If you are a partner or shareholder of a firm, you may know that you have to fill out a tax document to report your income, losses, capital gains, dividends, and more for the tax year. This document is the Schedule K-1, and it allows a partner’s earnings to be taxed at an individual rate instead of the corporate tax rate.
All pass-through entities including partnerships, LLCs, and S-Corporations must issue K-1s to individual partners and shareholders. The K-1 is designed to make it easier to measure the contributions of a partner or shareholder toward the overall performance of a business. A Schedule K-1 lists taxable income only for the types of businesses listed below.
The K-1 has three different types of tax forms:
- Form 1065 for partnerships: The partnership passes the earnings to the partners who then use the information when filing their individual tax returns to the IRS.
- Form 1120-S for S-corporations: Similar to the 1065, this shows how much each member of the S-Corporation earned or lost for the tax year. The IRS looks at the information provided to determine the percent ownership of an individual in an S-corporation.
- Form 1041 for beneficiaries of trusts and estates: This includes the income derived from an estate after the passing of a descendant.
Normally, the taxpayer doesn’t file the K-1 form. The entity that issued it to them files it, along with the entity’s tax return. The partner will just use the information in the K-1 to fill out their individual tax returns, and they do not need to send the K-1 to the IRS. Additionally, there are two ways a K-1 can impact personal taxes. Tax liability can be increased, or a tax deduction could be provided. If a K-1 is associated with income, tax liability for the year is likely to be increased. If the partnership records a loss over the tax year, partners can state the loss on the K-1 and carry the amount forward for a future tax deduction.
Reach out to us: If you are a partner in a business, a Schedule K-1 is an important document you will be responsible for. Understanding its nuances for both your business and individual tax returns is important. Our TFG CPAs can help guide you through all of this, call today at 855-542-7537.
