As a new entrepreneur, the end of the year might seem a bit scary. You’ve heard all about “closing the books” and how you should be preparing now for tax time. But, do you know what that means for your LLC partnership? We’ll walk you through the basics of partnership tax in this guide and how this may apply to your LLC or S corp.
Partnerships themselves are generally not subject to income tax. However, individual partners — including limited partners — may be taxed on their share of the partnership’s income, regardless of whether it is distributed.
A K-1 tax form is commonly issued to taxpayers who are partners in a business or have invested in financial products like limited partnerships (LPs). LPs are a common structure for hedge funds and private equity fund vehicles. Other investments where you may receive a K-1 form include exchange-traded funds (ETFs). EFTs can represent an investment in commodities.
If you’ve been a member of or investor in a partnership, you may have received an IRS form K-1 before. The purpose of a K1 tax form is to report each partner’s share of earnings, losses, tax deductions, and tax credits. It has roughly the same purpose as any one of the Form 1099s provided by the IRS. These forms report dividends or interest from securities or income from the sale of securities.
Stockholders of S-Corporations — which are companies with the tax classification Subchapter S of the Internal Revenue Code — also use form K-1 for tax reporting. These types of companies are taxed as partnerships.
Trusts and estates that distribute income to beneficiaries also file Schedule K-1s and use Form 1041 to file their own tax returns. If you receive trust or estate income, your K-1 tax form shows the amount of income you need to report on your own tax returns.
If you own an interest in a partnership, it’s essential to calculate the partner’s basis in the partnership before any other tax liability can be determined.
“Basis” is an accounting word for a partner’s investment or ownership stake in the partnership or venture. A partner can increase their basis by making capital contributions and thus increase their share of the partnership’s income. Basis is reduced by a partner’s share of losses and any capital withdrawals.
For instance, suppose Bob contributes $80,000 in cash and $10,000 in machinery to a widget-making partnership. The partnership makes enough to pay out income, and Bob’s share of income is $10,000 that year. Therefore, Bob’s total basis is $100,000, assuming he hasn’t made any withdrawals.
An important point about basis calculation is that if the partner’s basis balance is zero, any extra payments to the partner are taxed as ordinary income.
Schedule K-1s are issued annually. This tax form reports the gains, losses, interest, dividends, earnings, and other distributions from certain investments or business entities for the previous tax year. Entities that issue K-1s are usually pass-through entities that don’t pay corporate taxes themselves. Participants in these investments or enterprises use Schedule K-1 income to compute their personal income for their individual tax returns.
In order to issue a K-1 tax form, a business needs to track each participant’s ownership stake or basis closely. This means that they need to monitor each partner’s contributions, liabilities, and withdrawals.
When are K-1s due to partners? The IRS says they’re due to partners by the 15th day of the third month after the entity’s tax year ends. However, it’s unclear whether the IRS meant that they need to be issued by then or be in taxpayers’ hands by then. That said, you should expect to receive one around mid-March. If you’re running a business that’s issuing K-1 tax forms, you need to begin working with your bookkeeper and accounting staff on issuing your K-1s as soon as your tax year ends.
While a Schedule K-1 document is prepared and provided to each partner so they can file their own income taxes, the partnership itself needs to file information with the IRS — even as a pass-through entity. After issuing partnership K-1s, the partnership then files Form 1065, the partnership tax return that contains the activity on each partner’s K-1. Likewise, an S-corporation reports this activity on Form 1120-S, and trusts and estates report the K-1 form activity on Form 1041.
Form 1065, and likewise, Forms 1120-S and 1041, give the IRS a snapshot of the company’s financial status. Partners have to pay income tax on their reported earnings regardless of whether the earnings were distributed.
When operating a partnership, S-corporation, or administering a trust or estate, your focus will need to be on getting your Schedule K-1 tax forms out to your investors and beneficiaries on time. A tax professional can help you make this process run smoothly and efficiently, especially if you’re new to partnership accounting.
We can help you run your business more smoothly. First, we can help you incorporate or form your LLC. After formation, we can help keep you in compliance with our Worry-Free Compliance Service. We can also help keep you on track and ready for tax time with our set of business tools. Our ZenBusiness Money App can help keep your financial documents and receipts organized and ready for year-end. It makes bill paying, invoicing, and doing your taxes incredibly straightforward. And once you’re headed in the right direction, our Accounting Basics for Your Small Business can help you gain the confidence you need to be fluent in the language of finance.
Disclaimer: The content on this page is for informational purposes only and doesn’t constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.
Do you have to file a Schedule K-1? Technically, no one needs to file a Schedule K-1. For an individual partner or investor, your K-1 tax form is provided to confirm your partnership income, just as your Form W-2 or 1099 would if you were receiving income from a different type of business. The information from your K-1 is used by your tax preparer to prepare your personal income tax return.
You might receive a Schedule K-1 if you fit into any of the following categories:
If you fall into any of these categories and haven’t ever received a K-1 tax form, check with your tax preparer or other tax professional to understand why.
K-1 income isn’t typically considered earned income.
You should receive your Schedule K-1 by the 15th day of the third month after the end of the entity’s tax year or around mid-March. If you haven’t received it by then, check with your tax professional and any contact you have at the company.
You can find related tax forms and Form K-1 instructions at IRS.gov. The IRS provides a wealth of resources about how to read a K-1 form and how to fill out a K-1 form if you need to issue them yourself.
Yes. Income reported to you on your Schedule K-1 is taxable income, and the information is provided so you can report it on your personal income taxes.
A K-1 tax form is commonly issued to taxpayers who are partners in a business or have invested in financial products like limited partnerships. Other investments where you may receive a K-1 form include exchange-traded funds. A 1099 Form is a tax form documenting payments made by an individual or a business that usually isn’t your employer. A key difference is that K-1s are typically distributed to partners in a business, whereas a 1099 is commonly issued to independent contractors.
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