In this article, you will discover what a Schedule K-1 is, who should present it and why, and how to complete it correctly.
Some small businesses have more requirements than others when filing their business tax returns. A Schedule K-1 tax form can be one of them.
What is a K-1 form or the Schedule K-1 tax form?
The Schedule K-1 is a federal tax document in the United States used to report incomes, losses, and dividends of financial entities, businesses, or partnerships. When filing Schedule K-1 tax returns for Corporations and S Corporations, there are specific additional requirements. Let’s learn why these types of businesses should present this tax form.
What is a K-1 tax form used for?
The Schedule K-1 tax form is used to report incomes, losses, dividends, or capital gains during the fiscal year to the Internal Revenue Service by shareholders and partners.
With this tax form, the business can also track the participation of each partner in the business’ performance, depending on how much capital was invested.
The tax code of the United States allows some businesses to transfer their tax liability (that is, the taxes they have to pay on their income) to individuals investing in these companies, such as their partners or shareholders.
In other words, the business itself does not pay any taxes. But it transfers its obligations, profits, and losses to its shareholders and owners. These types of businesses are known as pass-through entities.
Are K-1 distributions taxable?
You will receive a Schedule K-1 if you invest in a business such as a partnership, C corporation, or LLC, or if you’re the beneficiary of a trust or an estate. You might report it since it’s taxable income. It’s already been reported to the IRS by the entity that paid you, so the IRS will know if you omit it when you file taxes.
Who has to file a Schedule K-1?
Schedule K-1 must be presented if you belong to a pass-through entity. Pass-through entities are S corporations, partnerships, and LLCs. Their business income is transferred directly to the personal tax returns.
Maybe, you are wondering, “Do I need to file a k1 if no income?” and the answer is yes, it is required to include Form K-1 in the tax return, even if there is no income. But if the Schedule K-1 that you’ve received has zeros in all boxes, you won’t need to report it to the IRS.
There are different Schedule K-1, and for each type of business, they will present a different one. According to their typology, these pass-through entities use another form to declare their taxes.
These businesses must file their return using Form 1065 k-1, as well as the corresponding Schedule K-1. This reports to the IRS the participation of each partner in the income, profits, losses, deductions, credits, and liabilities.
They declare their taxes using Form 1120S. They also must present the corresponding Schedule K-1, in which the percentage of income, profits, losses, deductions, and credits of each of the shareholders is reported.
These companies are somewhat different in fiscal terms.
When an LLC has more than one member, the IRS considers it as a partnership. To file your taxes, you must submit Form 1065 and Schedule K-1. The tax form reports the partnership income, which is the participation of each member in the business income, deductions, and tax credit items.
How to file a Schedule K-1
Now we will cover how to fill the Schedule K-1. Remember, it all depends on the type of company and the tax form used to file taxes.
How do I report K-1 income?
The Schedule K-1 has two types, with small differences, both divided into three parts:
Part I. Information about the company.
Part II. Information about the business partner or shareholder.
Part III. Information on the participation of the partner or shareholder in the income, losses, tax deductions, and credits.
Now, let’s look at some of the elements that each tax form includes. The following are the K-1 state filing requirements that always depends on the type of business:
Form 1065 K-1 for Companies
- Company information.
- Information about the partner, such as their name and address.
- Type of partner.
- The partner’s share in the gains, losses, capital, and liabilities at the beginning and end of the fiscal year.
- Analysis of the member’s account (how the balance evolves and changes during the period).
- Participation of the member in the income.
- Abroad transactions.
- Tax-exempt income and non-deductible expenses.
What does a K-1 tax form (Form 1065 K-1) look like?
A K-1 tax form for companies looks like this:
How to read a schedule K-1 form 1065 (Partnership’ form):
To read and fill out a Schedule K-1 correctly, you should pay attention to the following parts:
- The information about the partnership.
- Partner information, such as SSN, RIN, name, address, city, state, etc.
- Partner’s share of current year income, deductions credit, and other items.
Schedule K-1 for S Corporations (Form 1120S)
- Information about the corporation.
- Shareholder’s name, address, and other information.
- Percentage of the shareholder’s ownership for the fiscal year.
- The shareholder’s participation in income.
- Abroad transactions.
- Tax-exempt income and non-deductible expenses.
What does a K-1 tax form (Form 1120S) look like?
The S Corporations K-1 tax form looks like this
The information you need to fill out the tax form is in the business tax return and the financial statements.
Beneficiary’s instructions for schedule K 1 1041:
The K-1 Schedule 1041 is made “to report a beneficiary’s share of the estate’s or trust’s income, credits, deductions, etc.” To fill out this type of tax form, you will have to have this information:
- Information about the Estate or Trust
- Information about the beneficiary
- Beneficiary’s Share of current year income, deductions, credits, and other items.
To learn how to do it step by step, this is the 2020 instructions for a beneficiary filing form 1040 or 1040-SR.
When do you need to file a Schedule K-1? When is a K-1 required?
Businesses have to send the K-1 form until March 15 to all partners or shareholders. It’s proper that the company calculate the distribution of income and losses before this date for each of the owners.
Then, partners and shareholders must attach this information to their personal tax return, which they must submit by mid-April.
By the way, the easiest way to submit forms is by using the IRS’ electronic platform, or a tax preparing software. Or if you feel a bit nostalgic, you can walk to the post office and mail them.
5 tips for filing Schedule K-1
Filling out well the Schedule K-1 is an easy task. So that you can complete the tax form correctly, we have shared with you all the info you need. But here are some extra recommendations to file your Schedule K-1:
1. Ask for help if you need it: Yes, even though we have explained how to complete the tax form on your own, some steps may be complicated. Hire a tax professional or an experienced accountant to ensure the forms contain accurate information in your tax filing process.
2. Don’t forget to include the form: You will need to attach your Schedule K-1 to your personal tax return. Otherwise, the IRS will not accept it. Do not let your bad memory make you pay fines for filing late.
3. Use the correct tax form: There are different versions of the tax form, one for companies, which must refer to Form 1065, and another for S corporations, which must reference Form 1120S. Don’t mix ‘em up!
4. You will always receive a K-1: As long as you are a partner or shareholder of a business that operates as a pass-through entity, you will receive a Schedule K-1, even if the company has had losses during the year.
And fret not, even negative numbers can be good news, as they reduce the taxes you must pay.
5. Do not worry about blank spaces: You may not have to fill out the entire tax form, as the form covers a wide variety of situations that do not necessarily apply to all businesses.
Is it time to present your K-1 already?
This K-1 tax form will be presented alongside their partners’ or shareholders’ personal tax returns by transfer entities, such as companies, Limited Liability Companies, and S corporations.
And even though there are different K-1 forms, all the information you need to complete them is in your business tax return and your financial statements.
Finally, don’t forget to attach your tax form to your individual statement, and request the help of an expert when you need it.