Schedule K-1 Tax Form: What Business Owners Need to Know

If you are involved with a partnership, limited liability company (LLC), S corporation or a trust as either an owner or administrator, chances are you’ve heard of the Schedule K-1 tax form. The K-1 tax form is an annual form sent by the entity to each of its owners detailing their share of its taxable income or losses.

When you receive a K-1, you must include the information in your personal state and federal tax returns to avoid facing penalties. If you’re the administrator preparing K-1s to send to owners, you need to be aware of what information to include and the deadlines for issuance.

Let’s break down the Schedule K-1, including instructions for filing K-1s properly.

Key takeaways

• A K-1 is issued annually by a partnership, S Corporation or LLC to each of its owners. Certain types of ETFs, estates and trusts also issue K-1s.
• A K-1 details an owner’s share of the entity’s taxable income or tax deductible losses. Owners must include this information on their individual tax returns.
• The issuing entity is responsible for filing all K-1s with the IRS.

What is a K-1 tax form?

A K-1 tax form is an important document sent to each owner of a partnership, LLC, S corporation and some estates, trusts and ETFs that details the owner’s share of taxable income or losses, including all applicable deductions and credits. Entities that issue K-1s are called “pass-through entities,” meaning that their income is passed through to the owners, who are responsible for paying the taxes.

The K-1 tax form is similar in concept to the W-2 form, which is issued to employees, and 1099 forms, which are for non-employer payments. Each of these forms reports taxable income which must be included on the individual’s personal tax returns.

How a K-1 can affect your personal taxes

If you own an interest in a partnership, LLC or other pass-through entity that earns a profit, your share will appear on your K-1 and you must report and pay taxes on it. If the entity loses money, the K-1 will show your share of the loss, which typically will reduce your taxes.

It’s important to keep in mind that the entity files a copy of your K-1 form with the IRS. The information you put on your personal tax return must match the K-1.

Another thing to keep in mind is that your share of taxable income may be different from the actual cash distributions you receive in a particular year. This is caused by non-cash expenses like depreciation, non-income items like return of capital and other accounting technicalities.

Who needs to file a K-1 tax form?

Schedule K-1 is a tax form required to be filed by several different types of business entities as part of their annual tax return. The person responsible for filing the K-1s is the person responsible for preparing the tax return: This may be an owner of the entity or an accounting professional.

Partnerships

A partnership is a business structure in which two or more people share ownership of a business. The owners are responsible for paying the partnership’s income taxes. Partnerships issue a K-1 to each owner detailing their share of the business’s taxable income or loss for the year; the owners must include this information on their individual tax returns.

The partnership also reports this information to the IRS by filing a summary Form 1065 which includes a copy of each owner’s K-1.

LLCs with more than one member

An LLC is a business structure that allows pass-through taxation while providing limited liability protection for its members. Like partnerships, LLCs with more than one member issue a K-1 to each member and file a Form 1065 with the IRS including a copy of each owner’s K-1.

Important thing to know

LLCs with only one member don’t file Form 1065 or issue a K-1 to their owners. Instead, the owner files Schedule C with their individual tax returns, just like sole proprietors. LLCs with more than one member can also elect to be taxed like S-corps or C-corps, in which case they’ll file the tax forms used by those entities.

S Corporations

S Corporations combine pass-through taxation benefits with the liability protection of a corporation. S-corps issue a K-1 to each shareholder and file a Form 1120-S with the IRS that includes a copy of every K-1.

Trusts or estates

A trust is a legal arrangement in which a trustee holds and manages assets to benefit beneficiaries. An estate refers to the assets and liabilities left behind after an individual’s death.

Although trusts and estates aren’t business entities, many are required to issue Schedule K-1s, depending on the amount of income generated and the residency of beneficiaries.

Trusts and estates file Form 1041 to report their income to the IRS. If K-1s are needed, they are issued to beneficiaries and copies are filed with the form 1041.

Instructions for filing schedule K-1

The information appearing on a schedule K-1 is very similar for all types of pass-through entities that issue them. Here are brief instructions on what the K-1 form must contain:

• Part I is simply information about the entity issuing the form, including its employer identification number (EIN), name and address.
• Part II provides information about the partner, member, shareholder or beneficiary receiving the K-1. Basic requirements include their Social Security or tax identification number, name and address. If the K-1 comes from a partnership, LLC or S-corp, it needs to show the partner’s percentage of ownership and share of debts.
• Part III is the meat and potatoes of the Schedule K-1. It provides information that will flow through to the shareholder’s individual tax return, including income, dividends, capital gains and other taxable or deductible items. Additional schedules may be attached to the K-1 to provide more detail if needed.

K-1 tax form deadlines

Knowing the deadlines for filing K-1 tax forms is essential to complying with IRS rules. This table outlines the standard deadlines for different types of entities when it comes to filing K-1s.

Sometimes deadlines are extended due to natural disasters or similar disruptions, so it’s wise to double check each year before filing.

These deadlines assume the business has a calendar year end. If your company operates on a fiscal year, you may have a different deadline.

Filing for an extension

If the pass-through entity needs extra time to prepare its returns and K-1s, it can request an automatic six-month extension from the IRS (five and a half months for estates) by filing Form 7004. It can be completed and filed using a tax professional, tax software or via mail at the address found in the Instructions for Form 7004. The extension must be filed on or before the standard return due date.

It’s important to note that while Form 7004 extends the deadline for filing a return, it doesn’t extend the deadline to pay any tax due. It’s essential to notify owners and shareholders that the entity has requested an extension so they can request extensions for their personal tax returns as well. They may also need to pay estimated taxes to avoid penalties or interest charges.