A Schedule K-1 form is a tax document used to report income, losses, and dividends from a partnership or S corporation. This document is essential because it helps the Internal Revenue Service (IRS) understand how the entity is doing financially.
The IRS requires all partnerships and S corporations to file a Schedule K-1 form each year. There are two Schedule K-1 forms: 1) Form 1065 for partnerships and 2) Form 1120S for S corporations. This blog post will explain all you need to do to comply with the law.
Schedule K-1 Form Explained
The first thing you need to know about Schedule K-1 is that it's a tax form. This document reports income, losses, and dividends from a partnership or S corporation. The IRS requires all partners in partnerships and all shareholders in S corporations to file a Schedule K- 1 each year. The members of an LLC must complete a Schedule K-1 form if they desire to be taxed as a partnership.
There are two Schedule K-1 forms:
- Form 1065 for partnerships and
- Form 1120S for S corporations.
Schedule K-1 is crucial because it confirms to the IRS the information about how the entity is doing financially. This information is used to help the IRS determine whether or not the entity owes taxes. The Schedule K-1 also allows the IRS to confirm a member's or shareholder's piece in the company—and, as a result, tax liability.
Because the information was transmitted directly to the IRS when the pass-through prepared the form, you must submit it precisely as it was given to you. The IRS will verify that this information corresponds to their records.
For federal tax purposes, a pass-through entity is one that "passes through" its revenue, losses, and credits to its owners and members. Pass through taxation means that the entity owners are taxed on their share of the partnership income rather than the entity itself being taxed.
The three most common pass-through entities are partnerships, S corporations, and limited liability companies (LLCs):
- The partners of a partnership pay taxes on their portion of the partnership's earnings.
- In an S corporation, the shareholders are taxed on their share of the corporation's income.
- In an LLC, the members are taxed on their share of the LLC's income.
Who Needs to File a Schedule K-1 Form?
A Schedule K-1 is similar to a W2 or 1099 form in that it lists taxable income, but it only applies to certain types of companies. The tax form breaks down the income you've earned from your firm into several sections.
Two types of taxpayers must submit a Schedule K-1 with their tax returns:
- Business owners who have a pass-through entity
- LLCs taxed as an S-corp or partnership
2. Trust or estate beneficiaries
The content on the form and the filing rules differ depending on the sort of taxpayer you are.
The information on the K-1 form is used by owners, partners, or members to declare earnings, losses, tax deductions, or tax credits on their personal income tax returns.
If an estate or trust has a gross income of more than $600 in a tax year, it is usually required to file Form 1041, U.S. Income Tax Return for Estates and Trusts.
How to Fill in the K-1 form
Schedule K-1 filing instructions depend on the identity of the tax filer.
The filing instructions may differ based on the entity's identity in filing the taxes. There are three Schedule K-1 forms:
- Form 1065 Schedule K-1 for partnerships
- Form 1120S Schedule K-1 for S-corps
- Form 1041 Schedule K-1 for the beneficiaries of a trust or estate
Depending on your business, you'll want to select the proper form. Members of an LLC should choose the tax form corresponding to their tax status.
Although each Schedule K-1 has slightly different information, the following are the common elements:
- The company, trust, or estate information (Part I)
- Information on the owner or beneficiary of the business (Part II)
- Information about the partner's or beneficiary's share of the business income, losses, deductions, and credits for the current year (Part III)
Because different types of taxable income are subject to varying tax rates, income, losses, and other things are broken down by category. Individual income tax rates, for example, differ from capital gains tax rates.
All of the data for sections I through III should be available from your business's tax return or financial statements. The partnership agreement, LLC operating agreement, and corporate bylaws should include information about each business owner and their portions of the business.
Schedule K-1 Deadline
By the 15th of the third month after the end of the tax year, partnerships and S-corporations must file tax returns with the IRS and distribute Schedule K-1 forms to their owners. The filing date for corporations operating on a calendar-year Schedule is March 15.
After receiving the Schedule K-1 forms from the partnership and corporation, the owners, as individuals, have a month to file their taxes with the IRS. Remember to include your Form 1040(annual income tax return) in your Schedule K-1.
Where Can I Find a Sample K-1 Tax Form?
The IRS provides a sample copy of Schedule K-1 (Form 1065) for download. However, your accountant or whoever is in charge of submitting your partnership's Form 1065 will probably send you a copy of Schedule K-1 around tax season. Remember that if you don't include a Schedule K-1 with your personal income tax return (Form 1040), the IRS will reject it.
Will I Get One Even if My Company Had Losses?
Even if the company had losses during the tax year, you would receive a Schedule K 1 if you are a partner or shareholder of a pass-through entity. Don't overlook a Schedule K-1 that displays a loss because it may lower your tax burden!
Should I Wait to File My Taxes Until I Receive My Schedule K-1?
Each year, by March 15, Schedule K-1s must be completed. Filing your personal tax return can be tempting before receiving your K-1. However, doing so will have you alter your tax return, requiring you to pay more tax preparation fees. It's better to postpone filing your tax return until you've gotten all of the Schedule K-1s you're awaiting.
What Happens if I Don’t File My K1?
Additional penalties apply if you fail to file your federal income tax return because you did not obtain Schedule K-1. Failure to file penalties is 5%, with an extra 0.5 to 1% charged by the IRS for failure to pay any taxes owed.
Businesses can use Form 7004 to request a six-month delay in filing the 1065 tax form.
Is It Possible to Have a Schedule K-1 That Is Partially Finished Yet Has Blanks?
Don't be startled if only a handful of the fields on your Schedule K-1 are filled in. This does not imply that something is wrong with your Schedule K-1. The form is intended to cover a wide range of scenarios; however, not all procedures apply to all firms, partners, or shareholders within that business.
Who Is Liable for Paying Income Tax on Behalf of Estates and Trusts?
The short answer is that if a beneficiary receives income from a trust during the year, they must pay income tax on that income. Taxes will be paid from the estate if the trust is the only entity that makes money. A Schedule K-1 Form 1041 is the proper form to use if any income is earned.
A Final Word on Schedule K-1
If you have questions about Schedule K-1 or any other part of your tax return, it is best to consult with an attorney who specializes in taxes. They can help you make sure that everything on your return is correct and answer any other questions.
Don't wait until the last minute to get started on your taxes; give yourself plenty of time to complete them accurately and without stress. Thanks for reading!