K-1 Income from a US Partnership While Living Abroad

If you are a partner in a US partnership and you live abroad, you still receive a Schedule K-1 each year showing your share of partnership income, losses, deductions, and credits, and that income flows to your Form 1040. Most K-1 income from a US-based partnership is US-source income and cannot be excluded under the Foreign Earned Income Exclusion, since the exclusion only covers income from services you personally performed in a foreign country, not income from US business operations. Self-employment income on K-1 Box 14 is still subject to self-employment tax, which the FEIE does not eliminate, though a totalization agreement may provide relief if you are covered by a foreign social security system. Expats who are partners in foreign partnerships have separate and more complex reporting obligations under Form 8865. The passive activity loss rules apply to partnership K-1s regardless of where you live, so rental losses from US partnership activities must still meet the material participation or active participation tests to be deductible in the current year.