What is a Schedule K-1 Form?
Schedule K-1 is a tax form you receive from entities such as Partnerships, S corporations, Trusts and Estates. Schedule K-1 reports income, deductions, and credits received from an entity that should be recorded on an individual return. The income from these entities are “passed-through” on this tax form to each individual since the entities do not have to pay tax on the income, but the individual who receives the income will be taxed.
Partnership Schedule K-1s:
Partnerships are made up of individual partners. Each of these partners is responsible for paying taxes on the business income they receive on their individual tax return. The business itself does not pay tax on the income. To make this simple for the individual, the partnership has to file a 1065 informational tax form which produces the partners K-1’s that will show each partner's share of income, deductions, and credits.
For example, if there is a partnership with 50/50 partners and the business generated $60,000 of income then each partners K-1 will show income of $30,000. They will then have to record that $30,000 of income on their individual return.
S Corporation Schedule K-1’s:
S Corporation K-1’s are very similar to partnerships K-1’s. S Corporations have to file Form 1120S every year which produces the Schedule K-1 for each shareholder. S Corporation K-1’s reports each shareholder's share of income, deductions, and credits that needs to be recorded on there individual return, just like the partnership K-1.
Trust and Estate K-1 Forms:
Trusts and Estates are different from partnerships and S corporations. Trusts and estates use a Form 1041 to file the tax return. There are times when the trust will pay income taxes on earnings instead of earnings being passed on to the individual. However, this is not always the case. Sometimes trusts and estates will have pass-through income that will need to be recorded on the beneficiaries individual return, in which the beneficiary will receive a K-1 that will show the income that needs to be recorded on there individual return. To avoid being taxed twice - in the trust/estate and individually - the trust or estate reports a deduction for the same amount as the beneficiary distribution of income from there K-1 on Form 1041.
The Bottom Line
Whether you receive a Schedule K-1 from a partnership, S Corporation, Trust, or Estate, Schedule K-1 is meant to help you accurately record any income, deductions, and credits you may have received on your individual return.
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