A Schedule K-1 (Form 1065) is the form a partnership sends each partner showing that partner's share of the partnership's income, deductions, and credits for the year. The partnership also files a copy with the IRS, so the two records need to match. A partner generally keeps the K-1 for their records and uses the numbers on it to fill out their own return; they don't file the K-1 itself unless specifically instructed to.

What does a Schedule K-1 actually report?

A Schedule K-1 reports a partner's share of the partnership's items for the year, broken into three parts: Part I identifies the partnership, Part II identifies the partner and their ownership share, and Part III carries the actual numbers (income, deductions, credits) box by box.

Two of the most common boxes: Box 1 reports the partner's share of ordinary income or loss from the partnership's trade or business activities. Box 2 reports the partner's share of net rental real estate income or loss, and this amount is treated as passive for every partner by default, with one exception: a real estate professional who materially participated in the activity is not subject to that passive treatment.

Why might a K-1 loss not be deductible this year?

By default, a partner can deduct a partnership loss reported on their K-1 up to the amount of their basis in the partnership. That basis limit is the first of four checks a loss has to clear, in order: basis, then at-risk amount, then the passive activity rules, then the excess business loss limitation. A loss can pass the basis check and still get stopped at one of the later three.

This order isn't optional and it isn't the same for every partner. The passive activity check, for example, only applies to certain partner types (individuals, estates, trusts, closely held C corporations, and personal service corporations) and only when that partner actually has a passive loss or credit for the year. A partner who materially participates as a general partner may clear this check where a passive limited partner in the same partnership would not. Whether a given K-1 loss is usable this year depends on the partner's basis, their at-risk amount, their participation, and their entity type, not on the K-1 alone.

What this means for the preparer

The K-1 tells you what was allocated. It doesn't tell you what's deductible. Working out whether a partner's loss clears all four limitations is partner-specific, which is exactly the kind of judgment call that rewards a second, careful look rather than a templated answer.