Schedule K-1: Partner's Share of Income, Deductions, Credits, etc.

What Is Schedule K-1: Partners Share of Income, Deductions, and Credits, etc.?

Schedule K-1 is an Internal Revenue Service (IRS) tax form issued annually to the individuals in business partnerships. The purpose of Schedule K-1 is to report each partner's share of the partnership's earnings, losses, deductions, and credits. It serves a similar purpose for tax reporting as one of the various Forms 1099, which report dividend or interest income from securities or income from the sale of securities.

While a partnership itself is generally not subject to income tax, individual partners (including limited partners) are liable to be taxed on their share of the partnership income, whether or not it is distributed.

A K-1 is also commonly issued to taxpayers who have invested in limited partnerships (LPs) and some exchange traded funds (ETFs), such as those that invest in commodities.

In addition, a K-1 is issued to shareholders of S corporations, companies with under 100 stockholders that are taxed as partnerships. Estates and trusts that have distributed income to beneficiaries also issue and file Schedule K-1s.

Key Takeaways

  • Schedule K-1 is an Internal Revenue Service (IRS) tax form issued annually for an investment in a partnership. 
  • The purpose of the Schedule K-1 is to report each partner's share of the partnership's earnings, losses, deductions, and credits. 
  • Schedule K-1 serves a similar purpose as Form 1099.
  • A Schedule K-1 is issued to taxpayers who have invested in limited partnerships (LPs) and some exchange-traded funds (ETFs).
  • There are also K-1 forms for shareholders in S-Corporations and beneficiaries of estates or trusts.
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Schedule K-1

Who Files Schedule K-1?

The partnership that provides K-1s to its partners sends them to the IRS along with Form 1065, the partnership tax return. Normally, the partner doesn't file a K-1. They simply use the information on it to prepare their income tax return.

Background

The tax code in the United States in some cases allows the use of pass-through taxation, which shifts tax liability from an entity (such as a partnership) to the individuals who have an interest in it.

Hence, the K-1, which is prepared by a partnership to state each partner's basis (that is, the degree of financial participation) in the enterprise. A K-1 shows what each partner's share of the returns is based on the amount of capital they have in the partnership. A partner's basis is increased by capital contributions and their share of income, while it is reduced by a partner’s share of losses and any withdrawals.

IRS Form K-1

The three versions of Schedule K-1 (for partners, shareholders, and beneficiaries) are available on the IRS website.

S-Corporations also file K-1s, accompanying them with Form 1120S. Estates or trusts file K-1s with Form 1041.

The federal income tax filing due date for individuals is the 15th day of the fourth month after the end of the tax year.

Special Considerations When Filing Schedule K-1

While not filed with an individual partner's tax return, the Schedule K-1 is necessary for a partner to accurately determine how much income to report for the year. Unfortunately, the K-1 has a reputation for arriving late. It is required to be received by March 15 (or the 15th day of the third month after the entity's tax year ends). In fact, it's often one of the last tax documents to be received by the taxpayer.

The most common reasons for this are the complexity of calculating partners' shares and the need to individually complete every partner's K-1. (It used to be worse: Before the IRS rules changed in 2017, K-1s didn't have to be received by partners until April 15.)

To add insult to the injurious wait, the Schedule K-1 can be quite complex and require multiple entries on the taxpayer's federal return, including entries on the Schedule A, Schedule B, and Schedule D.

That's because a partner can earn several types of income on Schedule K-1, including rental income from a partnership's real estate holdings and income from bond interest and stock dividends.

It's also possible that K-1 income can trigger the alternative minimum tax.

Types of Schedule K-1

There are three K-1 forms, each of which is used by a different type of entity but issued to taxpayers for the same reason: to report income, deductions, credits, and other financial information on their tax returns.

Partnership K-1 Form

As referred to above, K-1s specifically for partnerships are filed with the IRS along with the partnership’s tax return (Form 1065). They're also provided to each partner so that they can add the information on them to their personal income tax returns.

S-Corporation K-1 Form

The K-1 form for S-Corporations is issued to shareholders by the corporation. When the corporation files its annual tax return (Form 1120-S), it also files the K-1 information about each shareholder’s share of income, losses, deductions and credits.

Estate or Trust K-1 Form

Estates and trusts issue a K-1 form to beneficiaries so that those beneficiaries may include the income that they've received on their personal income tax returns. The estate or trust then files its tax return, including K-1 information, using  Form 1041.

What Is a K1?

A K1, otherwise known as Schedule K-1, is an Internal Revenue Service form issued by partnerships, S-Corporations, and estates or trusts. Respectively, it goes to partners, shareholders, and beneficiaries and contains the financial information about income, deductions, credits, and more that they need to properly complete and file their personal income tax returns. These K1s are then filed by the partnership, S-corporation, or estate or trust with their annual tax returns.

Who Needs to File a Schedule K1?

Normally, the taxpayer doesn't file the K-1 form. The entity that issued it to them files it, along with the entity's tax return. A taxpayer simply uses the information contained in the K-1 to fill out their own tax return forms. They don't need to send the K-1 form to the IRS.

What Happens If You Don't File a K-1?

The IRS doesn't expect you, the taxpayer, to file the actual Schedule K-1 form. However, it does expect that you will include all the financial information on the K-1 that you were issued on your personal income tax return. The entity that issued you your K-1 will file that same form/info with the IRS. The IRS will compare the information on your tax return with the information on the entity's tax return to be sure that what you've reported matches up.

The Bottom Line

Schedule K-1 is an IRS form used by partnerships, S-Corporations, and estates and trusts to declare the income, deductions, and credits that partners, shareholders, and beneficiaries have received in the tax year.

Individual taxpayers transfer the financial information on their K-1s to their tax returns. Typically, they do not need to include the actual K-1 form with their tax returns when they're filed with the IRS.

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