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Why does the 1040 reflect a different figure than the K-1?

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Sometimes the loss on the K-1 is not totally deducted on the 1040 due to basis limitation…. And the unused basis limitation is carried forward in those computations. 

 

i.e.   You put $10k into new business.

               

The business has a loss of $12k on the first K-1

 

                BUT the 1040 will only show up to $10k being deducted (can only deduct up to the skin you have in the game).

               

                Year 2 we have gain of $50k and do not take any distributions.

 

                $50k is on the K-1 but the 1040 now reflects $48k ($50k profit this year plus we now have basis so can deduct prior year unused loss)

               

                Distributions would reduce the basis.  If the basis is reduced to below zero due to distributions,

                those distribuitons are considered to be a taxable dividendD