Many small businesses operate as a pass-through entity. With a pass-through entity, the partners or shareholders are responsible for paying the business tax rather than the company being liable.
Their return must include information from the source document, Schedule K-1. You’ll enter this for them on Schedule E, Line 28.
If you have clients involved in a partnership, multi-member LLC, or S corp, you’ll want to ensure you’re familiar with Schedule K-1. Here’s what it is, when to use it, and how it works
What is a Schedule K-1?
Schedule K-1 is an IRS form that reports “pass-through” earnings to the IRS for tax purposes. The form shows the total income of the business and the partner’s share of business profits, losses, deductions, and credits.
Most businesses in the U.S. fall under the “pass-through” business category, meaning they aren’t taxed at the corporate income tax rate. The business entity doesn’t pay taxes on its earnings – it “passes them through” to the stakeholders (i.e., partners and investors), who then pay the taxes as part of their income tax. They must file a Schedule K-1 to pay their taxes.
Schedule K-1 details the earnings of individuals with interest or ownership in these businesses and makes the individuals responsible for paying taxes due on earnings rather than the business entity. The specific earnings amounts paid to each individual are detailed on the K-1 and other forms so that the IRS can apply appropriate taxes. When you enter information from a K-1 into your TaxSlayer Pro software, all relevant information will automatically pull to the proper line on the client’s Form 1040.
Types of Schedule K-1 forms
There are three different versions of Schedule K-1:
- Schedule K-1 (Form 1065)
- Schedule K-1 (Form 1120S)
- Schedule K-1 (Form 1041)
Schedule K-1 for trusts and estates (Form 1041)
This version of Schedule K-1 is prepared by the fiduciary to an estate or trust as part of Form 1041. If the estate has Distributable Net Income, elects to distribute, and distributes enough assets to the beneficiary, it may send a Schedule K-1 to the beneficiaries. It will reflect the individual beneficiary’s portion of income and other items for them to report on their individual return. If there are mistakes or inconsistencies, the beneficiary can request an amended form from the fiduciary.
Schedule K-1 for partnerships (Form 1065)
Schedule K-1 Form 1065 is a tax document always prepared by a partnership. After the partnership files Form 1065, each partner is provided with a Schedule K-1. The K-1 reflects a partner’s share of income, deductions, credits and other tax items. The partner will need to report these items on Form 1040.
Schedule K-1 for s corporations (Form 1120S)
This version of Schedule K-1 is always prepared by an S corporation as part of their tax return. Then the corporation sends each shareholder this Schedule K-1. It reflects their share of income, deductions, credits and other items that the taxpayer will need to report on their Form 1040.
What is included on Schedule K-1?
The details captured and reported on a Schedule K-1 may vary, depending on whether it is filed for partnerships and LLCs, corporations, or trust and estate beneficiaries. However, all Schedule K-1s include information about types of earnings, deductions, and losses for accurate reporting.
The information could include:
- Ordinary business, rental, and real estate income
- Guaranteed payments and interest income
- Dividends and dividend equivalents
- Short- and long-term capital gains and losses
- Other items, including royalties, collectibles, self-employment earnings, other income, and deductions
Who receives a Schedule K-1?
A separate Schedule K-1 is prepared and filed for each partner or person who receives ownership income (i.e., not wages or bonuses) from a business.
Partners and shareholders will use a Schedule K-1 to report important earnings information on their tax returns (Form 1040) to calculate any individual taxes owed.
When are Schedule K-1s Due?
Businesses must file a Schedule K-1 on the 15th day of the 3rd month after tax year-end, usually March 15. They should file the schedule and the accompanying form with the IRS and provide copies to all relevant partners by this date. Sometimes, they can request a six-month extension if they think they will miss the deadline.
The individuals or partners who receive Schedule K-1 must include that information on their Form 1040 and file by Tax Day, usually April 15.
When will clients receive their Schedule K-1 tax form?
Schedule K-1 forms are due by March 15 (or the 15th day of the third month after the entity’s tax year ends). However, most of your clients will probably not have the form by then. Tell your clients to be patient and wait a week or so to receive the form. If they have not received it by then, you can help them contact the business to make sure the form has been sent.
How to file a Schedule K-1 for your clients
Use TaxSlayer Pro to help your clients file Schedule K-1. The form has three parts.
Part 1
The first part shows the business entity’s employer’s EIN and address. It also shows the IRS location where the tax return was filed and if it’s a publicly traded partnership.
Part 2
The second part describes the partner, shareholder, or beneficiary. It provides more detailed information about the K-1 recipient.
This info includes their:
- social security number
- address
- role in the entity
- profits, losses, and the capital and assets they contributed to the partnership
Part 3
The third part covers the entity’s share of this year’s income, deductions, credits, and other items. You will include details about the entity’s income and any tax deductions or credits.
How does the qualified business income deduction impact my clients?
Pass-through entities can deduct up to 20% of their qualified business income (QBI). Not all of your clients will qualify for the complete 20%. This deduction could move the taxpayer into a lower individual tax bracket, lowering their overall tax bill.
How TaxSlayer Pro can help tax preparers file a Schedule K-1
TaxSlayer Pro has unique menus to quickly and easily help you enter taxpayer data into all versions of Schedule K-1. Our software will pull the data into the appropriate place on the taxpayer’s return. See the TaxSlayer Pro knowledgebase for specific instructions and answers to common questions about Schedule K-1.
