Schedule K-1 is an IRS form that is important if you are the owner or co-owner of a pass-through business. Essentially, any company owned and operated through a pass-through business entity. Think of a business that is a:
- Limited liability company (LLC) with two or more owners
- S corporation
- General or limited partnership
- Limited liability partnership (LLP).
This includes almost every business, except regular C corporations and sole proprietorships in which a single individual personally owns the business. Schedule K-1 is not needed for these businesses. Nor for an LLC with only one owner. Such LLCs get the same treatment as sole proprietorships for tax purposes.
For tax purposes, what distinguishes pass-through businesses is that they pay no taxes themselves. Instead, the profits, losses, deductions, and tax credits of the business get passed through the business to the owners’ individual tax returns.
If the business has a profit, the owners pay income tax on their ownership share through their individual returns at their individual income tax rates. If the business incurs a loss, it is likewise shared among the owners who may deduct it from other income on their individual returns, subject to certain limitations.
Although pass-through entities pay no taxes, they still have to file tax returns with the IRS. However, these forms are not used to pay taxes. Instead, they are only informational returns that inform the IRS of the entity’s income, deductions, profits, losses, and tax credits for the year.
Partnerships and most LLCs with more than one owner file Form 1065, U.S. Return of Partnership Income. S corporations file an information return on IRS Form 1120S, U.S. Income Tax Return for an S Corporation. This form reports the corporation’s income, deductions, profits, losses, and tax credits for the year.
Form 1065 and Form 1120S both include a separate part called Schedule K-1. Each owner of the pass-through business fills out a Schedule K-1. The form reports the owner’s individual share of the business’s income or loss.
Each owner reports on his or her individual tax return (Form 1040) the owner’s share of the business’s net profit or loss as shown on Schedule K-1. Schedule K-1, then, is a bit like a W-2 form for a pass-through business owner (W-2 is the form used to report employees’ income to the IRS).
LLCs with multiple owners are ordinarily taxed the same as partnerships, using Form 1065. However, LLCs have the option of following taxation rules as S corporations instead. In this event, they file Form 1120S.
There are two versions of Schedule K-1, one for partners in partnerships and LLC owners (Form 1065, K-1); and one for shareholders in an S corporation (Form 1120S, K-1). You don’t file Schedule K-1 with your personal tax return. Instead, you include it with the information return filed by the business (Form 1065 or Form 1120S).
Schedule E Supplemental Income or Loss form, which you file with your personal return, includes information from Schedule K-1.
Schedule K-1 for LLCs and Partnerships
All partnerships and LLCs taxed as partnerships must provide each partner or LLC owner with a Schedule K-1 by March 15 each year. However, filing for an extension extends the deadline to September 15.
The March 15 deadline means you have a month after you receive Schedule K-1 to use it to complete your individual return, which is due April 15. Or October 15 if you obtain an extension to file. Be forewarned, Schedule K-1 is a complex tax form.
Three types of information gets reported on Form 1065, Schedule K-1:
- Part I. Information About the Partnership: This includes the name, EIN, address and filing center for the partnership or LLC.
- Part II. Information about the Partner. This includes the name, address, type of the partner or LLC owner; beginning and ending balance of the partner’s or owner’s share of profit, loss and capital; partner’s or owner’s share of all types of partnership liabilities; and partner’s or owner’s capital account analysis.
- Part III. Partner’s Share of Current Year Income, Deductions, Credits, and Other Items. This includes the partner’s or LLC owner’s share of the business’s income, deductions, credits, and distributions. Income taxed differently, such as interest income and capital gains, gets reported by category.
To complete the Schedule K-1, the totals for the business reported on Form 1065 are divided among the partners or LLC owners based on their share of the partnership or LLC as detailed in the partnership agreement or LLC operating agreement. For example, if an LLC earns $100,000 in taxable income and has two equal owners, each owner should receive a K-1 listing $50,000 of income.
Schedule K-1 for S Corporations
Like partners, S corporation shareholders must receive a Schedule K-1 listing their shares of the items on the corporation’s Form 1120S, U.S. Income Tax Return for an S Corporation. The shareholders use the information on the K-1 to complete their individual tax returns.
Each shareholder must receive a Schedule K-1 by March 15. However, filing for an extension of the corporation’s tax return extends the deadline to September 15. Form 1120S, Schedule K-1 is similar to the Schedule K-1 for LLCs and partnerships, but not identical.
- Part I. Information About the Corporation: This includes the name, EIN, address and filing center for the corporation.
- Part II. Information about the Shareholder. This includes the shareholder’s name, address, and identifying number; and percentage of stock ownership.
- Part III. Shareholder’s Share of Current Year Income, Deductions, Credits, and Other Items. This includes the shareholder’s share of the business’s income, deductions, credits, and distributions. Report income by category, such as interest income, dividends, and capital gains.
To complete the Schedule K-1, the totals for the business reported on Form 1120S, are divided among the shareholder’s based on their percentage of stock ownership. For example, if an S corporation earns $100,000 in taxable income and has four owners who each own 25 percent of the stock, each should receive a K-1 listing $25,000 of income.
Seek Help from a Dedicated Tax Professional
If you own and actively manage an LLC, partnership, or S corporation, it’s best to have a tax professional complete your Form 1065 or Form 1120S and the corresponding Schedule K-1s, since these forms are complex. If you’re a passive investor in an LLC or S corporation, be sure to check the K-1 you receive carefully. For example, make sure your ownership interest in the income the business earned is accurately recorded. IRS computers will double-check your individual tax return against the information on the K-1 filed by the business—the two must jibe or the IRS may question your return.
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MileIQ’s blog does not constitute professional tax advice. You should contact your own tax professional to discuss your situation.