What Is a Schedule K-1 Tax Form?

Updated: 3/1/24

As a new entrepreneur, the end of the year might seem a bit scary. You’ve heard all about “closing the books” and how you should be preparing now for tax time. But, do you know what that means for your limited liability company (LLC) partnership? We’ll walk you through the basics of partnership tax in this guide and how this may apply to your LLC or S corp.

Purpose of a Schedule K-1

Partnerships themselves are generally not subject to income tax. However, individual partners — including limited partners — may be taxed on their share of the partnership’s income, regardless of whether it is distributed.

A K-1 tax form is commonly issued to taxpayers who are partners in a business or have invested in financial products like limited partnerships (LPs). LPs are a common structure for hedge funds and private equity fund vehicles. Other investments where you may receive a K-1 form include exchange-traded funds (ETFs). ETFs can represent an investment in commodities.

Partnerships

If you’ve been a member of or investor in a partnership, you may have received an IRS form K-1 before. The purpose of a K-1 tax form is to report each partner’s share of earnings, losses, tax deductions, and tax credits. It has roughly the same purpose as any one of the Form 1099s provided by the IRS. These forms report dividends or interest from securities or income from the sale of securities.

S-Corporations

Stockholders of S-corporations — which are companies with the tax classification Subchapter S of the Internal Revenue Code — also use form K-1 for tax reporting. These types of companies are taxed as partnerships.

Trusts and Estates

Trusts and estates that distribute income to beneficiaries also file Schedule K-1s and use Form 1041 to file their own tax returns. If you receive trust or estate income, your K-1 tax form shows the amount of income you need to report on your own tax returns.

How to Determine Tax Liability in a Partnership

If you own an interest in a partnership, it’s essential to calculate the partner’s basis in the partnership before any other tax liability can be determined.

How to Do a Basis Calculation

“Basis” is an accounting word for a partner’s investment or ownership stake in the partnership or venture. A partner can increase their basis by making capital contributions and thus increase their share of the partnership’s income. Basis is reduced by a partner’s share of losses and any capital withdrawals.

For instance, suppose Bob contributes $80,000 in cash and $10,000 in machinery to a widget-making partnership. The partnership makes enough to pay out income, and Bob’s share of income is $10,000 that year. Therefore, Bob’s total basis is $100,000, assuming he hasn’t made any withdrawals.

An important point about basis calculation is that if the partner’s basis balance is zero, any extra payments to the partner are taxed as ordinary income.

Issuing a Schedule K-1

Schedule K-1s are issued annually. This tax form reports the gains, losses, interest, dividends, earnings, and other distributions from certain investments or business entities for the previous tax year. Entities that issue K-1s are usually pass-through entities that don’t pay corporate taxes themselves. Participants in these investments or enterprises use Schedule K-1 income to compute their personal income for their individual tax returns.

In order to issue a K-1 tax form, a business needs to track each participant’s ownership stake or basis closely. This means that they need to monitor each partner’s contributions, liabilities, and withdrawals.

When do Schedule K-1 forms arrive?

When are K-1s due to partners? The IRS says they’re due to partners by the 15th day of the third month after the entity’s tax year ends. However, it’s unclear whether the IRS meant that they need to be issued by then or be in taxpayers’ hands by then. That said, you should expect to receive one around mid-March. If you’re running a business that’s issuing K-1 tax forms, you need to begin working with your bookkeeper and accounting staff on issuing your K-1s as soon as your tax year ends.

What’s Form 1065?

While a Schedule K-1 document is prepared and provided to each partner so they can file their own income taxes, the partnership itself needs to file information with the IRS — even as a pass-through entity. After issuing partnership K-1s, the partnership then files Form 1065, the partnership tax return that contains the activity on each partner’s K-1. Likewise, an S-corporation reports this activity on Form 1120-S, and trusts and estates report the K-1 form activity on Form 1041.

Form 1065 and, likewise, Forms 1120-S and 1041 give the IRS a snapshot of the company’s financial status. Partners have to pay income tax on their reported earnings regardless of whether the earnings were distributed.

K-1s and Tax Extensions: Navigating Deadlines and Planning

When dealing with Schedule K-1 tax forms, understanding the implications of tax extensions is crucial for both the entity issuing the K-1s and the individuals receiving them. Schedule K-1 forms, issued by pass-through entities like partnerships, S corporations, and certain trusts and estates, detail each member’s share of income, deductions, and credits. Because these entities often need additional time to accurately compile this information, they might request a tax extension, which in turn affects the recipients of K-1 forms.

Implications for Pass-Through Entities: Entities that distribute K-1s frequently file for an extension to ensure that all financial transactions for the year are accounted for and properly classified. An extension grants these entities additional time to prepare their returns and distribute K-1s to their members. For partnerships and S corporations, the regular deadline for filing is March 15, while trusts and estates have an April 15 deadline. An extension can push these deadlines back by six months, impacting when K-1 recipients can complete their personal tax returns.

Planning for Individuals: For individuals awaiting a K-1, an extension can complicate personal tax planning. Since the income reported on a K-1 must be included in the individual’s tax return, a delayed K-1 can prevent timely filing. Individuals in this situation have two primary options:

1. File a Personal Tax Extension: If you’re waiting on a K-1, you may need to file an extension for your personal tax return to avoid penalties for late filing. An extension gives you until October 15 to file, providing additional time to receive your K-1 and incorporate its information into your return accurately.
2. Estimate and File: Alternatively, some taxpayers choose to estimate their income based on previous years’ K-1s or other available information and file by the regular deadline. If the actual K-1 data differs from the estimate, an amended return may be necessary, which can incur additional effort and possibly costs.

Communicating with the Pass-Through Entity: Open communication with the entity issuing the K-1 is essential. They can often provide estimates of when K-1s will be ready or offer preliminary figures that can aid in tax planning. Additionally, understanding whether the entity plans to file an extension can help you make more informed decisions about managing your own tax obligations.

Consider Professional Advice: Given the complexities of handling K-1 income and the potential need for extensions, consulting with a tax professional is advisable. They can assist with estimating income, deciding whether to file an extension, and amending returns if necessary. A tax advisor can also offer strategies for managing the uncertainty and potential financial impacts of receiving K-1 income.

Key Takeaways

When operating a partnership, S-corporation, or administering a trust or estate, your focus will need to be on getting your Schedule K-1 tax forms out to your investors and beneficiaries on time. A tax professional can help you make this process run smoothly and efficiently, especially if you’re new to partnership accounting.

We can help you run your business more smoothly. First, we can help you incorporate or form your LLC. After formation, we can help keep you in compliance with our Worry-Free Compliance Service. We can also help keep you on track and ready for tax time with our set of business tools. Our ZenBusiness Money tool can help keep your financial documents and receipts organized and ready for year-end. It makes bill paying, invoicing, and doing your taxes incredibly straightforward. And, once you’re headed in the right direction, our Accounting Basics for Your Small Business article can help you gain the confidence you need to be fluent in the language of finance.

Disclaimer: The content on this page is for information purposes only and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.