Do You Have a Schedule K-1? Here's How to Report It
Peacock & French CPAs
Jan 01, 2023
If you’ve never had a Schedule K-1 before, you might be wondering exactly what it’s for and how you’re supposed to report the numbers included on it on your tax return. Keep reading to learn more about K-1s and how to handle them properly.
Tax season will officially begin on January 24th. That’s barely more than three weeks away, and it’s time to start seriously thinking about your tax return and getting your tax documents in order. Many people receive a variety of tax forms from various employers, accounts, and other sources. Your tax forms for income alone can include a variety of 1099s, W-2s, and Schedule K-1s. If you’ve never had a Schedule K-1 before, you might be wondering exactly what it’s for and how you’re supposed to report the numbers included on it on your tax return. Keep reading to learn more about K-1s and how to handle them properly.
What Is a K-1?
As we stated above, a Schedule K-1 is an income form, similar to a W-2 or 1099. While a W-2 would report wages earned from an employer, a K-1 reports the income earned from a business—or, more specifically, an owner or partner’s share of a pass-through business entity’s profit or loss. If you are an owner or profiting partner in a business, you should receive a Schedule K-1 showing your personal share of the company’s profits or losses.
Who Issues K-1s and Who Receives Them?
Not all businesses will provide K-1s; it all depends on the company’s business structure. As stated, businesses must be a pass-through entity in order to pass their profits and losses on to their owners (and, therefore, be required to issue K-1s). However, there are several types of business structures that qualify as pass-through entities. These include:
- Partnerships
- LLCs with a partnership election
- S Corporations
These types of companies would then issue Schedule K-1s to all partners/owners who receive a portion of the company’s profits.
Additionally, beneficiaries that receive income from a trust or estate will also receive a Schedule K-1.
When Should You Receive Your K-1?
All businesses have a deadline for when their tax forms (not only K-1s, but W-2s and other tax forms as well). The issuance deadline for Schedule K-1s is March 15th each year; however, you should note that this is when the K-1 must be issued by, so you may not receive your form for several more days beyond this date. Obviously, this deadline is rather late into tax season, which can often make it difficult for business owners to file their tax returns before the April 15th tax deadline. For this reason, many partners in pass-through entities will file for a tax extension, providing themselves with an additional six months to ensure their taxes are filed properly.
Reporting Your K-1 Income Properly
Now that you have a clear idea of what a K-1’s purpose is, let’s discuss how to handle it properly in regards to your tax return. First, you should be aware that there are several forms that fall under the umbrella term of “Schedule K-1.” Just as there are many types of 1099s, there are many types of K-1s as well. Here are a few of them and who should be using them:
- Schedule K-1 Form 1065 – Partnerships
- Schedule K-1 Form 1120-S – Incorporated entities with an S election
- Schedule K-1 Form 1041 – Beneficiaries of an estate or trust
It’s incredibly important that you ensure you’re using the proper form based on your income source, and not assume that all K-1s are the same. Once you’ve double checked that you’re using the proper form, you should ensure your K-1 properly lists both your income from the business and your distributions. These two sources of business income are actually handled differently, despite being on the same form.
Your K-1 income shows your share of the business’s income based on how much the company made and your agreed-upon share of the profits. Distributions, on the other hand, are money you receive from the business throughout the year, and can come in the form of a dividend distribution or non-dividend distribution. A non-dividend distribution is a non-taxable even, but is added to your net income, which differs from K-1 income.
Additionally, it’s incredibly important for K-1 recipients to verify that their tax returns match what is reported on your K-1 exactly. All owners must calculate their tax bases in the company and perform a K-1 reconciliation to ensure that what has been reported on the form is accurate.
If this all sounds confusing and intimidating, you’re not alone. At Peacock & French, CPAs, we work with business owners and partners on a daily basis. We can help you accurately report your K-1 income so you can avoid IRS penalties. Call now to schedule a consultation.