You can prepare Schedule K-1 for each shareholder or partner after your S-corporation’s Form 1120S or your partnership’s Form 1065 is completed.
What Is Schedule K-1?
The K-1 reports taxable income, just like a W-2 or Form 1099, but not all business entities are required to file them. The business must be a pass-through entity: a partnership, an S-corp, or an LLC that’s elected to be taxed as a partnership or an S-corp. The business itself doesn’t pay taxes but passes its liability and losses onto its shareholders and owners. Part I of the K-1 simply provides identifying information about the business entity. Part II identifies the partner or shareholder receiving the K-1. Part II is more extensive in the partnership K-1, requiring additional information. Information regarding profits, losses, credits, and deductions is included in Part III.
Who Has to File Schedule K-1?
Each shareholder or partner is required to file Schedule K-1 along with their personal tax return to report their shares of pass-through business’s deductions, credits, profits, and losses. The K-1 reports only that shareholder’s or beneficiary’s portion of earnings. Each partner would receive a K-1 for half the partnership’s losses and earnings in a 50/50 partnership involving two partners. Trusts and estates must also file Schedules K-1 when they pass income on to beneficiaries, but beneficiaries are exempt from including the form with their tax returns.
What You’ll Need to File a Schedule K-1
At a minimum, you’ll need a completed 1120S tax return for the S-Corporation or a completed Form 1065 for a partnership to prepare the Schedule K-1. You’ll also need a complete transaction history and summary statement of each shareholder’s capital accounts, as well as each shareholder’s full legal name, address, and Social Security number. Ideally, you’ll have tax software that prepares 1120S or 1065 tax returns.
Items Reported on Schedule K-1
You won’t have to deal with all the K-1’s lines and boxes. This form covers multiple situations, and not all are applicable to every business. These corresponding lines and boxes apply to the Form K-1 for Form 1120S for S-corporations, the most commonly used. Not all versions of Form K-1 will include all these items.
Section 1231 gains and losses (line 9)Net short-term capital gains and losses (line 7)Net long-term capital gains and losses (line 8a)Dividends eligible for the dividends received deduction if a shareholder is a C-corporationCharitable contributionsTaxes paid to a foreign country (line 14)Tax-exempt interest and related expenses (box 16)Investment income and expenses (line 4)Amounts previously deducted, such as bad debtsRental real estate income and expenses (line 3b)Section 179 deductions (line 11)Tax credits (line 13)Non-deductible expenses, such as 50% of meals and entertainment expenses (box 8a)
The Deadline for Sending Schedule K-1
S-corporations and other pass-through entities are required to issue their Schedules K-1 by March 15, the deadline for Forms 1120S and 1065, or by the extended deadline, which is September 15. The deadline for these business returns is one month earlier than that for individual taxpayers, which usually falls on April 15 (Tax Day), to provide shareholders and partners ample time to receive their K-1s and incorporate the information with their own tax returns.
