OVERVIEW
The Schedule K-1 is slightly different depending on whether it comes from a trust, partnership or S corporation. Find out how to use this tax form to accurately report your information on your tax return.
K-1 form
The United States tax code allows certain types of entities to utilize pass-through taxation. This effectively shifts the income tax liability from the entity earning the income to those who have a beneficial interest in it. The Schedule K-1 is the form that reports the amounts that are passed through to each party that has an interest in the entity. These businesses are often referred to as pass-through entities.
K-1 Forms for business partnerships
For businesses that operate as partnerships, it’s the partners who are typically responsible for paying taxes on the business’ income, not the business. Each partner is responsible for filing a tax return reporting their share of income, losses, tax deductions and tax credits that the business reported on the informational 1065 tax form. As a result, the partnership must prepare a Schedule K-1 to report each partner’s share of these tax items.
- K-1s are provided to the IRS with the partnership’s tax return and also to each partner so that they can add the information to their own tax returns.
- For example, if a business earns $100,000 of taxable income and has four equal partners, each partner should receive a K-1 with $25,000 of income on it.
Schedule K-1 for S corporations
Similar to a partnership, S corporations file an annual tax return using Form 1120S. The S corporation provides Schedule K-1s that reports each shareholder’s share of income, losses, deductions and credits. The shareholders use the information on the K-1 to report the same thing on their separate tax returns.
K-1 Forms for trust and estate beneficiaries
Trusts and estates use Form 1041 to file their tax returns. In some cases, the trust pays the income tax on their earnings rather than passing it through to the beneficiaries. However, some trusts and estates pass income through to the beneficiaries. Some trusts and estates do a mixture of both depending on the type of income and governing documents of the trust or estate. For example, a trust might pass through dividends, interest, and other income to the beneficiaries but pay tax at the trust level on capital gains.
- In this case, the beneficiaries receive a K-1 that shows the income that they need to report on their own tax returns.
- Whenever a beneficiary receives a distribution of income, the trust or estate typically reports a deduction for the same amount on its 1041.
- This keeps the trust or estate from being taxed on the same income that is being passed-through to a beneficiary so that the income is only taxed once.
Schedule K-1 reporting
The Schedule K-1 is slightly different depending on whether it comes from a trust, partnership or S corporation. However, all K-1s provide detailed information about the type of income, tax deduction or loss so you can accurately report the information on your tax return.
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