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What Is A Schedule K-1 Form?

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Schedule K-1 forms are tax documents used to report an individual’s share of income associated with a “pass through” business, such as an S-Corporation, partnership, trust, or estates.

Someone (typically an accountant or bookkeeper) must prepare individualized Schedule K-1 forms for each person who is a partner, beneficiary, or shareholder of a business, trust, or estate.

The K-1 form allows individuals to declare income (or losses) associated with a business, and to pay the associated individual income tax due on the income.

If you expect to receive a Schedule K-1, make sure the tax filing software you use supports the form. TurboTax, H&R Block, TaxSlayer, and FreeTaxUSA all support the Schedule K-1. Cash App Taxes supports the Schedule K-1 for partnerships and S-Corporations, but not trusts and estates.

What Is A Schedule K-1 Tax Form?

Schedule K-1 documents are tax forms that businesses, partnerships, trusts and estates issue each year. The forms allow the pass-through entities to show income and losses and the various income types (dividends, capital gains, royalty or rental income, interest and ordinary business income).

There are three different variations of a Schedule K-1: 

  • Forms for S-Corporations. An S-Corporation is a “pass through” business where the business passes income, losses, deductions, and credits to the individuals who own the business. S-Corporations issue Schedule K-1 Form 1120-S. 
  • Forms for Partnerships. Partnerships, which can include Master Limited Partnerships and some crowdfunding real estate funds, send Schedule K-1 Forms 1065 to their partners. 
  • Forms for Estates and Trusts. Estates and trusts will send a Schedule K-1 Form 1041 to beneficiaries. If you’re responsible for generating a Form 1041, you’ll need to use special tax filing software designed for businesses, but estate beneficiaries (those who received an inheritance) can use most tax software programs to file their return.

Why Are K-1 Tax Forms So Complicated?

The IRS tells companies, partnerships, and trusts to issue their K-1 forms by March 15th, but these forms are often late because they are so difficult to fill out. A business has to “close their books” for the year, and classify its income and expenses. Then, someone (usually an accountant or bookkeeper) needs to generate individualized K-1 forms based on each person’s “share” of the income.

If a partnership has two partners that split the income 50-50, the math on the K-1 form isn’t too difficult. However, an S-Corp or a partnership may add more shareholders or more partners throughout the year. The accountant needs to properly distribute income based on both time and proportion of ownership.

On top of that, the entity can claim legitimate deductions or credits which also have to be proportionally distributed to relevant individuals.

The K-1 can be complicated because you aren’t always privy to how the K-1data was generated. And depending on the entity-type, you could have all sorts of different types of income, deductions, state tax liability, and more.

Furthermore, K-1 forms should also have the “basis” listed – which is the partner’s capital account. This can significantly impact the capital gains, losses, and deductibility of losses on tax returns. Basically – tax basis in partnerships can be very complicated. 

K-1 Form Due Dates

Businesses, partnerships, estates, and trusts should send K-1 forms by March 15th. This allows individuals to complete tax filing by the April 15th tax filing deadline. However, many businesses struggle to issue these forms in a timely manner. Because of that, you may need to request a tax filing extension.

Remember, the IRS doesn’t give you an extension on paying your taxes (even when you file late), so do your best to pay the estimated taxes on your Schedule K-1 income before the tax filing deadline.

How To Report K-1 Income

In general, you will not be required to a “file” a Schedule K-1 when you file your taxes. Instead, the numbers from the Schedule K-1 will be transferred to your individual tax return (IRS Form 1040). The income, deductions, and credits on the form will allow you to figure out the overall taxes that are due.

We highly recommend using either an accountant, a tax preparer, or tax filing software if you received a Schedule K-1. The software will allow you to transfer information from your Schedule K-1. It may even allow you to upload the form and transfer information for you.

However, making sure that you enter the K-1 items correctly can be difficult if you don’t know what you’re doing. Especially when it comes to balance sheet items.

Taxes Due on Schedule K-1 Income

Schedule K-1 forms can be used to report a wide variety of income including ordinary business income, interest income, dividends, rental income, royalty income and capital gains. If your Schedule K-1 form includes ordinary business income, you may need to pay self-employment taxes on the income. Other types of income typically don’t require paying self-employment taxes.

You Don’t Have To Be a Schedule K-1 Expert

Unless you’re an accountant or a bookkeeper, you probably don’t need to become a Schedule K-1 expert. For the typical person, the most important takeaways are that Schedule K-1 forms can arrive late, and you may need to file an extension to account for the delay. While you wait for your K-1, prepare the rest of your tax return, and make sure that you’ve paid estimated taxes for the remaining income.

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