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LLC & partnership taxation (Schedule K-1)
· Tax rule
Law or rule (2026)Set by statute, regulation or the agency; numbers change yearly.
LLCs and partnerships pay no federal income tax themselves; each owner reports a share of income from a Schedule K-1.
See it on the Personal Finance & Estate map →How it works
A multi-member LLC is taxed as a partnership by default. It files Form 1065 (California Form 568) and sends each owner a K-1 by March 15 showing their share of rents, interest, gains, depreciation and losses. Owners owe tax on that share even if no cash is distributed ('phantom income'). Losses are deductible only up to your basis, amount at risk and the passive-loss limits. California adds an $800 yearly LLC tax plus a fee once gross receipts top $250,000.
Why it matters for you
Most investment real estate is held this way; K-1s determine what owners owe, and late K-1s are the usual reason returns must be extended.
Think of it like
Like CAM pass-throughs: the entity bills nothing itself; each owner pays their share of the total.
Rules, limits and sources (2026)
Subchapter K of the 1954 Internal Revenue Code; IRS 'check-the-box' rules (1997) made partnership treatment the LLC default; FTB Form 568 instructions list California's tax and fees.
Watch out for
Partnership tax is notoriously complex; how hard IRS enforcement on large partnerships will bite after 2025 staff cuts is unclear.
Connections (4)
▸LLC & partnership taxation (Schedule K-1) passes business income into Income tax (federal & California)Law or rule (2026)
How they connect
A partnership or multi-member LLC pays no federal income tax; instead each owner's K-1 share of rents, interest, gains and business income flows onto the personal return, mainly Schedule E. Each item keeps its character: rental income stays passive, gains stay capital, and qualifying business income may get the 20% QBI deduction.
When it applies
Partnership pass-through taxation dates to the 1913 income tax; the 1954 code's Subchapter K set today's rules.
The rule
IRC Secs. 701-704 tax partners, not partnerships; Schedule K-1 (Form 1065) and Schedule E carry the amounts.
Watch out for
Allocations of income among partners, and whether they have 'substantial economic effect', are a frequent source of audits and disputes.
▸Family LLC / family limited partnership reports income on LLC & partnership taxation (Schedule K-1)Law or rule (2026)
How they connect
A family LLC with two or more members is taxed as a partnership: it files Form 1065 and California Form 568, pays the $800 California LLC tax, and issues each member a K-1. Each child is taxed on their share even without distributions, and the kiddie tax can tax young children's shares at parents' rates.
When it applies
The default since the IRS 'check-the-box' rules of 1997; family-partnership rules in Sec. 704(e) date to 1951.
The rule
IRC Secs. 701 and 704(e); Treasury Reg. 301.7701-3; FTB Form 568 instructions.
Watch out for
How to allocate income fairly when parents manage the property and children hold most units is a recurring audit issue.
▸QBI deduction (20% pass-through, Sec. 199A) reduces tax on LLC & partnership taxation (Schedule K-1)Law or rule (2026)
How they connect
Partnerships and LLCs do not claim the QBI deduction themselves; they report each owner's share of qualified income, W-2 wages and property basis on the K-1 (Box 20, code Z). Owners then compute up to 20% on their own returns. Guaranteed payments do not qualify.
When it applies
Reported on Schedule K-1 since 2018; covers rental, operating-business and some REIT and publicly traded partnership income passed through to owners.
The rule
Treasury Reg. 1.199A-6 sets the reporting rules; Rev. Proc. 2019-38's 250-hour safe harbor helps rental partnerships qualify.
Watch out for
Whether a triple-net or single-tenant rental reported on a K-1 qualifies outside the safe harbor is debated and fact-specific.
▸LLC & partnership taxation (Schedule K-1) exposes active income, but not rents, to FICA & self-employment tax (Social Security & Medicare)Law or rule (2026)
How they connect
Partners and many LLC members owe 15.3% self-employment tax on their share of active business income and guaranteed payments, such as fees for managing others' property. Rents from real estate, interest, dividends and capital gains are excluded, though the 3.8% investment-income tax may apply.
When it applies
Tax code section 1402 defines self-employment income; the limited-partner exclusion dates to 1977, and Congress froze proposed IRS rules for LLC members in 1997.
The rule
IRS instructions for Schedule K-1 (box 14) and Schedule SE; Tax Court cases have tested the limited-partner rules.
Watch out for
When an LLC member counts as a 'limited partner' is contested in the courts; how your entities' income is classified is a question for your CPA.