Limitations on Losses, Deductions, and Credits:

The specific order that must be followed is:

1) Other Specific Limitations (ex. Section 179 Expense Deduction).

2) The Basis Rules

3) At-Risk Limitations: Generally, the Partnership will attach statement to Schedule K-1 listing amounts not subject to the At-Risk Limitations.

4) Passive Activity Limitations: Apply to Partners who are Individuals, Estates, Trusts, closely held C Corporations, or Personal Service Corporations and have had a Passive Activity Loss or Credit for the tax year.

The following information is copied/pasted from the IRS Form 1041 Instructions. For complete instructions click the link listed below:

https://www.irs.gov/instructions/i1041sk1

Part I—Information About the Estate or Trust

Part III—Beneficiary’s Share of Current Year Income, Deductions, Credits, and Other Items

The amounts shown in boxes 1 through 14 reflect your share of income, loss, deductions, credits, etc., from an estate or trust. 

For Form 1040 filers, page 2 of Schedule K-1 provides summarized reporting information. 

• The summarized reporting information reflects references to forms in use for the applicable tax year.

Codes.

 In box 9 and boxes 11 through 14, the fiduciary will identify each item by entering a code in the column to the left of the dollar amount entry space. 

• These codes are identified on page 2 of Schedule K-1.

Box 1—Interest

• This box reports the beneficiary’s share of the taxable interest income. This amount is reported on line 8a of Form 1040 and Schedule B, Part I, line 1, if applicable.

Box 2a—Ordinary Dividends

• This box reports the beneficiary’s share of ordinary dividends. This amount is reported on line 9a of Form 1040 and Schedule B, Part II, line 5, if applicable.

Box 2b—Qualified Dividends

• This box reports the beneficiary’s share of qualified dividends. This amount is reported on line 9b of Form 1040.

Boxes 3 and 4a—Net Short-Term and Net Long-Term Capital Gain

• Net short-term capital gains are reported on line 5 of Schedule D (Form 1040) and net long-term capital gains are reported on line 12 of Schedule D (Form 1040).

If there is an attachment to this Schedule K-1 reporting a disposition of a passive activity, see the Instructions for Form 8582, Passive Activity Loss Limitations, for information on the treatment of a disposition of an interest in a passive activity.

Boxes 4b and 4c—28% Rate Gain and Unrecaptured Section 1250 Gain

• A 28% rate gain is reported on line 4 of the 28% Rate Gain Worksheet—Line 18 in the Schedule D (Form 1040) instructions.

• An unrecaptured section 1250 gain is reported on line 11 of the Unrecaptured Section 1250 Gain Worksheet—Line 19 in the Schedule D (Form 1040) instructions.   This is reported by adding the Schedule D page.

Box 5—Other Portfolio and Nonbusiness Income

• The amount reported in this box is your distributive share of royalties, annuities, and other income that isn't subject to the passive activity rules. 

• It also includes income in respect of a decedent (IRD), which isn't included in boxes 1, 2a, 3, 4a, 6, 7, or 8.

Boxes 6 through 8—Ordinary Business Income, Net Rental Real Estate Income, and Other Rental Income

• The fiduciary will provide you with a separate schedule showing your distributive share of income from each trade or business, net rental real estate, or other rental activity.Any losses reported in boxes 6 through 8 may be subject to the passive loss limitations of section 469, which generally limits deducting passive losses only from passive activity income. The rules for applying these limitations to beneficiaries haven't yet been issued. For more details, see Pub. 925, Passive Activity and At-Risk Rules.

Box 9—Directly Apportioned Deductions

• The fiduciary must attach a statement showing depreciation, depletion, and amortization directly apportioned to you, if any, for each activity reported in boxes 5 through 8.

Box 10—Estate Tax Deduction (Including Certain Generation-Skipping Transfer Taxes)

If an estate or trust distributes income in respect of a decedent (IRD) to a beneficiary, the beneficiary is entitled to deduct the portion of the estate tax imposed on the decedent's estate which is attributable to the IRD distributed to the beneficiary. 

