What is IRS Form Schedule K-1?
Schedule K-1 is a tax form issued by the IRS which is designed to report each partner’s share of:
- Earnings
- Credits
- And losses and deductions
Schedule K-1 applies to both partnerships as well as S corporations with less than 100 shareholders and serves much the same function as a 1099 for taxable income reporting (IRS Form Schedule C mirrors this but for LLCs).
Partnerships and S corps are not typically subject to income tax, so Schedule K-1 is used to tax partners on their share of the business’ earnings.
What is Form Schedule K-1 used for?
IRS Form Schedule K-1 is used in conjunction with what is called a “pass-through entity”, such as a partnership and S corp.
A pass-through entity is one which “passes” tax responsibility from the business entity to its partners or individuals who have interest in it.
In other words, instead of the business paying taxes, the individuals who have an interest in the business– in the case of a partnership, each of its partners– pay their share of its taxes instead.
This offers big potential tax advantages, though it also comes with more personal responsibility.
It also requires that each partner correctly track their share of tax liability. Schedule K-1 is exactly how partners can track this for tax time.
How to fill out IRS Form Schedule K-1
The Schedule K-1 form is, thankfully, a 1-pager, so it’s pretty simple and straightforward.
However, it does have some long sections that ask for somewhat detailed information.
Make sure to at least review a copy of the IRS official Schedule K-1 form to get an idea of the kind of information you should be tracking/need to gather from throughout the year to make tax time that much easier.
Part I: Information about partnership
First, start by filling in basic information about the partnership.
Nothing crazy, you’ll just need your EIN number if you don’t already have it.
Also, don’t forget to check off section D if you’re publicly traded.
Part II: Information about the partner
Next, it’s time to fill in information about the partner.
After some general information, you’ll want to notate what type of partner they are, including:
- General or Limited partner
- Domestic or Foreign partner
- If you’re a disregarded entity, and
- What type of entity they are
You’ll then fill out their share of profit/losses, a short capital account analysis, along with a few other details.
Next let’s talk about the lion’s share of the Schedule K-1 form, a breakdown of that partner’s share of the financials.
Part III: Partner’s share of current year income, deductions, credits, and other items
Part 3 is the real bulk of the Schedule K-1 form and it’s a pretty detailed breakdown of a partner’s share of the financials, including their:
- Income
- Deductions
- And credits
Fill out each line and make sure they’re as accurate as possible.
As you’re doing this, make sure you have records of some kind such as reports to back up each of these pieces of information, whether they’re bank records, income reports, or profit/loss.
Be ready when tax time comes around
Schedule K-1 may seem like a simple tax form, but if you’ve just started your partnership, you need to take it seriously.
Make sure you’re tracking your profit and loss numbers with reports as well as partner income, deductions, and credits.
That way, when tax time comes around, it’s not a huge source of stress but a small routine task you can get out of the way quickly and easily.
Click here for the IRS official Schedule K-1 form.
And click here to learn more about Schedule K-1 from the official IRS website.
