K-1s and How They Are Used

What is a Schedule K-1 tax form?

A Schedule K-1 tax form is part of IRS Form 1065, which reports a partnership’s net income for a specific tax year. Each partner in a partnership or LLC receives a Schedule K-1 from the partnership.

“A K-1 form is a tax document that reports ‘your share’ of the income, expenses and credits from a partnership, S-corporation or trust,” explained Christian Maldonado, founder and COO of TaxAdvisor365. “They’re used to then report the loss or gain of income on the individual or entity’s personal tax return.”

Who has to file a K-1 tax form?

All partnerships must file K-1 tax forms for each partner as part of their tax returns. Additionally, each partner must include a K-1 tax form with their individual tax return, whether they are in a general partnership, limited partnership, limited liability partnership or an LLC taxed as a partnership. You must also file a Schedule K-1 if you’re a shareholder in an S corporation.

Partners must file Schedule K-1 forms because partnerships are taxed as pass-through entities. In this structure, a company’s profits and losses “pass through” to the partners without being taxed at the business level. Schedule K-1 quantifies this profit or loss and clarifies how much of the partnership’s income or loss each partner should include in their personal tax returns.

Here is more detailed information about business structures that must file K-1 forms:

K-1 forms for business partnerships

Since a partnership’s co-owners pay taxes on the company’s income — and the business itself doesn’t — the partnership must file a Schedule K-1 form for each partner. This ensures each partner’s share of taxable profits or losses is correctly recorded for the company and its owners.

Additionally, each partner must receive a copy of their Schedule K-1 for use in their personal tax returns. Although this arrangement may feel tedious or confusing, filing and distributing K-1s is straightforward. 

For example, say you’re a partner in a company that earns $50,000 of taxable income in a given year:

• Two equal partners: If you and one business partner each own 50 percent of the business, you should each receive a Schedule K-1 declaring $25,000 of income. 
• Four equal partners: If there are four equal partners, you should each receive a Schedule K-1 declaring $12,500 of income.
• Two unequal partners: If one partner owns 40 percent and the other owns 60 percent, the 40 percent partner will receive a K-1 for $20,000, while the 60 percent partner will receive a K-1 for $30,000.

K-1 forms for LLCs and S corporations

By default, your LLC is a partnership, but you can file IRS paperwork to register it as another type of federal business structure. Whether your LLC needs to file a Schedule K-1 form depends on its tax classification. If your company is taxed as a C corporation or a sole proprietorship, you do not need to file Schedule K-1 forms. In all other cases, K-1 forms are required.

The process is slightly different for S corporations. K-1 forms for S corporations are included as part of the company’s annual Form 1120-S tax return. Each K-1 should outline a shareholder’s share of the company’s profits, losses, credits and deductions. Shareholders must also receive a copy of their K-1 to use when filing their personal tax returns.

K-1 forms for trust and estate beneficiaries

Occasionally, a living trust is a partner in a partnership. In this case, you should be aware of how K-1 forms work for trusts or estates.

If a trust or estate passes its tax burden to its beneficiaries, the trust or estate must include a Schedule K-1 in its IRS Form 1041 tax return and send a copy to the beneficiary. The beneficiary will then include this K-1 form with their individual tax returns. This K-1 will likely include more money recorded as distributions than ordinary income.

Where can you find a Schedule K-1 tax form?

The IRS has Schedule K-1 forms on its website. You can download the K-1 form in fillable PDF format for either you or your accountant. The form looks like this:

Source: Internal Revenue Service

How to fill out a K-1 form

Filling out a K-1 form requires careful attention to detail. Follow these steps to guarantee accuracy. If you’ve hired a CPA for your taxes, they can handle this process for you.

1. Indicate the tax year in question.

The top left corner of your K-1 form should contain boxes for adding the start and end dates of the tax year. Before proceeding, be certain these dates correspond to your partnership’s tax year.

2. Add your basic identifying information.

In Part I of the K-1 form, you should see spaces for adding your company’s employer identification number, name and address. Add this info here.

3. Indicate the IRS center where you filed your tax return.

You’ll need to add this information in Part I, Box C. You can find this information on the confirmation documents from your prior year’s filing or by referencing the filing instructions for your tax return. 

4. Add the partner’s identifying information.

In Part II, enter the partner’s identifying information, including their name, address and tax identification number (TIN) or Social Security number. Be meticulous to avoid filing the wrong information for the wrong partner.

5. Indicate the type of partner.

In Part II, Box G, specify whether the partner is a general partner or a limited partner. Then, in Box H, check whether the partner is domestic or foreign, as applicable. In Box I1, write “individual” to indicate that the partner is a person and not a business entity. If the partner is an entity, provide the appropriate description (e.g., “corporation” or “trust”).

6. List the partner’s profit, loss and capital shares.

If the partner in question owns 50 percent of your business, indicate this percentage in all six fields in Part II, Box J. The numbers in the “Ending” column will only differ if the partner’s share of the ownership changed at some point during the tax year. 

