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June 01, 2022

What is a Schedule K-1 Tax Form

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A Schedule K-1 is a tax form to report income, losses, and dividends of a business’s or enterprise’s partners. It’s also used to report income, losses, and dividends to S corporation’s shareholders.

Partners in a business have to file the form alongside their personal tax return. S corporations and partnership companies have to file Schedule K-1, but in the first case, the company files a Form 1120 S, and in the second, the company should file a Form 1065.

Check out our article to learn more about the Schedule K-1 tax form, who has to submit the form, and other useful details.

Understanding Schedule K-1

As mentioned, Schedule K-1 (Form 1065) is a document used by partnerships. It is a part of the tax return Form 1065. Upon filing Form 1065, the company has to hand Schedule K-1 to every partner.

Schedule K-1 is supposed to show a partner’s income and losses from holding a share in a company, deductions, credits, and other details that have to be filed as part of the individual tax return in Form 1040.

Schedule K-1 consists of the following three parts:

  • Partnership information. The details include the company’s name, address, other important details about the type of partnership, etc.
  • Information about the partner. The accountant should file such details as the investment in the partnership by a partner. The information should include the type of partner (general or limited), the share of profit in a company, their loss and capital, whether they share any liabilities.
  • Partner’s share of the current tax year’s income, losses, deductions, etc. This part requires the accountant to fill in details about the partner’s income, loss, deduction, and other information affecting the tax burden.

But what is the purpose of submitting this form? The goal of Schedule K-1 is to inform the IRS about each partner’s share of the business’s gains, losses, deductions, credit, and other existing distributions.

Schedule K-1 is to be sent to the IRS with Form 1065 since such financial information is not accepted with individual partners’ tax return forms. To file a personal tax return gained from the partnership, the individual should enter data with Form 1040 and other income sources.

Who has to File Schedule K-1 in 2022?

You have to file the Schedule K-1 form if your company is:

  • A general partnership.
  • A limited partnership.
  • A limited liability partnership (LLP).
  • A limited liability corporation (LLC) that chooses to tax as a partnership.

If you are not sure whether or not your company has to submit Schedule K-1, check the following factors:

  • A taxpayer co-owns a business with one or several taxpayers, and the business is not incorporated.
  • The taxpayer has a signed partnership agreement, and the partnership is registered in one of the US states.
  • If a taxpayer co-owns a limited liability corporation that did not vote to be taxed as a corporation during a tax year. In that case, partners don’t file Form 8832 but submit tax Form 1065.

If you meet one of these requirements, then you have to submit Schedule K-1.

What is a Schedule K-1 Tax Form

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How do partnerships file Schedule K-1?

To report the partnership’s annual income, accountants or other responsible employees must fill and submit IRS Form 1065. According to this form, partnerships do not pay taxes to the government. Instead, partners or members of LLC must file and pay taxes due as part of their personal tax income.

Each partnership has an agreement that determines how much income, dividends, and losses partners get. Form 1065 is an information return form. According to this Form, each partner in a partnership has to get a Schedule K-1. Each document must state a partner’s share within a company, including gains and losses during a specific tax year.

So, partners send Form 1065 to the IRS with Schedule K-1. But they should send a Form 1040 that includes their income gained from being a partnership’s shareholder.

What Documents does a Partnership need to file Schedule K-1 (1065)?

An accountant or another responsible employee has to prepare some documents and financial statements to file a form properly. Here are the statements to prepare:

  • Profit and loss.
  • Revenue and expenses ledger.
  • Any other statements of documents proving income, losses, and expenses.

An accountant will be able to calculate income during a tax year according to these documents. If the company ran at a loss over the tax year, these documents should be proof of this statement.

Filing taxes means that the partnership has some deductible expenses. This means the accountant should prepare receipts and reports stating all deductible expenses.

The partnership should provide the accountant with the documentation of where the income, losses, and expenses come from.

That’s why it’s so important to keep financial statements in order during the whole year. When it comes to filling and submitting forms, it’s much easier when accountants have all the documents to properly file taxes.

When filling out Form 1065, an accountant should follow the instructions. These instructions oblige the accountant to include the following data:

  • EIN, or Employer Identification Number.
  • Formation date (when the form was filled).
  • Business code.
  • An accounting method is used: cash or accrual.

This means that the partnership should provide the accountant with this data beforehand.

If the partnership is related to selling products or materials, the accountant should also have access to the documents that allow calculating the costs of goods sold that encompass the inventory value (at the beginning and end of the tax year). The accountant will also need documents that state what items the company purchased for the inventory during that tax year.

Deductible Expenses

To reduce the tax burden of partners, the accountant can deduct the following expenses:

  • Maintenance and repair of equipment the company owns.
  • Rent for business purposes.
  • Licenses, fees, permits, and non-federal taxes.
  • Depreciation of business property (only if it’s actively used for profit generation).
  • Employees’ and partners’ retirement plans.
  • Employees’ and partners’ benefit programs.

Businesses are recommended to keep documents on depreciable equipment. The IRS has strict requirements for depreciable assets. A partnership should prove that an asset has an expiration date and it will depreciate over time. The documentation should include when the equipment was bought. Depreciable property is those assets that were used for longer than a tax year.

When Should Partnerships Receive IRS Schedule K-1?

When partnerships should receive and submit Schedule K-1 is a very confusing topic. The IRS says these forms are due by March 15. But should the form be issued by the 15th, or should it be delivered to a taxpayer to fill it by March 15? It’s a topic of debate.

One thing is clear about Schedule K-1 — taxpayers are supposed to receive the form by March 15. If March 15 is on Saturday or Sunday, then taxpayers receive it during the closest business days.

Final Thoughts

Investing in a partnership and gaining profit means that you have to file taxes properly. A partnership files Form 1065 that includes the partner’s details. Partners are to file Form 1040 even if they have a small share. The best idea is to keep all documents and financial statements during the 2022 year to be prepared to submit Schedule K-1.

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Author: Charles Lutwidge

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