This article focuses solely on the entry of the Income (or Loss) items which are found on Lines 1 through 10 of the Schedule K-1 (Form 1120-S) Shareholder’s Share of Current Year Income, Deductions, Credits, and Other Items. For additional information regarding the requirements for Schedule K-1 (Form 1120S), see: Shareholder’s Instructions for Schedule K-1 (Form 1120-S). To enter the income items from a K-1 (Form 1120S) in Keystone Tax Solutions Pro from the Main Menu of the Tax Return (Form 1040) select:
- Income Menu
- Rents, Royalties, Entities (Sch E, K-1, 4835, 8582)
- K-1 Input – Select New and double-click on Form 1120-S K-1 (S Corporation) which will take you to the K-1 Heading Information Entry screen. If the initial K-1 entry was previously keyed in, double click on the entry in the K-1’s pick list.
After entering all of the information required on the K-1 Heading Information screen, select ‘OK’ The K-1 1120-S Edit Screen has two distinct sections entitled Heading Information and Income, Deductions, Credits, and Other Items.
The K-1 1120-S Edit Screen in the tax program has an entry for each box on found on the Schedule K-1 (Form 1120-S) that the taxpayer received. A description of the income items contained in boxes 1 through 10, including each of the Codes for Other Income (Loss) that can be entered in Box 10 can be found below. The amounts shown in boxes 1 through 10 reflect the taxpayer’s share of income, loss, deductions, credits, etc., from the corporation. These amounts do not take into consideration the following limitations: the adjusted basis of the interest in the corporation; the amount for which the taxpayer is at risk; or the passive activity limitations. See Publication 925 – Passive Activity and At-Risk Rules.
Line 1 – Ordinary Income/Loss from Trade or Business Activities – Ordinary business income (loss) reported in Box 1 of the K-1 is entered as either Non-Passive Income/Loss or as Passive Income/Loss. The determining factor in whether the income should be reported as Passive or Non-Passive depends is whether the taxpayer materially participated in the business activities. See: Publication 925 – Passive Activity and At-Risk Rules.
If the income (loss) is entered as Non-Passive Income/Loss it will carry to the Schedule E (Form 1040), Line 28 column (j) for income or Line 28 column (h) for any loss. If the income (loss) is entered as Passive Income/Loss, it will carry to Worksheet 3 of Form 8582 – Passive Activity Loss Limitations where any losses may be limited and any income may be offset by other passive losses that the taxpayer has. If the loss is allowed, it will then flow through to Schedule E (Form 1040).
In addition to being the entry field for Ordinary Income (Loss) from Trade or Business Activities that is reported on Box 1 of the K-1, this field is used to make other entries that are reported to the taxpayer on a Schedule K-1 (Form 1120-S) which should flow through to Schedule E, Line 28 or to Worksheet 3 of Form 8582. Accordingly, when an item needs to be reported on Schedule E, Line 28, column (j) or when an item needs to be reported on Line 28 column (h) for certain loss items or deduction items (these items will be subject to the passive activities limitations of Form 8582), it will be entered in this input line. When reporting such an item on Schedule E, Line 28, column (j) or column (h), a separate K-1 entry can be created instead of combining amounts to enter in the field. By creating separate K-1 entries, each item will be reported on a separate line of Line 28, Schedule E and not as a net amount. This will permit you to identify the source of the separate item on Line 28 of Schedule E.
Line 2 – Net Income/Loss from Rental Real Estate Activities – Net income (loss) from rental activities is reported Box 2 of the K-1. When opening this field, three options for entering the Box 2 amount are available. Generally, the income (loss) reported in Box 2 is a passive activity amount unless the taxpayer is a real estate professional and can meet the criteria of materially participating in the activity. If the taxpayer is a real estate professional the amount from Box 2 is not a passive activity and should be entered as Material Participation Income/Loss. For all other taxpayers the amount in Box 2 is a passive activity and as such would normally would be entered as either Active Income/Loss or as Non-Active Income/Loss.