7. Complete the liability share and capital account fields.

Assuming your partnership uses accrual-based accounting, you’ll need to complete Part II, Boxes K and L, to reflect the partner’s share of the values listed therein. This part can get tricky, but an accountant can walk you through it based on your books.

8. Indicate any property contributions with built-in gain or loss.

Occasionally, assets that a partner contributes to a company come with built-in gains or losses. Check the appropriate item in Part I, Box M, to indicate any such gains or losses.

9. Add the partner’s ordinary business income.

In Part III, Box 1, you must add the partner’s direct income from the business. This represents the partner’s portion of the partnership’s taxable income from regular business operations. For example, if the partnership generated $75,000 in income during the tax year and the partner owns 50 percent of the business, their income for Box 1 would be $75,000 × 0.5 = $37,500.

10. Add additional income line items.

Often, you will also need to add dollar amounts for the following line items in Part III:

• Guaranteed payments (Boxes 4a, 4b and 4c)
• Interest income (Box 5)
• Section 179 equipment deductions (Box 12)
• Other deductions (Box 13)
• Self-employment earnings (Box 14)
• Distributions (Box 19)

Your accountant may find most of these numbers more readily than you can, but calculating your self-employment earnings is usually simple. Generally, it’s the same as your ordinary business income since the IRS levies self-employment taxes on companies with pass-through taxation structures.

11. File your K-1 form and give all partners copies.

Once you’ve followed the above steps, your K-1 form is ready. Attach it to your IRS Form 1065 and ensure each partner receives a copy of their personal tax filings. Instructions for how partners should use the K-1 are available on page two of the form.

Despite the above guidance, you may still have questions, as Part III of the K-1 form has over a dozen fields where you can enter profits or losses. If you have questions about completing these fields, consult your accountant, tax consultant or bookkeeper for additional guidance.

What happens when you don’t file a K-1 correctly (or at all)

Failing to file a K-1 form correctly — or not filing one — can lead to significant IRS penalties and complications for both the partnership and its partners. Consider the following repercussions:

You may be assessed a late filing fee.

K-1 forms are due on the 15th of the third month after the company’s fiscal year ends. For companies that follow a calendar year, that’s March 15. If your business files for an extension, you gain an additional six months, moving the deadline to September 15 for calendar-year companies. 

However, if you’re behind on your taxes and file your K-1 late, the penalty is $235 per Schedule K-1 per month (or part of a month) that it’s late. For partnerships with many partners or those filing very late, these penalties can quickly add up. However, the IRS caps this penalty at 12 months, or $2,820 per Schedule K-1. 

If you’re more than 12 months late, your business will be subject to collection activity and penalties from the IRS, including possibly having your business assets seized.

You may be assessed a penalty for failing to furnish K-1s to partners in a timely manner.

The IRS distinguishes between being negligent and intentional when you fail to give each of your partners their K-1s in plenty of time for them to file. 

• Negligence: If you forget to do it, the penalty is $310 for each K-1, up to a maximum of $3,783,000 for entities with gross receipts over $5 million and $1,261,000 for entities with gross receipts at or under $5 million. 
• Intentional: If the IRS decides that you purposely did not give K-1s to partners, the penalty is $630 per K-1 or 10 percent of the aggregate amount of items required to be reported, whichever is greater, with no maximum.

You may incur partner and stakeholder distrust.

Failing to distribute K-1s and file the required Form 1065 doesn’t just lead to IRS penalties — it can also damage your business’s relationships with partners and stakeholders.

Logan Allec, CPA and owner of Choice Tax Relief, emphasized how critical K-1s are for maintaining trust. “The obvious consequence of failing to complete and file an entity’s Schedule K-1s is that the entity’s partners or shareholders will be angry because they need their respective Schedule K-1 to complete their own individual income tax returns,” Allec explained.

Allec cautioned that the consequences can be even more severe for entities with outside investors. “If there are investors in the pass-through entity, the failure of the entity to file and issue Schedule K-1s to these investors could cause the investors to lose faith in the enterprise, thinking, ‘If this business can’t meet its basic tax obligations, how can I trust it to invest the capital I’ve invested in it?'”

Failing to meet your K-1 obligations can harm your business’s financial standing, reputation and long-term growth potential.

Mitigating IRS penalties for K-1s

The best way to avoid penalties is to file your K-1 forms and distribute them to your partners on time. However, if your business is penalized for a K-1 issue, you can contact the IRS on your own or through a tax attorney to try to get the penalty lowered or waived. The IRS may grant relief if it determines that the filing issue was due to “reasonable cause,” such as the following:

• This is the first time your business has made this mistake, and previously, you have always filed and distributed K-1s on time.
• This is the first time your business has been required to file a K-1.
• The relevant business records were unavailable due to a “supervening event,” such as a fire or the death or serious illness of the person responsible for filing.
• The company gave its records to an accountant to file on time, but the accountant failed to file the form when it was due and had a satisfactory reason why this happened.