Schedule K-1 BasicsSchedule K-1 Basics

A Schedule K-1 is an IRS form that reports your share of an income or loss from a pass-through entity. It prevents double taxation by avoiding taxes at the entity level and shifting the liability to the owners/beneficiaries who will report income or loss on their personal tax return. In this article, we are going over the basics of how a Schedule K-1 works and what it reports to the IRS.

What is on a Schedule K-1?

A Schedule K-1 is made up of 3 parts. The first part is information on the entity. This would include the name, address, and Employer Identification Number. Part two is the shareholder information. This is their name, address, social security number, and percentage of ownership. Lastly, part three is the financial information. Here the entity reports ordinary business income and loss, rental real estate income and loss, interest and dividend income, capital gains and losses, as well as deductions and credits.

Who Received a K-1?

You will receive a K-1 if you are part of one of the following entities:

  • Partnership-a business will file a Form 1065 and issue a K-1 to each of the partners.
  • S-Corporation-your business will file a Form 1120s and issue K-1s to reflect shareholder income or loss.
  • Limited Liability Company-if you are part of an LLC the K-1 will be reported as a partnership or S-corporation.
  • Trusts and Estates-here the K-1 will report income or losses to beneficiaries.

How a K-1 Works

With a K-1, profits are not taxed at the corporate level. You pass the taxes on to individual owners/beneficiaries. The first step is that the entity will file its own tax return and report their overall financial activity to the IRS. Then they send separate K-1s to the IRS for each partner, shareholder, or beneficiary. You will receive an individual copy of your K-1. Then you will use the information from your Schedule K-1 to report your income or loss on your Form 1040.

K-1s and You

Make sure you do not ignore any K-1s, since the IRS receives a copy and will cross reference your information. Not sure how to file? Meet with a qualified tax professional who can help.

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