On Which Form Do I Report Excess Property Distributions From K1 on My Tax Return?

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A pass-through organization, such as an S corporation or partnership, is responsible for providing its owner K-1s. A K-1 details the owner's “share” of the organization’s fiscal activity for the year. Property distributions from these organizations are taxable but only to the degree that it exceeds the owner’s basis in the organization. Generally, the excess is treated as a capital gain to the owner and is reported on Schedule D of his personal return.

Pass-Through Tax Entities

  • A pass-through organization is a tax-free entity that “passes on” its taxable income and losses for the year to its owners. The fiscal activity is divided amongst the owners based on their share of the entity. The owners’ share of the organization’s fiscal activity is treated as their own, and is taxed as such. The benefit of this is to prevent double taxation, or taxes applied at the business and at the owner level. Both S corporations and partnerships are flow-through entities.

Basis

  • For any pass-through entity, the calculation of the owner’s basis in the entity is important. The idea of basis, or the investor’s after-tax investment in the organization, is important for preventing double taxation related to the owner’s transactions with the business. Basis for both partnerships and S Corporations is calculated by taking the original investment and adding the cumulative share of past business income during the owner’s tenure plus additional contributions made by the owner. Then, subtract his share of business losses and any distributions that have been made. Distributions from pass-through entities are only taxable if they exceed the owner’s basis in the company.

Purpose of K-1s

  • K-1s are forms that S corporations and partnerships provide their owners regarding their share of the organization’s profits, losses, deductions and credits. K-1s break down the sources of income and losses to their component parts and include information about ordinary activities that occur during the course of business, the sale of business assets, and distributions made to individual owners.

How to Report Distributions

  • S corporation and partnership K-1s must follow specific guidelines on how to report property distributions. Only the amount of distributions that exceed the value of the owner’s basis is taxable and needs to be reported, and it is the individual owner’s responsibility to make sure that happens. On the K-1 form for S corporations, all property distributions are reported on line 16 and are signified with a Code D. For property distribution you are to reduce the basis of stock by the fair market value (FMV) of the property. The excess of the value is reported as a capital gain and is reported on Schedule D of your individual tax return. For partnerships, property distributions are reported on line 19 of the K-1 and are signified with either a code B or C. As with a partnership, you decrease your basis in the partnership by the FMV of the property. The excess value is treated as a capital gain, and is reported on Schedule D.

Tax Tips and Disclaimer

  • For complex returns, consult with a tax professional, such as a certified public accountant or licensed attorney, as he can best address your individual needs. Keep your tax records for at least seven years, to protect against the possibility of future audits.

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