Taking care of your financial business can sometimes be a hassle. However, when done correctly, filing taxes can be a piece of cake. That’s what we’re going to show you how to do by giving you step-by-step instructions for filling out a k1.
Many people who have businesses that they earn through a k1 get audited. It’s all in how you handle the situation, though. This article will show you how to daisy chain them and never get audited.
If you have a k1, here’s how:
First, gather all of your documents. You’ll need the following:
-Your W-2s from all employers that you worked for during the year. If you were self-employed, include your own W-2.
-A copy of any 1099s or other forms that show income from other sources such as dividends or interest income.
-A copy of Schedule C (if applicable) and all schedules attached to it.
-Any information about any charitable contributions made during the year; this includes receipts from nonprofit organizations as well as records showing how much money was given away in cash or property to qualified charities that are exempt from taxation under section 501(c)(3) of the Internal Revenue Code.
K-1 form
The United States tax code allows certain types of entities to utilize pass-through taxation. This effectively shifts the income tax liability from the entity earning the income to those who have a beneficial interest in it. The Schedule K-1 is the form that reports the amounts that are passed through to each party that has an interest in the entity. These businesses are often referred to as pass-through entities.
K-1 Forms for business partnerships
For businesses that operate as partnerships, it’s the partners who are typically responsible for paying taxes on the business’ income, not the business. Each partner is responsible for filing a tax return reporting their share of income, losses, tax deductions and tax credits that the business reported on the informational 1065 tax form. As a result, the partnership must prepare a Schedule K-1 to report each partner’s share of these tax items.
- K-1s are provided to the IRS with the partnership’s tax return and also to each partner so that they can add the information to their own tax returns.
- For example, if a business earns $100,000 of taxable income and has four equal partners, each partner should receive a K-1 with $25,000 of income on it.
Schedule K-1 for S corporations
Similar to a partnership, S corporations file an annual tax return using Form 1120S. The S corporation provides Schedule K-1s that reports each shareholder’s share of income, losses, deductions and credits. The shareholders use the information on the K-1 to report the same thing on their separate tax returns.
K-1 Forms for trust and estate beneficiaries
Trusts and estates use Form 1041 to file their tax returns. In some cases, the trust pays the income tax on their earnings rather than passing it through to the beneficiaries. However, some trusts and estates pass income through to the beneficiaries. Some trusts and estates do a mixture of both depending on the type of income and governing documents of the trust or estate. For example, a trust might pass through dividends, interest, and other income to the beneficiaries but pay tax at the trust level on capital gains.
- In this case, the beneficiaries receive a K-1 that shows the income that they need to report on their own tax returns.
- Whenever a beneficiary receives a distribution of income, the trust or estate typically reports a deduction for the same amount on its 1041.
- This keeps the trust or estate from being taxed on the same income that is being passed-through to a beneficiary so that the income is only taxed once.
Schedule K-1 reporting
The Schedule K-1 is slightly different depending on whether it comes from a trust, partnership or S corporation. However, all K-1s provide detailed information about the type of income, tax deduction or loss so you can accurately report the information on your tax return.
What is a Schedule K-1 tax form?
The IRS requires each partnership, S corporation and estate or trust to file a Schedule K-1 tax form annually. The profits, losses, deductions and credits on a given owner’s form are allocated based on their ownership stake in the business. This stake determines the owner’s “tax basis” in the business — that is, the amount that a partner has invested in it.
“Your K-1 helps you track basis, and it helps track differences in basis for federal and state tax purposes,” said financial planner Sean W. Mullaney. “States, for example, might have different depreciation rules than the IRS uses.”
Pass-through entities
There are multiple versions of the Schedule K-1 form, and each one applies to a particular kind of pass-through entity. Most small businesses are pass-through entities, meaning income passes or flows through the business to an owner’s individual tax return as it does for partnerships, S corporations, sole proprietors and limited liability company (LLC) owners. Sole proprietors and single-member LLCs do not need to file a Schedule K-1. But partnerships, S corps and trusts and estates do — their owners file them along with their personal tax returns. Each has its own form and set of instructions:
- Form 1065 applies to partnerships
- Form 1120-S is for S corporations
- Form 1041 is used for trusts and estates.
Each of these has a corresponding K-1 form and instructions. We’ll explain all of the forms, in depth, below.
Follow the Schedule K-1 instructions if your business is a:
Partnership
Partnerships include general or limited partnerships, limited liability partnerships (LLP) and limited liability companies (LLC) that have more than one owner. These companies should file their taxes using Form 1065, along with the corresponding Schedule K-1.
