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What is a Schedule K-1?

A Schedule K-1 is an IRS tax form that is used for investment in partnership interests. It is used to report the share of each partner in the earnings, deductions, credits, and losses. It can also be used by companies that have less than 100 stockholders who are taxed as partnerships.

There are three different kinds of Schedule K-1 forms, one for partnerships, one for S corporations, and one for trusts and estates. If you are required to submit one of these forms with your taxes and do not turn it in with your tax return, the IRS will not accept your return, so it is important that you include these in your tax returns. It has a slightly different look, depending on which version you need, but they all have the same detailed information about income. The IRS has instructions you can download to help guide you through the K-1 form.

Partnerships

If a business has a partnership, the partners are the people who are responsible for paying the income tax on the business' income. A partnership itself is usually not required to pay income taxes, but the individual partners can be taxed on their share of the income, even if it has not been distributed to them. To put it simply, the Schedule K-1 requires partnerships to keep track of the financial participation of every partner in the enterprise. The partners will each fill out their own tax returns, "reporting their share of income, losses, tax deductions and tax credits that the business reported on the informational 1065 tax form."

Partnerships can wear many different hats, but some of the more common partnerships include:

  • "Domestic partnerships

  • "Limited Liability Companies (LLCs) classified as partnerships for federal income tax purposes

  • "Foreign partnerships that have income that comes from the U.S. or receives income connected with doing business or trade in the U.S."

S Corporations

An S corporation is a business with less than 100 stockholders. The business has to file an annual tax return, and it provides the Schedule K-1 along with it. Their shareholders will also use the information on the K-1 for their own taxes.

Trust and Estate Beneficiaries

If a trust or estate passes income to its beneficiaries, they will receive a K-1 detailing the income information they need to include in their taxes. When a beneficiary receives income from the trust or estate, it will report a deduction of that amount to keep it from being taxed on that income again.

Often Tardy Form

The Schedule K-1 is known for being late and it is usually one of the last things to be sent out during tax season, since it is not due until March 15. "The most common [reason for its tardiness] is the complexity of calculating partners' shares, and that every partner's K-1 often has to be individually figured." The due date used to be April 15, leaving people with little to no time to decipher this complicated form and file their taxes accordingly.

References

FreshBooks. “What Is a Schedule K-1 Tax Form? Easy Filing Tips for Small Businesses.” FreshBooks, www.freshbooks.com/hub/taxes/schedule-k-1-tax-form.

Segal, Troy. “What Are Schedule K-1 Documents Used For?” Investopedia, Investopedia, 29 Feb. 2020, www.investopedia.com/ask/answers/09/k-1-tax-form.asp.

TurboTax. “What Is a Schedule K-1 Tax Form?” TurboTax Tax Tips & Videos, turbotax.intuit.com/tax-tips/small-business-taxes/what-is-a-schedule-k-1-tax-form/L95lj0sJq.


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