Whether the amount in Box 2 is considered Active or Non-Active is dependent on whether the taxpayer is an active participant in the rental activity. A taxpayer is not considered to actively participate in a rental real estate activity if, at any time during the tax year, the taxpayer’s interest (including their spouse’s interest) in the activity was less than 10% (by value) of all interests in the activity. Active participation is a less stringent requirement than material participation. A taxpayer may be treated as actively participating if they participated, for example, in making management decisions or arranging for others to provide services (such as repairs) in a significant and bona fide sense. Management decisions that are considered active participation include approving new tenants, deciding rental terms, approving capital or repair expenditures, and other similar decisions. To determine if the taxpayer is actively participating in the rental activity, see: Shareholder’s Instructions for Schedule K-1 (Form 1120S); Instructions for Form 8582 – Passive Activity Loss Limitations.
If the income (loss) is entered as Material Participation Income/Loss, it will automatically carry to the Schedule E (Form 1040), line 28, column (j) for income or Line 28, column (h) for any loss. If the income (loss) is entered as Non-Active Income/Loss, it will automatically carry to Worksheet 3 of Form 8582 and is subject to the passive income limitations. Any Non-Active Income will flow through Form 8952 to Schedule E (Form 1040), unless a passive loss carryover or a passive loss from another activity exists, which may otherwise reduce or eliminate this income. Any Non-Active Loss will not flow through Form 8582 to Schedule E (Form 1040). Instead, any Non-Active Loss will only be applied against passive income in the current or future tax years. Instructions for Form 8582 – Passive Activity Loss Limitations.
If the income (loss) is entered as Active Income/Loss, it will automatically carry to the Worksheet 1 of Form 8582 and is subject to the Rental Real Estate Activities with Active Participation Special Allowance. In this instance, the taxpayer may, subject to certain income restrictions, be permitted to deduct up to $25,000 of the loss. Instructions for Form 8582 – Passive Activity Loss Limitations.
Line 3 – Net Income/Loss from Other Rental Activities – The amount reported in Box 3 is a passive activity amount for all taxpayers. The amount entered will automatically carry to the Worksheet 3 of Form 8582 and is subject to the passive income limitations. Any income will flow through Form 8952 to Schedule E (Form 1040), unless a passive loss carryover or a passive loss from another activity exists, which may otherwise reduce or eliminate this income. Any loss will not flow through Form 8582 to the 1040. Instead, any loss will only be applied against passive income in the current or future tax years. Instructions for Form 8582 – Passive Activity Loss Limitations.
Line 4 – Interest – Amounts in Box 4 are not passive income. Amounts entered on this line will automatically flow to Line 2a of Form 1040 (prior to the 2018 redesign of the Form 1040, this amount flowed to Form 1040, Line 8a).
Line 5A – Ordinary Dividends – Amounts reported in Box 5A are not considered passive income. Amounts entered on this line will automatically flow to Line 3b of Form 1040 (prior to the 2018 redesign of the Form 1040, this amount flowed to Form 1040, Line 9a).
Line 5B – Qualified Dividends – Amounts reported in Box 5B are not considered passive income. Amounts entered on this line will automatically flow to Line 3a of Form 1040 (prior to the 2018 redesign of the Form 1040, this amount flowed to Form 1040, Line 9b).
Line 6 – Royalties – Amounts reported in Box 6 are not considered passive income. Amounts entered on this line will automatically flow to Schedule E (Form 1040), Line 4.
Line 7 – Net Short-Term Capital Gain/Loss – Amounts reported in Box 7 are not considered passive income. Amounts entered on this line will automatically flow to Schedule D (Form 1040), Line 5.
Line 8A – Net Long-Term Capital Gain/Loss – Amounts reported in Box 8A are not considered passive income. Amounts entered on this line will automatically flow to Schedule D (Form 1040), Line 12.
Line 8B – Collectible (28%) Rate Gain/Loss – Amounts reported in Box 8B are not considered passive income. Amounts entered on this line will automatically flow to a 28% Rate Gain Worksheet and then to Schedule D (Form 1040), Line 18.
Line 8C – Unrecaptured Section 1250 Gain – Amounts reported in Box 8C are not considered passive income. Amounts entered on this line will automatically flow to an Unrecaptured Section 1250 Gain Worksheet and then to Schedule D (Form 1040), Line 19.