• You may claim this amount on line 28 of Schedule A (Form 1040) as a miscellaneous itemized deduction not subject to the 2% floor. For an example on how this amount was computed, see Regulations section 1.691(c)-2 and Pub. 559, Survivors, Executors, and Administrators.  

Box 11, Code A—Excess Deductions on Termination

• If this is the final return of the estate or trust, and there are excess deductions on termination, you may deduct the beneficiary’s share of the excess deductions on line 23 of Schedule A (Form 1040) as a miscellaneous itemized deduction subject to the 2% floor.

Excess deductions on termination occur only during the last tax year of the trust or decedent’s estate when the total deductions (excluding the charitable deduction and exemption) are greater than the gross income during that tax year. Only the beneficiary of an estate or trust that succeeds to its property is allowed to deduct that entity’s excess deductions on termination. 

A beneficiary who doesn’t have enough income in that year to absorb the entire deduction can’t carry the balance over to any succeeding year.

Box 11, Codes B and C—Unused Capital Loss Carryover

Upon termination of the trust or decedent’s estate, the beneficiary succeeding to the property is allowed to deduct any unused capital loss carryover under section 1212.

Add Schedule D to report the following.

• A short-term capital loss carryover, reported as code B, is reported on Schedule D (Form 1040), line 5.

• A long-term capital loss carryover, reported as code C, is reported, as appropriate, on Schedule D (Form 1040), line 12; line 5 of the 28% Rate Gain Worksheet for Schedule D, line 18; and line 16 of the Unrecaptured Section 1250 Gain Worksheet for Schedule D, line 19.

Box 11, Codes D and E—NOL Carryover

Upon termination of a trust or decedent’s estate, a beneficiary succeeding to its property is allowed to deduct any unused net operating loss (NOL) if the carryover would be allowable to the trust or estate in a later tax year but for the termination. 

• The deduction for regular tax purposes, reported as code D, is reported on Form 1040, line 21.

• A deduction for an Alternative Tax NOL (ATNOL) carryover for Alternative Minimum Tax (AMT) purposes, reported as code E, is reported on Form 6251, line 11.

Box 12—Alternative Minimum Tax Items

The information reported in box 12, codes A through I is used to prepare your Form 6251. 

• Code A:

Adjustment for minimum tax purposes, is the total amount reported on Form 6251, line 15. Codes B through F represent the portion, if any, of the amount included in code A.

• Codes B through F:

 If you have an amount in box 12 with code B, C, D, E, or F, see the instructions for lines 37, 38, and 39 of Form 6251.

• Codes G through I:

Include the amount with any of these codes on the applicable line of Form 6251.

• Code J:

Exclusion items. If you pay alternative minimum tax in 2017, the amount in box 12, code J will help you figure any minimum tax credit for 2018. See the 2018 Form 8801, Credit for Prior Year Minimum Tax—Individuals, Estates, and Trusts, for more information.

Box 13—Credits and Credit Recapture 

Codes A through Q, and code Z, list all the credits that may be allocated to you as a beneficiary.

Generally, you must file the source credit form along with Form 3800, General Business Credit, to claim the general business credits listed on Schedule K-1 (Form 1041), codes C through Q and code Z. 

However, if your only source for the credits listed on Form 3800, Part III, is from pass-through entities, you may not be required to complete the source credit form. Instead, you may be able to report the credit directly on Form 3800. See below for the instructions for specific credits.

Credit Codes:

• Code A. Credit for estimated taxes.

 The beneficiary treats this amount as a payment of estimated tax. Treat the amount entered in box 13, code A, as an estimated tax payment made on January 16th.

• Code B. Credit for backup withholding.

Include this amount on line 64 of your Form 1040 and attach a copy of Schedule K-1 (Form 1041) to your return.

Line 64 is Federal Income Tax Withheld from Form W-2 & Form 1099.  Add the "Estimated Tax & Extension Payments" page and enter the amount in the "Additional Form 1099 Withholding" field.

