Being a part of a business partnership, you should know what tax requirements are imposed on you? You might think of partnership tax requirements the same as for sole proprietorships and corporations, but they are different.
In the United States, certain entities are allowed for pass-through taxation. Due to this, these entities aren’t subjected to corporate income tax; instead, the entities’ beneficiaries are responsible for paying the taxes based on the allocated share of the profits on their taxable income.
For this purpose, Schedule K-1 is used to report each member’s shares who has a beneficial interest. However, it is slightly different for trust, S corporation, and Partnership.
If you also have to file a Schedule K-1 form, find out how you can report your taxes using K-1, how it works, and when is it due.
What is Schedule K-1?
It is a tax form used by business partners or S corporation shareholders to report their incomes, losses, and dividends. It provides detailed information on the type of income taxes, tax deductions, losses, and partners’ dividends. Every partner prepares a separate schedule K-1 that is added to the information on Form 1065.
K-1s are then reported to the Internal Revenue Service (IRS) for partnership tax returns. Moreover, each partner also reports his individual Schedule k-1 for his tax return.
There is a slight difference in Schedule k-1 for various entities. Partnerships report tax returns on Form 1065, S corporations report it on Form 1120S, whereas Trusts and Estates report their tax returns on Form 1041.
Before filing Form 1065, Partnership must have the following financial statements that help to determine the net income taken in by them:
- Profit and loss statements
- Revenue and expenses ledger
- Statements mentioning money earned and spent in Partnership
- Documents showing income sources
Who should file Schedule K-1?
You have to file a tax return if you are part of the following partnerships:
- Limited liability partnership
- General Partnership
- Limited Partnership
- LLC to be taxed as a partnership
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When is K-1 Due?
The partnership company has to file Form 1065 to the IRS before the 15th march of next year. The company must also issue the K-1s to each partner.
April 15 is the deadline for personal tax returns, which gives another one month to each partner for filing individual tax returns.
Important parts of K-1
Part 1: Details about Partnership
The first part involves the basic information on Partnership. Their names, addresses, and employer identification numbers (EIN) are entered on the form. If the Partnership is publicly-traded, then the PPT box is checked off.
Part 2: Details about the Partner
This section includes the information on the partner and his investment. It outlines the type of partner i-e general or limited, applicable partner’s share of profit, losses, and whether his share of liabilities is recourse or non-recourse.
Information on available capital at the start of the tax year, amount put in, reduction, withdrawals, distributions, and increases, and the final capital at the end of the tax year is also added.
In this part, you write about the partner’s share of the Partnership’s income, losses, credits, deductions, and other items you receive as per your stake in the Partnership.
Where to get the Schedule K-1 forms?
You can easily download a copy of Schedule K-1 (Form 1065) from the IRS official page. (https://www.irs.gov/pub/irs-pdf/f1065sk1.pdf). If you don’t know how it looks like, here is a sample from last year of the form.
However, every year around tax time, every partner gets a copy of Schedule K-1 from the accountant or the person who manages the Partnership’s Form 1065. If you report your personal tax return on Form 1040, you must attach Schedule K-1 with it.