What is a Schedule K-1?

by | May 30, 2024

What does a K-1 form entail?

In the United States tax system, certain entities have the option to utilize pass-through taxation, which transfers the responsibility of income tax from the earner to those who benefit from it. The Schedule K-1 form is used to report the amounts that are passed through to each party with an interest in the entity. These types of businesses are commonly referred to as pass-through entities.

Who is required to complete a K-1 form?

Specific entities and partnerships are required to file Schedule K-1 forms with the IRS and provide them to their partners and shareholders. While individual taxpayers generally do not file K-1 forms, the information received from a K-1 can be used when filing personal income tax returns.

There are four main types of entities that must file a K-1:
1. Business partnerships
2. LLCs with at least two partners or that choose to be taxed as corporations
3. S corporations
4. Trusts and estates Each of these entities completes a different type of K-1 form, although they share similarities and differ slightly based on the filing entity.

There are multiple K-1 forms tailored to the aforementioned entities, and three main groups typically receive a Schedule K-1:
1. Business owners, co-owners, and partners
2. Shareholders and investors
3. Individuals receiving income or assets from a trust or estate

What does a K-1 form serve for business partnerships?

In partnerships, the partners, rather than the business itself, are responsible for paying taxes on the partnership’s income. Each partner must file a tax return reporting their share of the income, losses, tax deductions, and tax credits. The partnership reports these items on the 1065 tax form and prepares a Schedule K-1 to report each partner’s share to the IRS and provide them with the necessary information for their own tax returns. For example, if a business earns $100,000 of taxable income and has four equal partners, each partner should receive a K-1 with $25,000 of income indicated.

What is the purpose of a K-1 form for LLCs?

An LLC is categorized as a pass-through entity, which means that partners and co-owners must report their share of income, losses, tax deductions, and credits. If you have an ownership stake in an LLC, you may receive a Schedule K-1. However, not all LLCs are required to file K-1s. The filing requirements depend on how the IRS treats the LLC, which can be as a partnership, disregarded entity, or corporation, based on the elections made and the number of members. If an LLC elects to be treated as an S corporation, the owners may receive Schedule K-1 (Form 1120-S) to report their share of income. On the other hand, if the LLC elects to be treated as a C corporation, no K-1 form is filed because taxes are paid at the corporate level.

What is the purpose of a Schedule K-1 for S corporations?

Similar to partnerships, S corporations file an annual tax return using Form 1120S. These corporations provide Schedule K-1s to report each shareholder’s share of income, losses, deductions, and credits. Shareholders then utilize the information from the K-1 to report it on their individual tax returns.

What is the role of a K-1 form for trust and estate beneficiaries?

Trusts and estates use Form 1041 to file their tax returns. In some cases, the trust itself pays the income tax on the earnings, while in other cases, the income is passed through to the beneficiaries. The treatment depends on the type of income and the governing documents of the trust or estate. For example, a trust may pass through dividends, interest, and other income to beneficiaries but pay taxes at the trust level on capital gains. In such cases, beneficiaries receive a K-1 that indicates the income they need to report on their tax returns. When a beneficiary receives income, the trust or estate typically reports a corresponding deduction on its Form 1041 to avoid double taxation on the same income. Since the income is being passed through to a beneficiary, it is only taxed once.

How to file a Schedule K-1 consists of three parts:

1. Part I provides information about the entity, including its employer’s EIN, address, IRS location of tax return filing, and whether it is a publicly traded partnership.
2. Part II contains detailed information about the partner, shareholder, or beneficiary receiving the K-1. It includes their SSN, address, role in the entity, and their share of profits, losses, and contributed capital and assets for the year.
3. Part III covers the entity’s share of income, deductions, credits, and other items for the current year. It requires specific details about the entity’s income, as well as any tax deductions or credits.

Although the Schedule K-1 may vary slightly depending on whether it originates from a trust, partnership, LLC, or S corporation, all K-1 forms provide comprehensive information about the type of income, tax deductions, or losses, enabling accurate reporting on individual tax returns.

Do you have further questions about the K-1 or need help staying on top of your numbers? Contact us at [email protected], we’d love to help!