If you have an interest in a partnership or an S corporation, you should receive a Form K-1 every year. The Form K-1 represents your share of profits and losses from the business. Just like any other form of income, you must report income from Form K-1 on your individual tax return.
What is a K-1?
Businesses that operate as partnerships are considered to be pass-through entities for tax purposes. That means that all profits and losses flow through to owners. At the end of the year, partnerships, S corporations, and LLCs taxed as partnerships calculate their total profit and loss for the year. They then divide the profits and losses according to each partner's interest and complete a Form K-1 tax form for each partner.
If you receive a Form K-1, that means that you have income or loss from a partnership investment for the tax year. Just as with any other income, you need to report this income on your personal tax return. Enter ordinary dividends on line 2a of Form 1040 and qualified dividends on line 2b. Add any interest income from the K-1 to line 8a and report any net operating loss carryover on line 21.