What Is a K-1 Tax Return?
Schedule K-1 is a form attached to three types of tax returns: IRS Form 1041 (trusts and estates), IRS Form 1120S (S Corporations) and IRS Form 1065 (partnerships). Since the most common use of Schedule K-1 is for the preparation of tax returns for partnerships (such as law firms and medical practices), this article will focus on the use of Schedule K-1 in conjunction with IRS Form 1065.
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General Format
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Since partnerships are not taxed separately by the IRS as corporations are, Schedule K-1 is used to report each partner's share of the partnership's income, deductions and credits. Part One requires identifying information about the partnership itself; Part Two requires identifying information about the individual partner; and Part Three is where each partner's share of the partnership's income, deductions and credits is calculated.
Who Must File
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Schedule K-1 is filed by partnerships on behalf of individual partners, not by the individual partners themselves. Copies of Schedule K-1 are normally distributed to each partner in order to ensure consistency between the tax liability reported to the IRS by the partnership and the tax liability reported by each individual partner. Although Schedule K-1 should not be included with an individual partner's income tax return, the IRS will compare Schedule K-1 with the partner's individual income tax return to ensure that there are no discrepancies. Under certain circumstances, the IRS will require the individual partner to exclude deductions from income on that partner's individual income tax return, even when such deductions were listed on Schedule K-1.
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Items to Be Calculated
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The partnership must calculate, with respect to each general and limited partner, ordinary business income or losses; net rental real estate income or losses; other net rental income or losses (such as equipment leasing); guaranteed payments; interest income; ordinary dividends; qualified dividends; royalties; net short-term capital gain or loss; net long-term capital gain or loss; gain or loss from collectibles; unrecaptured Section 1250 gain or loss; net Section 1231 gain or loss; other income or loss; Section 179 deductions; other deductions; self-employment earnings or loss; credits; foreign transactions; alternative minimum tax items; tax-exempt income and nondeductible expenses; distributions; and certain other information. It is important to remember that these calculations will differ according to whether the partner is a general partner or a limited partner.
Errors on Form K-1
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A partner who finds that Schedule K-1 contains an error with respect to his tax liability should notify the partnership and have an amended Schedule K-1 prepared and filed with the IRS with a copy sent to the partner.
Filing Deadline
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Schedule K-1 must be filed by the 15th day of the fourth month after the end of the partnership's tax year as reported to the IRS. The date of the end of the partnership's tax year must be listed on the top of Schedule K-1.
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