If you’re planning to start a business, it’s important to know which tax reports you must file to stay compliant. The Schedule K-1 Form is required for businesses – especially pass-through entities. If you’re unfamiliar with its implications, below is a quick guide to walk you through its purpose and filing process.

What Is A Schedule K-1 Tax Form?

If you’re part of a pass-through entity, your business’s income passes directly through the owners, shareholders, and investors of the company. This shifts your business’s tax liability to the individuals mentioned beforehand.

The Schedule K-1 Form reports the passed income, gains, losses, dividends, or deductions of each partner or shareholder in your company.

It exists in several types depending on the business entity that needs to file it. But its overall objective is to track the contribution of each shareholder towards the annual performance of your company.

Who Needs To File A K-1 Form?

If you’re part of a business entity, the owner is responsible for filing a Schedule K-1 form while they issue it to their beneficiaries and shareholders.

Business entities or beneficiaries that are required to file a schedule K-1 form include:

• Partnerships
• Limited liability company (LLC) with at least two partners
• S-corporations
• Estates and trusts beneficiaries

Individual taxpayers aren’t required to file a K-1 form, but you can use the information on your personal income tax report.

How Do Business Entities File A K-1 Form?

Each business entity will issue a different K-1 since they must address different features. Below is a quick guide on how each should file them:

Partnerships

A partnership comprises two or more people who operate a business together. Although the entity reports its income, gains, deductions, losses, or credits on the partnership’s 1065 tax form, each partner must still report their share on their own Schedule K-1 form.

Schedule K-1 Form 1065 contains three main sections – information about the partnership, information about the partner, and the partner’s share of current year income. Make sure to fill in every necessary detail in the form. If you have clarifications, you can refer to this guide.

The amount you report should be equivalent to the percent stake you have in the company. For example, if you have a 30% stake in your business and it earns a profit of $100,000, you can calculate your income by:

$30,000($100,000×30%) = $900,000,000

If your partners have an equal stake in your business, each should divide your profits equally and report the same amount.

LLC

If you’re part of an LLC filing as a partnership, the same rules apply as above – where your entity must file Form 1065, and each member must fill up their own Schedule K-1 Form. By members, this means the owner, individual members, corporations, or partners in your entity.

But if your LLC functions as a corporation, you don’t need to file a K-1 Form since your entity will be paying corporate tax.

S-corporations

If your business is an S-corporation, the owners must file Form 1120S to report your annual income. Each shareholder must also fill up their own Schedule K-1 Form using the same information on their individual tax returns.

The Schedule K-1 Form for S-corporations is similar to the one you use for partnerships, where it contains three main sections: information about the corporation, information about the shareholder, and the shareholder’s share of current year income.

The amount you report shall also equal the percent stake you have in the business, which you can calculate using the same formula as you would for partnerships.

Estate And Trust Beneficiaries

For trust and estate beneficiaries, you must file Form 1041 to report your tax return. Depending on the type, some estates and trusts pay their income tax from their earnings, while others pass them directly through to the beneficiaries.

So if you’re the latter, you’ll receive a Schedule K-1 to report on your own tax return. This prevents the estate or trusts from being double-taxed on the same income passed through to you.

Does A K-1 Form Affect Your Personal Taxes?

The Schedule K-1 form can affect your personal taxes if it’s related to an income by increasing your total tax liability for the year. On the other hand, it can also reduce your taxes or provide a tax deduction if you report a loss or expenditure on your K-1 form.

Need Help With Filing Your Taxes?

If you need help with filing a K-1 form, Lear & Pannepacker can help. They have a team of professional accountants with extensive experience in various industries. They also offer bookkeeping, auditing, budgeting, and business advisory services to help your business grow or keep your finances in check. For questions or inquiries, feel free to contact their team now.

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