If you receive a Schedule K-1 from a partnership or S corporation, you may qualify for the Qualified Business Income Deduction (QBID), also known as the Section 199A deduction.
This deduction generally allows eligible taxpayers to deduct up to 20% of their qualified business income (QBI), plus up to 20% of qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership (PTP) income. The deduction can significantly reduce your taxable income, but not all income reported on a Schedule K-1 qualifies. The partnership or S corporation is responsible for determining which items qualify and reporting that information to you on your Schedule K-1.
How Is Qualified Business Income Reported on a K-1?
The location of QBID information depends on the type of K-1 you receive.
Schedule K-1 (Form 1065) - Partnership
If you receive a Schedule K-1 (Form 1065), Section 199A information is generally reported in:
- Box 20, Code Z
You may also see Codes AA through AH, which provide details about your share of:
- Qualified business income (QBI)
- W-2 wages
- Unadjusted basis immediately after acquisition (UBIA) of qualified property
- REIT dividends
- Publicly traded partnership income
- Other Section 199A items needed to calculate the deduction
For additional details, review the IRS Partner's Instructions for Schedule K-1 (Form 1065).
Schedule K-1 (Form 1120-S) - S Corporation
If you receive a Schedule K-1 (Form 1120-S), Section 199A information is generally reported in:
- Box 17, Code V
This code provides the information necessary to calculate your QBID and may include your share of QBI, W-2 wages, UBIA of qualified property, and other Section 199A items.
For additional guidance, review the IRS Shareholder's Instructions for Schedule K-1 (Form 1120-S) and any supplemental statements provided by the S corporation.
Why Doesn't All Ordinary Business Income on a K-1 Qualify?
It's common to assume that all ordinary business income shown on a Schedule K-1 qualifies for the QBID, but that's not always the case. Pass-through entities such as partnerships and S corporations must separately report certain income, deductions, gains, and losses because they may receive different tax treatment on each owner's individual return. Only items that are included in current-year taxable income and meet the requirements of Section 199A are generally considered qualified business income.
To help taxpayers calculate the deduction correctly, Schedule K-1 forms issued for tax years 2018 and later include specific Section 199A reporting codes and supporting statements.
What If My K-1 Does Not Include Section 199A Information?
If a partnership or S corporation does not provide the required Section 199A information, you may not be able to claim a QBID related to that business activity.
Under IRS guidance, unreported amounts for:
- Qualified business income (QBI)
- W-2 wages
- UBIA of qualified property
may be treated as zero for purposes of calculating the deduction. If your Schedule K-1 does not include Section 199A information but you believe the business may qualify, contact the partnership or S corporation and request the missing details. Many businesses provide this information on a separate statement that accompanies the Schedule K-1.