If you’re starting a business partnership for the first time, you may be asking, What is a Schedule K-1 form for taxes? Also known informally as a K1 form, a Schedule K-1 is a federal tax document that the IRS requires of partnerships. Two or more partners use a Schedule K-1 to report their share of profits, losses, and dividends.
Startup businesses often are not aware of their obligation to provide the K1 tax form to their partners. This can lead to harsh penalties levied by the IRS. To help you understand the process, here’s everything you need to know about Schedule K-1.
Who Needs to File Schedule K-1s?
Partnerships and S Corporations are known as pass-through entities because they generally don’t pay income tax directly. Instead, the business income flows through to the partners or shareholders who then file and pay tax on any income.
So, each year when tax season rolls around, partnerships must file Form 1065 with the IRS. This form is how partnerships declare their profits, losses, deductions, and credits. Part of Form 1065 requires the partnership to issue Schedule K-1s to each of their partners or shareholders.
Schedule K-1 allows partners and shareholders to report their shares of income, deductions, and credits to the IRS on their tax returns, typically via Form 1040. An exception is estates and trusts with multiple beneficiaries, who then report their K-1 forms on Form 1041.
In most cases, no individual taxpayer must file a K-1. A partner or their tax preparer will transfer the information on the K-1 form to an individual tax return.
Partners and shareholders are generally not required to attach their K-1 forms to their tax returns. However, they should keep their K-1s with their tax records.
What Are the Sections of a K-1?
The Schedule K-1 has three sections:
Issuing Entity Information
This section includes information about the business issuing the K-1. This includes the employer ID number, address, and the business’s IRS filing location. You can also find the publicly traded partnership status if applicable.
This area includes the partner’s information, such as their tax ID number, name, and address.
This section shows the partner’s profits and losses related to the business’s activities, as well as non-business activities such as interest, dividends, and capital gains. If you’re a partner or shareholder and have received a distribution, or if you have income from a partnership or S-corp, this is where you enter that information. Your losses are also included in this section. This is the longest section of the form, and additional pages may be attached if needed.
What if My Partnership Isn’t Profitable?
If your business is operating at a loss and there is no taxable income for any partner or shareholder to report, the partnership is still responsible for issuing Schedule K-1s.
In fact, your shareholders or partners will be even more eager to get their K-1s if the pass-through entity has a loss, since it may help reduce their income tax liability. Regardless, partners and shareholders will need information from the K-1 to file their tax returns.
When Are K-1 Tax Forms Due?
Partners and shareholders use Schedule K-1 to complete their annual tax filing, typically due on March 15 or April 15 (unless they file for an extension). This applies to teams of all sizes. So even if your business has only two partners or shareholders, you must issue Schedule K-1s to yourselves.
You must issue K-1s to your partners or shareholders on or before the deadline of the partnership or S corporation’s tax return. For calendar year businesses, this falls on March 15 or in September, if you’ve filed for an extension. This typically leaves recipients a month to use the information from the K-1 to file their taxes.
If you’re going to file an extension for your LLC or S Corp tax return, each partner or shareholder should file an extension for their returns as well.
If partners and shareholders file their personal returns without their final K-1s, their returns might be missing key details about the partner’s gains and losses. If this happens, they must amend their returns after the fact or risk dealing with local or federal tax authorities who have questions about incomplete information.
If you’re a member of a partnership and haven’t received a Schedule K-1, be sure to estimate your expected taxable income or loss from the business when you file your extension. In some instances, CPAs can prepare draft versions of K-1s for partners or shareholders to help provide the most accurate estimate.
The Consequences of Not Issuing Schedule K-1 Tax Forms
Not issuing Schedule K-1s on time can have severe consequences. There are two expensive penalties companies face when they fail to meet their Schedule K-1 responsibilities.
First, if a pass-through business is late to file its tax returns and issue K-1s, they are fined $195 per partner or shareholder per month — even if the business isn’t profitable.
Additionally, the flow-through will face fines of up to $260 for each K-1 tax form not issued to their partners or shareholders on time.
For example, if your S Corp has five shareholders, and you don’t file your S Corp return with K-1s on time, you’ll owe $2,275 in fines after just one month, even if you have no income to report.
These are fines that put major pressure on a small business, especially one that isn’t profitable. The penalties can be avoided by issuing K-1 forms to partners and shareholders on time.
inDinero Can Help with Schedule K-1 Form for Taxes
All the IRS rules and regulations can be intimidating for a startup business. Filing Schedule K-1 is an important obligation for any partnership — and it’s just one of many for your company. To help you stay compliant, you need a trusted partner.
inDinero’s team of accountants, CPAs, CFOs, and tax advisors offers the expert services you need. Reach out today to see how we can help your business!