Are you a partner in a business? Do you receive distributions from an S corporation? If you answered “yes” to either of these questions, then the business entity you participate in should have provided you with a Schedule K-1 tax form. But just what is a Schedule K-1 and how does it work?
Reporting Pass-through Income
Owners of partnerships and S corporations who receive distributions of profits from a business are said to have earned pass-through income. It’s called “pass-through” because the income (or loss, as the case may be) passes directly through the business entity and ends up in (or out of) the pockets of individual taxpayers, who then report it on their personal income tax forms. For tax purposes, multi-member LLCs are considered partnerships.
Owners and members know how much to report to the IRS when the business provides them with a Schedule K-1. Businesses are required to provide such forms by March 15 of each year. Businesses also submit a Schedule K-1 for each owner to the IRS, along with its annual information return, by March 15 (or on the next business day if March 15 falls on a weekend or holiday).
K-1 Forms for Partnerships (Including Multi-member LLCs)
Partnerships are required to complete a Schedule K-1 tax form to report each business partner’s share of taxable income, losses, credits, and deductions. A K-1 form is provided to each business partner. The K-1 forms are also collectively submitted to the IRS along with Form 1065, the annual informational form partnerships must provide each year to the federal government.
All partners must then individually report their business income (or loss) on their Form 1040 personal tax returns, which are typically due on April 15.
K-1 Forms for S Corporations
Businesses structured as S corporations must provide to each owner/shareholder a K-1 that reports the income, losses, credits, and deductions. The S corporation then files all the K-1s with the IRS, along with Form 1120S, the informational form S corporations much provide each year.
Each owner/shareholder then takes the financial information on the K-1 tax form to report it on his or her Form 1040 personal tax return. The deadline for filing is usually April 15.
Still Not Sure?
An accounting professional can help your business complete Schedule K-1 tax forms. A tax accountant can also assist you with incorporating Schedule K-1 information into your personal tax return.