What is a Schedule K-1?
Schedule K-1 is a federal tax document used to report income, losses, and dividends of a business or financial entity’s partner or S corporation shareholder. A Schedule K-1 file is prepared for each individual partner and is included on the partner’s individual tax return. S corporations report activities on Form 1120S, while partnerships report transactions on Form 1065.
- Limited partnerships and certain ETF business partners, S corporation shareholders and investors use Schedule K-1 to report their gains, losses and dividends.
- Schedule K-1s are typically issued by pass-through business or financial entities that do not pay corporate tax directly on their income, but instead pass the tax liability (along with the bulk of their income) to their stakeholders.
- Schedule K-1 requires business entities to keep track of each participant’s underlying or ownership stake in the business.
- There are several different types of income that can be reported on Schedule K-1.
- Schedule K-1 should be issued to taxpayers no later than March 15 or the third month following the end of the entity’s fiscal year.
Understanding Timeline K-1
U.S. federal tax law allows the use of pass-through strategies in certain circumstances to transfer tax liability from an entity (trust, partnership) to an individual who is interested in it. The entity itself does not pay taxes on income or income; instead, any expenditures – along with any taxes due – are “passed through” directly to stakeholders. This is where Schedule K-1 comes in.
The purpose of Schedule K-1 is to report each participant’s share of the business entity’s gains, losses, deductions, credits, and other distributions (whether or not they are actually distributed). Although not filed with the individual partners’ tax returns, the financial information posted to each partner on Schedule K-1 will be sent to the IRS along with Form 1065. Income generated by the partnership is added to the partner’s other sources of income and entered on Form 1040.
Consider a partnership agreement
A partnership is defined as a contract between two or more people who decide to work together as partners. The rules for this business arrangement are set out in the partnership agreement. The partnership has at least one general partner (GP) who runs the partnership.
GPs are responsible for their actions as partners and for the activities of other GPs in the partnership. On the other hand, limited partners are only responsible for the debts and obligations of the partnership based on their capital contributions. The partnership agreement sets out how the partners share the profits, which affects the information on Schedule K-1.
Schedule K-1 requires the partnership to track the basis of each partner in the partnership. In this context, foundation refers to the partner’s investment or ownership in the business. The partner’s base is increased by the capital contribution and their share of income; it is reduced by the partner’s share of losses and any withdrawals.
For example, suppose a partner contributes $50,000 in cash and $30,000 in equipment to the partnership, and the partner’s share of income for the year is $10,000. The partner’s total base is $90,000, minus any withdrawals they make.
The base calculation is important because when the base balance is zero, any additional payments to partners are taxed as ordinary income. The underlying calculations are reported on Schedule K-1 in the Partner Capital Account Analysis section.
Partners can earn several types of income under Schedule K-1, including rental income from real estate held by the partnership and income from bond interest and stock dividends.
Many partnership agreements provide guaranteed payments to general partners who have invested time in running the business, and these guaranteed payments are reported on Schedule K-1. Guaranteed payment is in place to compensate the partner for the substantial time investment.
The partnership may generate royalty income and capital gains or losses, which are allocated to each partner on Schedule K-1 under the partnership agreement.
Those receiving K-1 reported income should consult a tax professional to determine if their income would trigger an alternative minimum tax.
IRS Schedule K-1 FAQs
What is IRS Schedule K-1?
Schedule K-1 is the Internal Revenue Service (IRS) tax form issued annually. It reports gains, losses, interest, dividends, gains and other distributions from certain investments or business entities for the previous tax year. These are usually pass-through entities that do not pay corporate tax themselves, as they pass on profits directly to stakeholders or investors. Participants in these investments or businesses use the numbers on the K-1 to calculate their income and tax payable.
Who gets an IRS Schedule K-1?
People who may receive a Schedule K-1 include:
- S Corporation Shareholders
- A partner in a limited liability company (LLC), limited liability partnership (LLP) or other business partnership
- Investors in a Limited Partnership (LP) or Master Limited Partnership (MLP)
- Investors in certain exchange-traded funds (ETFs)
- trust or estate beneficiary
Is IRS Schedule K-1 income considered earned income?
It varies by individual participation and status. For trust and estate beneficiaries, limited partners, and passive investors, Schedule K-1 income is more similar to unearned income. For general partners and active owners of a business or pass-through business entity, income can be considered earned income and they may be subject to self-employment tax.
When should I receive an IRS Schedule K-1?
Schedule K-1 forms are notorious for being late. The IRS says they should be due on March 15 (or the 15th day of the third month following the end of the entity’s tax year), but does that mean they only need to be issued then, or are they actually due by then Right in the hands of the taxpayer, it seems to explain it. However, most authorities agree that you should receive one by March 15th or the nearest business day.
Do you have to file an IRS Schedule K-1?
Yes, you do if you are the general partner of a limited partnership or the owner of a pass-through business entity or S corporation. The K-1 must be filed with your tax return.
For limited partners and trust or estate beneficiaries, it is generally not necessary to actually fill out Forms K-1 and 1040 (although the data on them must be reported on the return and included in the calculation of taxable income and income tax owed).