Three gates, one loss
K-1 at-risk and passive limits: the checkboxes that decide how a loss is entered
A loss on a K-1 passes three gates before it reaches the return, and the K-1 only supplies the inputs for two of them. The checkboxes on the face of the form tell you whether the inputs were sent; they do not tell you the answer.
Small firms get this wrong in a way that is hard to see: the loss goes in, the return computes, and the carryforward schedule at the back is built from a single number that should have been eleven. The difference does not show up until a year the client has income, and by then nobody remembers where the figure came from.
The order
A loss meets basis, then at-risk, then passive
| Gate | Where it is computed | What it does to the loss | What the K-1 gives you |
|---|---|---|---|
| Basis | The partner's own schedule | A loss beyond basis is suspended at the partner level and carried forward | The K-1 cannot help. This gate is computed from prior years. |
| At-risk | Form 6198; K-1 box 22 for Form 1065 (box 18 for 1120-S) | Amounts not economically at risk are excluded until the partner is at risk | The activity statement is the input. Without it the form cannot be completed activity by activity. |
| Passive activity | Form 8582; K-1 box 23 (box 19 for 1120-S) | Passive losses are allowed only against passive income, with the special rental allowance | The K-1 records which activities are passive for the partner only through the statement behind the checkbox. |
Each gate suspends a different portion, and each suspension carries forward on its own schedule. Running them out of order — applying the passive limit before the at-risk limit, for instance — produces a number that is plausible, wrong and impossible to trace back.
What the checkboxes actually assert
Box 22 on a partnership K-1 and box 18 on an S corporation K-1 say the same thing: this partner has more than one activity for at-risk purposes, and there is a statement. Box 23 and box 19 say it for passive activity purposes. Neither box carries a figure, and neither is a conclusion.
That makes them a completeness test rather than a tax rule. A checked box means the K-1 you are holding is not the whole document. If the statement is missing, the file is incomplete, and the right response is to ask for it on the day it is noticed — not to enter the totals as one activity and hope.
The check that the statement belongs to the box
Take every activity on the statement, add the amount in the boxes it covers, and compare the total with the same boxes on the K-1. The two must agree. If the statement runs higher, it is carrying a partnership-level amount; if it runs lower, an activity line is missing from the statement — usually the one with no income and a loss.
Then check the names. An activity called something different on the statement than on last year's carryforward is the reason a passive loss carryforward resets to zero without anyone typing anything. Match activities by the partnership's own label, and where the label changed, record both.
When the totals agree and the names line up, the statement can be carried straight into the workpapers for Form 6198 or Form 8582 with nothing decided. That is the point of the check: it lets the reading step hand over facts and leaves the determination with the preparer who knows the client's participation.
Where this goes wrong in practice
- One activity, eleven lines. The statement is read as a summary instead of a list, and the whole loss is entered once. Every later carryforward is now attached to the wrong place.
- A K-1 with no checkbox and a statement anyway. The statement is real even when the box is empty. If a statement is in the file, read it.
- Two checkboxes, one statement. At-risk and passive groupings are different groupings, and one statement rarely serves both. Reading one as the other puts the loss in the wrong schedule.
- The partnership changed its grouping. Nothing on the K-1 announces it. It shows up as a statement whose activity list does not match the prior year, which is exactly what the name check catches.
The amounts you need for this are on the face of the K-1 and the pages behind it. Reading them off with the page reference kept — which is what the CSV step produces, including the checkbox state — means the statement check can be run without reopening the PDF. The statement guide covers what else to record about an attachment.
Plain answers
Questions about the activity boxes
What does box 22 mean on a Schedule K-1?
That the partner has more than one activity for at-risk purposes and a statement listing each activity is attached. It is not a computation and it is not an amount. It is a pointer, and the pointer is only useful if the statement is actually in the file.
What does box 23 mean?
The same thing for passive activity purposes: more than one activity, with a statement listing them. Form 1120-S uses boxes 18 and 19 for the same two ideas, so a shareholder reading a K-1 against a partner's instructions will look for the wrong numbers.
Does a checked box change the tax?
Not directly. It changes what the software has to be told. A K-1 with box 23 checked and no activity breakdown will either be entered as one activity — which produces the wrong carryforward — or held, which is why the checkbox is worth noticing on the day the K-1 arrives rather than in the week the return is due.
How do I know which activities are passive for my client?
The partnership cannot tell you that, because material participation is a partner-level test. What the statement gives you is the partnership's grouping, and the partner's own participation decides the rest. Record the grouping as printed and let the preparer who knows the client make the determination.
Does K1 FastTax read the activity statement?
No. It reads the checkboxes and records them, and it records every amount with the page it came from. The activity statement behind the box is yours to read, and the check in this guide is about whether the file you were given is complete before you start.
Record the checkbox, not an interpretation
K1 FastTax reads the at-risk and passive activity checkboxes from a K-1 PDF, writes them as their own fields, and keeps every amount with the page it came from.