According to Benjamin Franklin, there are only two certainties in life, death, and taxes. We can help you understand the second one.
Although for some, filing their taxes feels like a slow and painful death, there’s no reason to be so dramatic. While tax regulations make the process of filing taxes somewhat tortuous, it is possible to meet your tax obligations and not die trying.
Speaking of complicated processes, some small businesses have more requirements than others when filing their taxes. Schedule K-1 can be one of them.
In this article, you will discover what a Schedule K-1 is, who should present it and why, and how to complete it correctly.
What is a Schedule K-1 tax form?
For Corporations and S Corporations, there are certain additional requirements when filing their tax returns. These “complications” are named: Schedule K-1.
Let’s see why these types of businesses should present this tax form.
What is a K-1 tax form used for?
The tax code of the United States allows some businesses to transfer their tax obligations (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.
Schedule K-1 is the tax form used by partners and shareholders to report to the Internal Revenue Service their income, losses, dividends, or capital gains during the fiscal year.
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.
Are K-1 distributions taxable?
Yes. If you’ve ever invested in a business such as partnership, C corporation, or LLC, or if you’re the beneficiary of a trust or an estate, then you’ve probably received a Schedule K-1 in the mail. Just like any other income, you need to 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?
S corporations, partnerships, and LLCs are pass-through entities, as we have already mentioned. Their business income is transferred directly to the personal tax returns of its owners, partners, or shareholders, who must present them alongside Schedule K-1.
Now… this is where things get a bit confusing.
Each of these pass-through entities, according to their typology, uses a different form to declare their taxes. And each type of business must present a different Schedule K-1 form.
These businesses must file their return using Form 1065, 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 participation of each member in the business income, deductions, and tax credit items.
How to file a Schedule K-1
We already clarified who has to submit this tax form and which type of Schedule K-1 is needed. As we explained, it all depends on the type of company, and the tax form used to file taxes.
Let us focus now on how to present the K-1.
How do I report K-1 income?
Although there are two types of Schedule K-1 with small differences, both divide 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, depending on the type of business:
Schedule K-1 for Companies (Form 1065)
- 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) look like?
Take a look at this sample of a K-1 tax form for Companies:
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?
Take a look at this sample of a K-1 tax form for S Corporations:
The information you need to fill out the tax form is in the business tax return and the financial statements.
When do you need to file a Schedule K-1?
When do K-1 forms have to be sent? Businesses have until March 15 to send the tax form to all partners or shareholders. Before this date, companies should have already calculated the distribution of income and losses for each of the owners.
Then, partners and shareholders must attach this information to their personal tax return, which they must submit 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
Being well prepared never hurts. And being too prepared is never a bad thing.
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 make sure the forms you contain accurate information.
2. Don’t forget to include the form
The IRS will not accept your personal tax return if the Schedule K-1 does not accompany 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?
Transfer entities, such as companies, Limited Liability Companies, and S corporations, must present this tax form alongside the personal tax returns of their partners or shareholders.
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.