Some businesses, such as partnerships, don’t pay taxes at the business level. That’s because the income goes straight to the individual partners, shareholders, or beneficiaries. In the US, we call this “pass-through” taxation. And if you receive income from a partnership, then you need an IRS Schedule K-1 to complete your own personal tax return.
The concept of how K-1s work can be hard to grasp, however. To help you understand how to issue K-1s and use them to complete your tax return, our attorneys explain everything you should know below.
What Is a Schedule K-1 Form?
Schedule K-1 reports the income, losses, and dividends of pass-through entities such as partnerships, trusts, or S-corps. The entity prepares the document and sends it to the individual partners, shareholders, and beneficiaries so they can complete their personal tax returns.
You won’t receive a K-1 if you’re part of an entity which pays tax at the corporate level, or if you’re a solo business owner. It’s only applicable if you’re part of a multi-owner entity where individuals take responsibility for paying taxes on business income or earnings.
Who Must File It?
There’s no need for individuals to file K-1s. The entity completes and files the relevant K-1 forms. Individuals, however, should use the information contained in the K-1 to complete their own personal tax return.
Types of K-1 Forms
There are different types of K-1 forms for each type of entity. Although the forms are similar, it’s crucial to use the correct form for the businesses and individuals involved.
- Partnerships: Owners of partnerships, including multi-member LLCs, complete their tax returns using K-1 Form 1065.
- Trusts and Estates: Any estate or trust should use K-1 Form 1041 when filing a tax return.
- S-corps: S-corps should file K-1 Form 1120S, which provides a breakdown of shareholder income, credits, losses, and deductions.
If your LLC is taxed as a C-corp, it won’t file any K-1 since it pays tax at the corporate level. If you’re unsure about the structure and tax treatment of your business, reach out to our experienced tax professionals for help!
Who Receives Copies of a K-1 Form?
The following individuals should receive a Schedule K-1 from the relevant pass-through entity:
- Trust beneficiaries
- Estate beneficiaries
- Investors
- Shareholders
- Business partners and owners
If you’re unsure whether you should receive a K-1, check with the relevant organization or, if it’s a trust, the trustees.
How Are Earnings and Expenses Calculated for Each Owner?
Schedule K-1 is completed for each partner individually, showing each owner’s share of the business’s income, expenses, deductions, and credits. But how do you calculate each partner’s share?
- Generally, your share of taxable income, tax credits, etc. is based on your interest in the partnership, as laid out in a partnership agreement. So, if you own 50% of the partnership, you’ll report 50% of its income and expenses, and claim 50% of its deductions and credits.
- Your partnership agreement may also contain specific adjustments to standard allocations.
- If you don’t have a partnership agreement, you can treat each partner as having an equal ownership interest by default. However, you may wish to speak to a tax professional about your situation.
Refer to the IRS detailed instructions for how to enter each item on Schedule K-1.
Your Gordon Law tax attorney can assist if you need help completing your tax return so you don’t overlook any reportable earnings or expenses from the partnership.
When Are IRS Schedule K-1 Forms Due?
According to the IRS, taxpayers should receive K-1s by March 15 if the business follows the traditional calendar year for accounting purposes. If the business uses an alternative fiscal year, then the K-1s should arrive in the third month after the fiscal year ends.
Unsure when you should issue or receive a K-1? Ask our Chicago business attorneys to help you understand what to expect.
Using a K-1 to Complete Your Personal Tax Return
The information from Schedule K-1 is reported on Schedule E of Form 1040 (the individual tax return). There’s no requirement to attach the K-1 to your tax return, but you should retain these records for at least 3 years. See our Self-Employed Tax Guide for more information.
If you’re unsure how to complete your tax return, or you disagree with any information on the K-1 form, we can explain what options you might have for disputing the K-1 and we’ll help you file your taxes correctly.
What Should I Do if My IRS Schedule K-1 Form Is Late?
It’s not unusual for businesses to send out Schedule K-1 forms late. However, delays can make it challenging for individuals to file their own tax returns. If you find yourself in this situation, you should take the following action.
- Review your business agreement or partnership agreement. The business may be legally obliged to provide you with a K-1 by a certain date, or within a certain timeframe, or else they’re in breach of the agreement.
- Ask the IRS for a tax filing extension. This doesn’t mean you have more time to pay; however, it grants you a little longer to actually file your tax return.
If you’re concerned about Schedule K-1 delays, contact Gordon Law to discuss your options and how you can avoid unnecessary IRS tax debt.
Got Business Tax Questions? Contact Gordon Law!
Unsure how to make sense of a Schedule K-1? Don’t panic––these forms can be complex. That’s why the Gordon Law team is here to help. Our experienced tax lawyers can walk you through the entire filing process to ensure you complete your tax return with ease. And if you have concerns about tax debt or meeting your filing obligations, we’re on hand to help with IRS negotiations or to explain your legal rights.
Don’t delay in seeking the help you deserve to complete your tax return. Give yourself the best chance of avoiding tax debt by calling Gordon Law for a free, no-obligation first meeting. Or contact us online to discuss how we can help.
