If you're starting a business partnership for the first time, you may be wondering: What is a Schedule K-1 form for taxes? Also known informally as a K1 form, aK-1 scheduleis 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 companies are often unaware of their obligation to provide the K1 tax form to their partners. This can lead to heavy fines imposed by the tax authorities. To help you understand the process, here's everything you need to know about Schedule K-1.
Who must file Schedule K-1s?
Partnerships and S corporations are known as pass-through entities because they generally do not pay income taxes directly. Instead, business income flows through to the partners or shareholders, who then file and pay taxes on all income.
So every year when tax season rolls around, partnerships must fileFormulate 1065with the tax authorities. Partnerships report their profits, losses, deductions, and credits on this form. 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 share of income, deductions, and credits on their tax returns to the IRS, typically throughFormula 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 is required to file a K-1. A spouse or their tax advisor 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 must keep their K-1s with their tax records.
What are the sections of a K-1?
Schedule K-1 consists of three sections:
Information about the issuing entity
This section contains information about the company issuing the K-1. This includes the company's employer identification number, address, and IRS registration location. If applicable, you will also find the partnership status listed.
Partner/shareholder information
This area contains the partner's information, such as his tax number, name and address.
Financial details
This section shows the partner's profits and losses related to business activities, as well as non-business activities such as interest, dividends and capital gains. If you are a partner or shareholder and have received a benefit, or have income from a partnership or S-corp, enter this information here. Your losses are also included in this section. This is the longest part of the form; additional pages can be attached if necessary.
What if my partnership is not profitable?
If your business is loss-making and there is no taxable income for a partner or shareholder to report, the partnership is still responsible for issuing Schedule K-1s.
In fact, your shareholders or partners will crave their K-1s even more if the pass-through entity is incurring a loss, as this can help reduce their income taxes. Either way, partners and shareholders need K-1 information to file their tax returns.
When are K-1 tax forms due?
Partners and shareholders use Form K-1 to complete their annual tax returns, which are typically due March 15 or April 15 (unless theyfile 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-1 to yourself.
You must issue K-1s to your partners or shareholders on or beforethe corporate tax deadline or the S corporation's tax return. For calendar year companies this falls on March 15 or in September if you have applied for an extension. This typically gives recipients one month to use the information from the K-1 to file their tax returns.
To file an extension of your LLC or S Corp tax return, each partner or shareholder must also file an extension of their return.
If partners and shareholders file their personal returns without their latest K-1s, their returns may be missing important details about the partner's profits and losses. If this happens, they must amend their returns after the fact or risk encountering local or federal tax authorities with questions about incomplete information.
If you are a member of a partnership and have not 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 cases, CPAs may prepare drafts of K-1s for partners or shareholders to help create the most accurate estimate.
The consequences of not issuing Schedule K-1 tax forms
Failure to submit Form K-1 on time can have serious consequences. There are two costly penalties that companies face if they fail to meet their Schedule K-1 responsibilities.
First, if a pass-through company is late filing its tax returns and issuing K-1s, penalties will be assessed$195 per partner or shareholder per month- even if the company is not profitable.
In addition, the pass-through will face penalties of up to $260 for each K-1 tax form not provided 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 penalties after just one month, even though you have no income to report.
These are fines that put a lot of pressure on a small business, especially one that is not profitable. The fines can be avoided by providing K-1 forms to partners and shareholders on time.
inDinero can help plan your K-1 form for taxes
All the IRS rules and regulations can be intimidating for a startup. The Schedule K-1 filing is an important obligation for any partnership, and just one of many for your business. To help you stay compliant, you need a trusted partner.
inDinero's team of accountants, CPAs, CFOs and tax advisors provide the expert services you need.Grab it todayto see how we can help your business!
