Partnerships and Subchapter S corporations don't pay income taxes. Instead, they pass along their profits to their owners, who pay personal income taxes on the money. Each year, any partnership or "S corp" in which you have an ownership stake will send you a copy of Schedule K-1, which reports your share of the business's income based on your share of ownership. When you do your taxes, you report K-1 income on Schedule E. The Internal Revenue Service gets a copy of your K-1, too, and it compares the income listed there with what you report on your Schedule E, so it's critical that you get it right.
Check the type of Schedule K-1 you've received. This information is in the upper left-hand corner of the front page of the form. If it says "Form 1120S" beneath "Schedule K-1," the form is reporting income from an S corporation. If it says "Form 1065," it's reporting partnership income.
Determine whether your income from the business was "passive" or "nonpassive." The difference lies in the extent to which you actively participated in running the business during the year. Generally, your income is nonpassive if you worked at the business for more than 500 hours in the year; if you worked there for more than 100 hours and put in more time than anyone else; or if your work for the business represented "substantially all" of the work anyone did for the business.
Add up your passive and nonpassive income from the amounts in Boxes 1 through 4 of a partnership K-1 or Boxes 1 through 3 of an S corporation K-1. Generally, income in Box 1 may be either passive or nonpassive, while income from the other boxes is passive.
Write the name of the partnership or S corporation on Line 28(a) of Schedule E.
Enter "P" on Line 28(b) if the business is a partnership. Enter "S" if it's an S corp.
Check the box on Line 28(c) if the business is a foreign partnership.
Write the business's employer identification number on Line 28(d).
Check the box on Line 28(e) if any amount of your stake in the company is not at risk. "At risk," according to the IRS, means that you could lose that stake if, for example, the company went bankrupt. This matters only if you were to report a loss from your ownership in the company, because the amount you can claim as a loss is limited by the amount of your stake.
Enter the amount of passive income on Line 28(g).
Enter the amount of nonpassive income on Line 28(j). If you have nonpassive income from the business, you may be able to deduct certain expenses, such as depreciation of a personal vehicle used for business purposes. See IRS Form 4562. If you have deductible expenses, enter the amount on Line 28(i).
Add the amounts on Lines 28(g) and 28(j) and enter the result on Line 30. Enter the amount, if any, from Line 28(i) on Line 31.
Subtract Line 31 from Line 30. Enter the result on Line 32 and include it on Line 41.
