Updated October 16, 2026. Quick answer: Box 9 of Schedule K-1 (Form 1120-S) shows a shareholder’s share of the S corporation’s net section 1231 gain (loss). The 2025 instructions send a gain, or a loss that is not from a passive activity, to column (g) of Form 4797 line 2, and send a passive loss through Form 8582 first. Whether the amount is passive depends on whether it came from a rental activity or a business the shareholder did not materially participate in.
What box 9 reports
On the form, line 9 of Part III is labelled “Net section 1231 gain (loss)”. This page covers the shareholder’s side of a K-1 that was received, not how the corporation files its own return. Every other box is set out on the Schedule K-1 (Form 1120-S) boxes overview.
When box 9 is passive
The instructions begin with the passive test. “The amount in box 9 is generally passive if it is from a:”
The two cases listed are “Rental activity, or” and “Trade or business activity in which you didn’t materially participate.” “However, an amount from a rental real estate activity isn’t from a passive activity if you were a real estate professional (defined earlier) and you materially participated in the activity.”
The real estate professional definition appears earlier in the same instructions. “You were a real estate professional only if you met both of the following conditions.” “More than half of the personal services you performed in trades or businesses were performed in real property trades or businesses in which you materially participated.” “You performed more than 750 hours of services in real property trades or businesses in which you materially participated.”
Where the amount goes
The routing turns on whether a loss is passive. “If the amount is either (a) a loss that isn’t from a passive activity, or (b) a gain, report it in column (g) of Form 4797, Sales of Business Property, line 2, after applying the basis and at-risk limitations on losses.” Form 4797 is covered on the Form 4797 page.
| Situation | Where the instructions send it |
|---|---|
| Gain, or a loss that is not from a passive activity | “report it in column (g) of Form 4797, Sales of Business Property, line 2, after applying the basis and at-risk limitations on losses.” |
| Columns (b) through (f) of Form 4797, line 2 | “Don’t complete columns (b) through (f), of Form 4797, line 2.” “Instead, enter “From Schedule K-1 (Form 1120-S)” across these columns.” |
| Loss from a passive activity | “report the loss following the Instructions for Form 8582 to figure how much of the loss is allowed on Form 4797.” |
| More than one activity | “it will attach a statement that will identify the section 1231 gain (loss) from each activity.” |
A passive loss in box 9
A loss from a passive activity takes an extra step. “If the amount is a loss from a passive activity, see Passive Loss Limitations in the Instructions for Form 4797.” “After applying the limitations on losses and deductions, report the loss following the Instructions for Form 8582 to figure how much of the loss is allowed on Form 4797.” Form 8582 is covered on the Form 8582 page.
When the corporation has more than one activity: “If the corporation had net section 1231 gain (loss) from more than one activity, it will attach a statement that will identify the section 1231 gain (loss) from each activity.”
Material participation in brief
Because the passive test depends on material participation, the instructions give seven tests for individuals. The first is “You participated in the activity for more than 500 hours during the tax year.” The second is “Your participation in the activity for the tax year constituted substantially all the participation in the activity of all individuals”. “All determinations of material participation are based on your participation during the corporation’s tax year.”
Some work does not count. “You do the work in your capacity as an investor and you aren’t directly involved in the day-to-day operations of the activity.”
Limits that apply before box 9 reaches the return
The instructions put the limits in a fixed order: “These limitations and the order in which you must apply them are as follows: the basis limitations, the at-risk limitations, the passive activity limitations, and the excess business loss limitations.” The amounts printed in Part III are before any of them. “The amounts shown in boxes 1 through 17 reflect your share of income, loss, deductions, credits, and other items from corporate business or rental activities without reference to limitations on losses, credits, or other items that may have to be adjusted”.
Basis is the shareholder’s own record to keep. “You are responsible for keeping the information needed to figure the basis of your stock in the corporation.” “Any losses and deductions not allowed this year because of the basis limit can be carried forward indefinitely and deducted in a later year subject to the basis limit for that year.”
For the at-risk step, “you will have to complete Form 6198, At-Risk Limitations, to figure your allowable loss for the activity.” Form 6198 is covered on the Form 6198 page.
The passive step comes last of the three. “When applicable, the passive activity limitations on losses are applied after the limitations on losses for a shareholder’s basis in stock and debt and the shareholder’s at-risk amount.”
Some items carry their own limit first. “Other limitations may apply to specific deductions (for example, the section 179 expense deduction). Generally, specific limitations apply before the at-risk and passive loss limitations.”
Consistency and the year to use
The shareholder reports what the corporation reported. “Generally, you must report corporate items shown on your Schedule K-1 (and any attached statements) the same way that the corporation treated the items on its return.” If a figure looks wrong: “If you believe the corporation has made an error on your Schedule K-1, notify the corporation and ask for a corrected Schedule K-1.” “Don’t change any items on your copy of Schedule K-1.”
Fiscal-year corporations shift the year. “If you file your tax return on a calendar-year basis, but the corporation files a return for a fiscal year, report the amounts on your tax return for the year in which the corporation’s fiscal year ends.”
Which revision applies
The edition read for this page is the 2025 Shareholder’s Instructions for Schedule K-1 (Form 1120-S) and the 2025 Schedule K-1 (Form 1120-S) itself, which are the revisions irs.gov served when they were read on 2026-10-16. Check the revision printed on the Schedule K-1 you received and the matching instructions, because a later edition can change the box layout, the column letters and the reporting lines.
Common mistakes
- Entering a box 9 loss on Form 4797 without checking whether it is passive. The instructions send only a gain, or a loss that is not from a passive activity, straight to column (g) of line 2; a passive loss goes through the Instructions for Form 8582 first.
- Filling in the property columns of Form 4797 line 2. The instructions say not to complete columns (b) through (f) and to write “From Schedule K-1 (Form 1120-S)” across them.
- Treating every rental amount as passive. The instructions carve out rental real estate for a real estate professional who materially participated, and that status requires both listed conditions.
Related: Form 4797 sales of business property, Form 8582 passive activity losses, Form 6198 at-risk limitations, and Schedule K-1 (Form 1120-S) boxes explained.
Sources
- 2025 Shareholder’s Instructions for Schedule K-1 (Form 1120-S): https://www.irs.gov/pub/irs-pdf/i1120ssk.pdf
- Schedule K-1 (Form 1120-S) (2025), Shareholder’s Share of Income, Deductions, Credits, etc.: https://www.irs.gov/pub/irs-pdf/f1120ssk.pdf
Read from the IRS documents linked above on October 16, 2026. General information, not tax advice. Your own facts decide the outcome, and a preparer, the account provider or the IRS is the right place to confirm anything consequential.