What Is a Schedule K-1 and How Is It Taxed?
Business owners and partners often receive a Schedule K-1 as one of their many tax forms at the beginning of the year. If you’re new to business ownership and this is your first year receiving a K-1, you might be uncertain about what this form is and how to handle it. As tax professionals who work with business owners on a daily basis, Demian & Company CPAs can help you appropriately file your return, and even help your business with issuing K-1s to partners. Keep reading to learn more about what a Schedule K-1 is and how to handle it on your tax return.
What Is a Schedule K-1?
Like W-2s and 1099s, K-1s are a type of income report. Specifically, a K-1 reports income earned from a business—or, to be more specific, an owner’s share of the profit or loss of a business entity. Also like your 1099 or W-2, a Schedule K-1 is issued by the business that paid the income.
Who Issues Schedule K-1s?
Schedule K-1s are not actually issued by every type of business. Rather, they are only issued by pass-through business entities, which pass any profits or losses from the business on to the partners or owners. Pass-through entities include the following types of business structures:
- Partnerships
- LLCs with a partnership election
- LLCs with an S-Corp election
It’s also important to note that there are different types of K-1s. Partnerships report their taxes using Schedule K-1 Form 1065, while LLCs with an S-Corp election file a Schedule K-1 Form 1041. Additionally, any beneficiaries who share an income from an estate or trust must report the income using a Schedule K-1 1041. It’s incredibly important that each business is issuing the correct K-1, but if you’re merely receiving the K-1, you should still double check that you’re using the correct form when filing, or else your tax return may be rejected.
What’s the Deadline for Issuing K-1s?
For qualifying entities that must issue K-1s, it’s incredibly important that those forms be issued on time. K-1s must be issued to all owners by March 15th every year. This can make the tax deadline difficult for many people, given that businesses must also file by March 15th, and individuals must file by April 15th. This is why many individuals who receive a K-1 will typically request a tax extension, so they can ensure that their K-1s are handled properly and all income is accurately reported.
Each individual K-1 should show that partner’s share of the income. Companies should also ensure, however, that the cumulative K-1s issued to all partners are equal to the total earnings of the business. Double checking that this is correct will help you to avoid calculation errors.
What Should You Do If Your K-1 Is Inaccurate?
If you receive a K-1 that you believe is inaccurate or calculated incorrectly, as a partner, you can dispute the error and request that it be recalculated. If there is an error on one K-1, there’s a good chance that there will be an error on all of the issued K-1s, and they will all need to be recalculated and corrected.
What Should Be Reported on a K-1?
As we stated above, your K-1 should show your share of the company’s profit or loss. More specifically, it will show your percentage of profits, gains, losses, credits, and deductions, and you are responsible for filing these items on your personal tax return. The exact types of figures reported on your K-1 will vary depending on your business, but here are some of the most common figures seen on these forms:
- Dividends and distributions received from the business
- Guaranteed payments based on your initial agreement
- Gains or losses from stock ownership
- Business capital account assessment
- Credits and deductions
If you feel your K-1 is missing any of these, you can dispute the form as described above.
How Do You Report K-1 Income?
K-1 income is typically reported using a Form 1040, which is filed alongside your personal tax return. If you’re having trouble figuring out how to accurately report the numbers listed on your K-1 and transfer them to your Form 1040, contact Demian & Company CPAs for professional assistance. We can also provide support in issuing Schedule K-1s to partners in your business. Call now to schedule a consultation, and we’ll help you ensure that your K-1s are issued on time, and that your business tax return is filed by the deadline as well.