If you have a business partnership or corporation, you’ll likely need to file a K-1 Form for tax purposes. But you might not be familiar with how it works and how to file it.
While there are different types of K-1 Forms, it’s mostly used for preparing your individual tax return and measuring the contributions of a shareholder towards a business. To help you file it correctly, let’s break down the K-1 Form and its types below.
What is a K-1 Form?
Pass-through entities are able to transfer their profits and tax liabilities from the entity to their individual tax returns. This means they won’t be subject to double taxation or corporate tax and will only be liable for their personal income tax.
So if you’re a beneficiary, shareholder, or partner of an entity, a K-1 Form reports your income, deductions, and dividends for the tax year. It can also be used to report the income of beneficiaries of a trust or estate that has a gross income of more than $600 a year.
Although it’s mostly used for tax purposes, a K-1 Form also lets beneficiaries and partners stay informed about their investments in an entity.
Who needs to fill out a K-1 Form?
All pass-through entities, including sole proprietorships, partnerships, S-corporations, and Limited Liability Corporations (LLC) are required to file a K-1 Form.
Take note that only LLCs with 2 or more members are required to issue a K-1 Form. if you only have one member, you’ll need to file a Schedule C with your individual tax return, similar to sole proprietors.
If you’re a partner or shareholder, you’ll be issued one once you invest in your chosen entity. Although individuals don’t need to submit a K-1 Form, you can still use the information you provide on your K-1 Form for filing your separate tax return.
Types of K-1 Forms
The type of K-1 Form you need will depend on the type of entity you’re part of. These types of forms include:
- 1065 Form – this form is for businesses that operate as partnerships. Each partner will be issued their own K-1 Form so they can add the information to their own tax returns.
- 1120-S Form – this form is for S-corporations and LLCs that are treated as S-corporations. But if your LLC is treated as a partnership, you won’t need to file a K-1 Form. As well as when it’s treated as a C-corporation since you’ll need to pay taxes at a corporate level.
- 1041 Form- this form is for beneficiaries of a trust or estate. It keeps the trust or estate from being taxed twice on the same income that’s being passed through to the beneficiary.
Does a Schedule K-1 count as income?
A K-1 Form may list down your distributions, but it doesn’t qualify as a secondary or additional source of income. It only shows how much your share is out of the income that the entity has made.
But the non-dividend distribution you receive will be added to your net income when you file your individual tax return.
Does a K-1 affect your personal taxes?
If you’re s partner of an entity, a K-1 can affect your personal taxes either by increasing your tax liability or by giving you a tax deduction.
It will only raise your tax liability if your K-1 is associated with a profit or an income. But if you experience some losses or expenses, you might expect a tax deduction for the year.
How do you file a Schedule K-1 Form?
As discussed above, the K-1 For you need to use will depend on the type of entity you’re part of, so make sure you’re using the correct one when filing to avoid complications.
Each form may need differing information, but they’re typically broken into three parts:
- Part 1: Information about the entity – for this section, you’ll need to provide the entity’s employer number (EIN), address, IRS location, and confirm whether it’s a publicly traded partnership.
- Part 2: Information about the partner/shareholder/beneficiary – for this part, you’ll need to provide your personal information, including SSN/TIN, name, address, role in the entity, profit, loss, capital, liabilities, and assets.
- Part 3: Share of current income – for the last part, you’ll need to provide details of your income, guaranteed payments, dividends, tax deductions, and credits you claimed from the entity.
Need help with filing your taxes?
If you have more questions about your K-1 form or need assistance with filing your business taxes, Lear & Pannepacker can help you. They have a team of professional CPAs and accountants that’s ready to help you with your accounting needs. They offer various services, including bookkeeping, financial planning, business advisory, and tax services. For inquiries, feel free to contact them now.