• Code C. Low-income housing credit.

The fiduciary will provide you with a statement showing the amount to report on lines 4 and 11 of Form 8586. If your only source for the credit is a pass-through entity, such as an estate or trust, you can report the amounts from lines 4 and 11 of Form 8586 directly on Form 3800, Part III, lines 1d and 4d, respectively.  Add Form 3800 and locate applicable credit.

• Code D. Rehabilitation credit and energy credit.

The fiduciary must give you a statement that shows the information you will need and where to enter it on Form 3468, Investment Credit, so that you can figure the amount of any rehabilitation credit and energy credit that you may claim. Add Form 3800 and locate applicable credit

• Code E. Other qualifying investment credit.

 This code is used to report the qualified investment for figuring the qualifying advanced coal project credit, the qualifying gasification project credit, and the qualifying advanced energy project credit. The fiduciary must provide you with a statement that shows the information you will need and where to report it on Form 3468 so that you can figure the amount of the previously listed credits that you may claim. Add Form 3800 and locate applicable credit.

• Code H. Biofuel producer credit.

 See the Instructions for Form 6478 for more information. If your only source for the credit is a pass-through entity, such as an estate or trust, you can report the amount on Form 3800, Part III, line 4c. Add Form 3800 and locate applicable credit

• Code J. Renewable electricity, refined coal, and Indian coal production credit.

The fiduciary must provide you with a statement showing the amount of credit to report on Form 8835, line 19 (including the allocation of the credit for production during the 4-year period beginning on the date the facility was placed in service and for production after that period). If your only source for the credit is a pass-through entity, you can report the amount from line 19 directly on Form 3800, Part III, lines 1f and 4e, as applicable. Otherwise, complete Form 8835 as directed. Add Form 3800 and locate applicable credit 

• Code O. Biodiesel and renewable diesel fuels credit.

 If this credit includes the small agri-biodiesel producer credit, the fiduciary will provide additional information on an attached statement. If no statement is attached, report this amount on line 9 of Form 8864. If a statement is attached, see the Instructions for Form 8864, line 11. Add Form 3800 and locate applicable credit 

• Code R. Recapture of credits.

 If you are required to recapture any credits, the fiduciary will provide a statement with the information you need to figure your credit recapture. Add Form 3800 and locate applicable credit 

• Code Z. Other credits.

This code is used to report the beneficiary’s share of the employee retention credit. For more information on the employee retention credit, see the Instructions for Form 5884-A. If your only source for the employee retention credit is a pass-through entity, such as an estate or trust, you can report the amount directly on Form 3800, Part III, line 1aa.  Add Form 3800 and locate applicable credit 

Box 14—Other Information

• Code C. Qualified production activities income. 

If any of the income is oil-related qualified production activities income, the fiduciary must give you a statement that shows the amount. Enter the oil-related amount on Form 8903, Domestic Production Activities Deduction, line 7, col. (a). Enter the amount from all activities on Form 8903, line 7, col. (b).

• Code F. Gross farming and fishing income.

 The amount of farming and fishing income is included in box 6. This income is separately stated to help determine if you are subject to a penalty for underpayment of estimated tax. Report the amount of gross farming and fishing income on Schedule E (Form 1040), Supplemental Income and Loss, line 42.

• Code H. Net investment income tax.

 This amount is the beneficiary's adjustment for section 1411 net investment income or deductions. Enter this amount on line 7 of Form 8960, as applicable. See the Instructions for Form 8960.

• Code I. Other information.

If this code is used, the fiduciary will provide you with any additional information you may need to file your return that isn't shown elsewhere on this Schedule K-1.

If you receive a statement regarding the splitting of foreign tax credits from the income to which it relates, section 909 may prevent you from deducting the foreign tax credit until the related foreign income is taken into account. 

See Form 1116, Foreign Tax Credit, and Pub. 514, Foreign Tax Credit for Individuals, for more information.