Line 9 – Net Gain/Loss under Section 1231 – Enter the amount reported in Box 9 of the K-1. When exiting this field, a question asking “Is the Net Section 1231 Gain or Loss from a Passive Activity?’ will be displayed on the screen. How this question is answered will affect the treatment that the Gain/Loss will receive. If the amount is a gain (or a non-passive loss), it will automatically be reported on line 2, column (g), of Form 4797, Sales of Business Property. See: Instructions for Form 4797. If the amount is a loss from a passive activity, the loss will automatically carry to the Worksheet 3 of Form 8582 and is subject to the passive income limitations. See: Instructions for Form 8582 – Passive Activity Loss Limitations.
Line 10A – Other Portfolio Income (Loss) – Any entry in Box 10, Code A will occur if the corporation reports portfolio income other than interest, ordinary dividend, royalty, and capital gain (loss) income. The corporation should provide the taxpayer a statement informing the taxpayer of the type of portfolio income that is being reported. Typically, only real estate mortgage investment conduits (REMIC) report income (loss) on Line 10A. When the user opens this entry field they receive a menu that will allow the user to report the portfolio items that come from a REMIC. These items are REMIC Income (net loss) which will automatically carry to Schedule E (Form 1040), line 38, column (d); ‘Excess Inclusion’ which will automatically carry to Schedule E (Form 1040), line 38, column (c); and ‘Section 212 expenses’ which will automatically carry to Schedule E (Form 1040), line 38, column (e).
Line 10B – Involuntary Conversions – The amount reported in Box 10, Code B represents the net gain (loss) from involuntary conversions due to casualty or theft. This amount will not automatically carry to any form or schedule in the program. The taxpayer should receive instructions from the corporation needed to complete Form 4684.
Line 10C – Section 1256 Contract & Straddles – The corporation will report any net gain or loss from section 1256 contracts in Box 10, Code C. The program will automatically pull this amount to Part I of Form 6781.
Line 10D – Mining Exploration Costs Recapture – The corporation will provide the taxpayer a statement that shows the information needed to recapture certain mining exploration costs. This amount will not automatically carry to any form or schedule in the program. Each S corporation shareholder, not the corporation, elects whether to capitalize or to deduct that shareholder’s share of exploration costs. See: Publication 535 – Business Expenses.
Line 10E – Section 951A income – The corporation will report information needed to determine section 951A income. See Instructions for Form 965 – Inclusion of Deferred Foreign Income Upon Transition to Participation Exempt System.
Line 10F – Section 965(a) inclusion – The corporation will report the taxpayer’s share of 965(a) inclusions in Box 10, Code E. Any amount reported should be reduced by the amount reported in Box 12, Code K. See Instructions for Form 965 – Inclusion of Deferred Foreign Income Upon Transition to Participation Exempt System.
Line 10G – Subpart F income other than section 951A and 965(a) inclusion – The corporation will report the taxpayer’s share of Subpart F inclusions965(a) inclusions. See Instructions for Form 965 – Inclusion of Deferred Foreign Income Upon Transition to Participation Exempt System.
Line 10H – Other Income (Loss) – Amounts reported in Box 10, Code H are other items of income, gain, or loss not included in Boxes 1 through 9 or reported in Box 10 using codes A through G. Any entry in this box will not automatically pull to the Form 1040. The taxpayer should receive instructions from the corporation needed to address the items contained in this box.
NOTE: This is a guide on entering the Income (Loss) items from Schedule K-1 (Form 1120S) into the tax program. This is not intended as tax advice.
Additional Resources:
Shareholder’s Instructions for Schedule K-1 (Form 1120S)
Schedule K-1 (Form 1120S) – Heading Information
Schedule K-1 (Form 1120S) – Deductions
Schedule K-1 (Form 1120S) – Credits & Foreign Transactions
Schedule K-1 (Form 1120S) – Alternative Minimum Tax (AMT) Items
Schedule K-1 (Form 1120S) – Items Affecting Shareholders Basis