For example, imagine that LJM Consulting LLC is a consulting firm formed by Larry, Jim and Mike. LJM Consulting LLC uses Form 1065 to report its income, deductions and other items to the IRS every year. The business issues Larry, Jim and Mike each a Schedule K-1 (Form 1065) that they can use to identify their share of the LLC’s income and other items on their personal tax returns.
S corporation
S corporations pass corporate income onto their shareholders, and the shareholders report taxes on their personal income tax forms. These companies should file their taxes using Form 1120-S, along with the corresponding Schedule K-1.
For example, imagine that Curls & More Salon, owned by two business partners, is an S-corp that uses Form 1120-S to file its income taxes every year. The company issues each of its owners a Schedule K-1 (Form 1120-S) to identify how much of the income, liabilities, etc., each partner is responsible for. CEO Lisa and Chief Stylist Nicole each use the information from the K-1 to fill out their personal income tax returns.
See how to fill out partnership and S corporation forms, below.
Estate or trust
Estates and trusts hold the money left to inheritors by a deceased person. These entities pass income, deductions, gains or losses through to the beneficiaries. The estate or trust must file Form 1041 annually and issue the corresponding Schedule K-1 forms to all the beneficiaries or owners of the entity if it meets certain conditions. A trust has to file the form if it had a gross income of $600 or more during the tax year, the beneficiary is a nonresident alien or the trust has any taxable income. An estate has to file the form if it meets either of the first two of those conditions.
For example, imagine that when Jeremy and Jane’s grandmother died, she left them a trust fund worth $100,000, which was invested in a portfolio of stocks. Each year, Jeremy and Jane receive a Schedule K-1 (Form 1041) listing how much money the trust gained in income, along with its losses, liabilities and other items. The siblings use the numbers in the Schedule K-1 to fill out the appropriate lines in their individual income tax returns.
When are Schedule K-1s due?
Partnerships and S-corps must file tax returns to the IRS and Schedule K-1 forms to their owners by the 15th day of the third month after the end of the tax year. For companies on a calendar-year schedule, that means the filing deadline is March 15.
To request a six-month extension for filing the business’s tax return and Schedule K-1, file Form 7004, which can be done by mail or electronically. You will automatically be granted the six-month extension unless the IRS notifies you otherwise.
| Entity type | Tax forms | Filing deadline |
| Partnership | Form 1065 (Instructions) Form 1065 Schedule K-1 (Instructions) | The 15th day of the third month after the end of the tax year; March 15 for calendar-year filers |
| S corporation | Form 1120-S (Instructions) Form 1120-S Schedule K-1 (Instructions) | |
| Trust or estate | Form 1041 (Instructions) Form 1041 Schedule K-1 (Instructions) | The 15th day of the fourth month after the end of the tax year; April 15 for calendar-year filers |
If you are the recipient of a Schedule K-1 form, you do not need to send this form to the IRS with your tax return. You should give this form to your tax preparer to help them complete your individual tax return.
Schedule K-1 instructions for partnerships
Schedule K-1 (Form 1065) for partnerships is broken into three parts:
- Part I: Information About the Partnership
- Part II: Information About the Partner
- Part III: Partner’s Share of Current Year Income, Deductions, Credits and Other Items
Part I of the form requires a small amount of basic information about the company: the partnership’s name, address and EIN, as well as the IRS center where the partnership filed its return.
Part II asks for information about the partner, including the partner’s share of profit, loss, capital and liabilities, as well as how each percentage has changed. There’s also a portion that accounts for changes in the partner’s capital account, which is an account that reflects a partner’s share of equity in the business.
In Part III, the form provides dedicated spaces for specific information such as business income, real estate income, interest income, dividends, royalties, capital gain, foreign transactions, credits and other items.
There are also boxes to identify other income, deductions and other items, and the form comes with a page of codes that must be applied to identify the categories in which these items fit. The company can put an asterisk after the code for any item for which it has attached additional information.
Schedule K-1 instructions for S corporations
Schedule K-1 (Form 1120-S) is broken into three parts for S corporations:
- Part I: Information About the Corporation
- Part II: Information About the Shareholder
- Part III: Shareholder’s Share of Current Year Income, Deductions, Credits and Other Items
Part I asks for the corporation’s name, address and EIN, as well as the IRS center where the corporation filed its return.
Part II requires that you identify the shareholder’s name and identifying number, as well as the share of that shareholder’s stock ownership.
In Part III, the form provides dedicated spaces for specific information such as business income, real estate income, interest income, dividends, royalties, capital gain, foreign transactions, credits and other items.
There are also boxes to identify other income, deductions and other information, and the form comes with a page of codes that must be applied to identify the categories in which these items fit. The company can put an asterisk after the code for any item for which it has attached additional information.