K-1s are often the last in the long line of documentation needed when filing taxes. As such, we always recommend to our clients that they begin this process as early as possible. In fact, it is our policy to begin collecting and reconciling K-1s in July and August.
What is a Schedule K-1?
- A Schedule K-1 lists taxable income related to certain business entities.
- K-1s should be filed by entities that are permitted to shift the income tax liability from the entity earning the income to those who have an interest in it.
- The Schedule K-1 is the form that reports the amounts that are passed through to each party with an interest in the entity.
- The form itself itemises the income received from these businesses and breaks it down into specific categories.
Who has to file a Schedule K-1?
There are two main groups of taxpayers who need to file K-1s:
- Owners of Pass-Through Entities and Beneficiaries of Trusts or Estates.
- The owners of Pass-Through Entities include S-Corps, Partnerships, and LLCs taxed as S-Corps or Partnerships.
Pass-Through Entities
- A pass-through entity is a business entity for which income, losses, credits, and deductions are reported on the owners’ personal tax returns. That income is then taxed at the owners’ individual income tax rates.
- Each partner or shareholder – basically, anyone who has a beneficial interest in the entity – is expected to attach the Schedule K-1 form to their personal income tax return.
- S-Corps use tax return Form 1120S for their annual tax returns. The S-Corporation provides Schedule K-1s that report each shareholder’s share of income, losses, deductions and credits. The shareholders then use the information provided on the K-1 to report the same information on their separate tax returns.
- Partnerships prepare a Schedule K-1 to report each partner’s share of income, losses, tax deductions and tax credits that the business reported on the informational 1065 tax form.
What is reported?
A Schedule K-1 shows the income or loss depending upon the share of business owned, or percentage of stock owned, by that partner or shareholder.
- Dividends, deductions, gains, and losses are reported on each partner’s or shareholder’s K-1.
- Guaranteed payments are also reported on the partner’s K-1s where relevant.
- A capital account analysis for each partner, or percentage of stock ownership for each shareholder, is included on the K-1.
Beneficiaries of Trusts and Estates
Beneficiaries of a Trust or Estate also need to file a Schedule K-1.
- There are Trusts and Estates that will pay their taxes directly, but oftentimes it is passed through to the beneficiary to pay. When this occurs, the beneficiary will receive a K-1 that shows the income they are required to report on their personal tax returns. When a beneficiary receives a distribution of income, the Trust or Estate reports a deduction for the same amount on its 1041.
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The biggest difference between the Trusts and Estates group and the Pass-Through Entity Ownership group is that Trusts and Estates beneficiaries should not include the Schedule K-1 with their tax return. Instead, they can keep the K-1 with their records and only use it to report trust or estate income losses, deductions, or credits.
When are K-1s due?
- Schedule K-1s are due to the taxpayer by March 15th. If an extension is filed, the due date is September 15th. Those who have received a K-1 are expected to include it with their tax filings (when relevant) in April.
- Because K-1s are often received late, and since they can add complexity to a tax filing, Plumb works with our clients as early as possible to begin the K-1 collection process on their behalf.
At Plumb, we can help you manage, track, and collect all the various K-1s you are due to receive each year. As K-1s are received, we reconcile them against the transactions in your books to ensure accuracy and work with the appropriate parties if corrections are needed. We can then provide reconciled year-end financial statements to the CPA for finalising tax returns.
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