A Partnership is an unincorporated business venture with 2 or more partners; it is a "pass-through" entity, meaning it doesn't pay its own tax, but instead reports income and certain deductions to partners who put the items on their personal income tax returns. Partnerships file a Form 1065 and then Schedule K-1s for each partner are generated out of that tax return. The information on Schedule K-1 (Form 1065) is reportable on the partner's individual tax return.
A loss from a partnership may be deductible by the partner, assuming that neither the basis limitation nor the at-risk limitation will affect the deductible losses.
For federal income tax purposes an S Corporation is similar to a partnership. It generally doesn't pay its own tax, but passes through income and deductions to the shareholders via Schedule K-1 (Form 1120S). However, S corporations are taxed differently than C Corporations. One difference is that C Corporations pay their own corporate level tax and income is taxed again when dividends are issued to shareholders. C corporations do not issue K-1s to shareholders.
The Schedule K-1 is a reporting document, like a W-2 or 1099-INT. It generally will show investment income, like interest, dividends and capital gains/losses as well as passive income like rents or nonpassive business income. You also may see some deductions and credits on this schedule. Some of the entries are merely carried over to a particular form, but others may be carried to different places depending on what they represent. The H&R Block software will ask questions in the interview to be sure these items go to the right place on your tax return.
Income (or loss) is classified as either passive income or nonpassive income. The classification is important because it will determine where any income (or loss) is reported on the taxpayer’s return. There are restrictions on taking passive losses against ordinary income - these are called the passive loss rules. The general rule is that passive losses can only offset passive income.
Passive income is income derived from a passive activity. There are 2 types of passive activities. A trade or business activity in which the taxpayer does not materially participate during the year is one type of passive activity. Rental activities, regardless of whether a taxpayer materially participates or not, are the other type of passive activity. However, if a taxpayer is a real estate professional and meets certain requirements, income derived from rental activities is nonpassive.
Whatever type of income you have from your K-1, the H&R Block software will guide you through the entry of your data. Just visit the Partnerships and S Corps (K-1) topic by using Take Me To.. You'll find it under the Business, Rental, Partnership, Farm and Royalty heading in the Income section.