxed as non-passive income.

If you're a passive investor, say in a real estate syndication or a fund, you may have no idea what to expect until the K-1 arrives. It might even show a loss, but as we'll cover below, you often can't use that loss yet.

Do you pay tax on the money you take out? Profit vs. distributions

This is the most common K-1 misconception. Cash hits your personal account and you assume it's all taxable. Or the money stays in the business account, so you assume there's nothing to pay. Neither is quite right.

With a pass-through entity, you pay tax on your share of the business profit, whether or not you take it out. Distributions themselves are generally tax-free. They're distributions of profit you're paying tax on this year, or profit you already paid tax on in a prior year.

A few scenarios that trip people up:

You reinvested everything. Your business made $1 million, but you put most of it into inventory, equipment, or real estate. You still pay tax on the profit, even though you never saw the cash.

You got a distribution to cover taxes. Many businesses distribute cash in the current year to cover last year's tax bill. A 2026 distribution covering your 2025 taxes tells you nothing about your 2026 taxable income.

Your K-1 shows a loss but you received cash. Entirely possible. The distribution and the taxable result are separate numbers, and both are broken out on the K-1.

The behind-the-scenes concept here is basis: profit you've paid tax on but left in the business increases your basis, and that's what lets you pull the cash out tax-free later. So when you're planning for what you'll owe, look at the business's P&L and your share of the profit, not your distributions.

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Can you use a loss on your K-1?

It depends on whether you materially participate.

If it's your own business, one you run and that's your main source of income, a loss can generally be netted against your other income.

If you're a passive investor, a loss usually can't be used yet. It sits on your return and carries forward indefinitely, until you have passive income to absorb it or you dispose of the investment. Many investors see a big loss on a K-1 and get excited about a deduction that isn't actually available this year.

And if the business ever shuts down, suspended losses are released and you can finally take them. If you have remaining basis when it closes, you may be able to write that off too.

Not every box is income: the different taxes on a K-1

A K-1 carries several kinds of numbers, and they're taxed differently:

Self-employment tax. S corp K-1s never carry self-employment tax. Partnership K-1s might. That generally applies to general partners, partners who materially participate, or guaranteed payments. It's an extra 15.3% for Social Security and Medicare, so if you've been mischaracterized as non-passive on a partnership K-1, flag it immediately.

Net investment income tax. Interest, dividends, and capital gains flowing through either entity type can be subject to NIIT. It's usually shown in an informational box as total investment income.

Informational items. Some boxes duplicate or summarize other boxes, so you don't add them all together. To a non-tax person, a K-1 can read like a form in a foreign language, and that's normal.

Then there are the footnotes and attached statements. Read them, or make sure your CPA does. Footnotes can change how income is taxed, affect your QBI deduction, or disclose things like composite state taxes paid on your behalf. The IRS has tried to standardize some of this with forms K-2 and K-3 for foreign items, but plenty still lives in the fine print.

State K-1s: credits you don't want to miss

If the business operates or files in multiple states, you'll usually get a supplemental K-1 for each state. These matter for two reasons:

First, they break out which income is taxed where (say, 80% in California and 20% in Georgia) so you apportion correctly and avoid double tax.

Second, they often carry money already paid on your behalf: pass-through entity (PTE) tax elections and non-resident withholding both show up on state K-1s as credits against your personal tax bill. If you were expecting state K-1s and only received the federal one, follow up. Missing them means missing credit for tax that's already been paid.

What to do when your K-1 is late

If you haven't received a K-1, don't file your tax return. This is exactly what extensions are for. The deadlines are even staggered on purpose: S corp and partnership returns on extension are due September 15, a month before the individual October 15 deadline, so K-1 recipients have what they need in time.

Two practical tips:

Request an estimated K-1. Common with VC funds and law firm partnerships. An estimate lets you calculate and pay your tax liability accurately during extension season, so the final K-1 brings adjustments, not surprises.

Don't file now and amend later. Unless there's a compelling reason, like a mortgage application or a refund you need, filing before your K-1 arrives creates unnecessary compliance. An amended return with a refund can take 16 weeks to process versus days for an original return, and in practice many people never file the amendment they promised themselves they would.

One more thing: don't ignore the final-year K-1

If an investment or business shuts down, that last K-1 is one of the most important ones you'll ever receive. The final year is when suspended losses and remaining basis get freed up: real deductions that disappear if you shrug the form off as irrelevant.

And a word on complexity: every K-1 you add has a compliance cost. One client spread small $1,000 checks across dozens of angel investments and ended up with dozens of K-1s, each hundreds of pages, each requiring review and basis tracking, each raising his tax prep fees. Even a K-1 with $3 of distributions still has to be read, reported, and tracked. Sometimes simple is better.

Frequently Asked Questions

Do I pay tax on K-1 distributions?
Generally no. Distributions from an S corp or partnership are typically tax-free returns of profit you're already paying tax on (or paid tax on in prior years). What you owe tax on is your share of the business profit, whether or not you took it out.

What should I do if my K-1 hasn't arrived by the filing deadline?
File an extension rather than filing without it. Extended business returns are due September 15, a month before the individual October 15 deadline, specifically so K-1s arrive in time. For investments like funds, request an estimated K-1 so you can pay your liability accurately during the year.

Can I deduct a loss shown on my K-1?
If you materially participate in the business, generally yes; it nets against your other income. If you're a passive investor, the loss is usually suspended and carries forward indefinitely until you have passive income or dispose of the investment. Suspended losses are released when the activity ends.

Do I still need to report a K-1 with little or no income?
Yes. Every K-1 must be reported and its basis tracked, even if the dollars are small. And the final-year K-1 of a closed business is especially important: it's when suspended losses and remaining basis are freed up.

Why doesn't my K-1 match the cash I received?
Because profit and distributions are separate numbers. You can have taxable profit with no cash received (reinvested earnings) or receive cash with a loss on the K-1 (distributions of prior-year profits). Both figures are broken out on the form.

It's not your job to decode your K-1. It's ours. Talk to a Gelt tax strategist.