If you are a partner in an S corporation or a shareholder in a Limited Liability Company (LLC), you must file Schedule K-1. This form is sent via email to all individuals required to file. This document, similar to Form 1099, asks partners and shareholders to report their income.
How the tax is levied will depend on the amount of money you report. This document is attached to the general income tax return document; therefore, when you begin to organize your tax filing, you should follow these steps to enter Schedule K-1.
What is Schedule K-1?
Form K-1 is a tax document where certain corporations and trusts must report annual income, losses, credits, deductions, and more for each company partner, shareholder, or beneficiary with the Internal Revenue Service (IRS).
The U.S. Tax Code regulates this process, whose objective is to transfer the income tax liability to the shareholders or partners who have personal interests in the company. These companies that share the tax liability to the shareholders are called “pass-through entities.”
Who must submit the form?
Like Form 1099, Schedule K-1 lists taxable income for individuals or companies. The document records the company’s revenue and divides it into different segments.
Two types of taxpayers must file Schedule K-1 with their taxes. The information that the form must contain and how it must be filled out vary depending on the type of taxpayer. If you are on the following list, you must file the document:
- Owners of Pass- through business entities:
- S – Corporations
- LLCs taxed as S – corporations or partnerships
- Beneficiaries of trusts or estates
If you must file the Anezo K -1, you will know because the Internal Revenue Service will send it by e-mail when the date approaches.
When to file Schedule K-1?
The deadline for owners to submit the Annex K -1 is March 15. That same day is the due date for the business tax return; by that date, you should have calculated the income and losses of each partner.
The form should reflect the roles of each partner in terms of income and losses in the company, as well as the responsibility with each credit that each partner received for the company. March 15 is the maximum deadline estimated by the Internal Revenue Service for reporting and filing the document and the personal income tax return, which is usually in April.
How is K-1 income taxed?
Form K -1 is taxed in the same way as all other taxes. But thanks to the Jobs and Tax Reduction Act, created in 2017, some mechanisms were established that allows reducing the amount of taxes to be paid.
Owners can pass on tax liabilities and receive 20% deductions on their taxes. The interested party must know which form is being used to apply this deduction. It is important to remember that there are three types of schedules:
- Form 1041 Schedule K-1 for beneficiaries of a trust or estate.
- Form 1065 Schedule K-1 for partnerships
- Form 1120S Schedule K-1 for S corporations
How this tax is imposed depends on the type of entity you belong to.
Form K -1 for Pass- through business entities
The channeling entities report their income, losses, and deductions in the income tax of their owners. Subsequently, the revenue is taxed at each partner’s capital tax rates. S – Corporations, partnerships, and LLCs taxed as S – corporations or partnerships are the entities that pay tax as “pass-through entities.”
Pass-through entity taxation is more beneficial than corporate taxation on income earned, depending on the factors involved. Exhibit K-1 shows each owner’s share of the company’s revenue and losses. For example, if a partner owns 30% of the company’s shares, the form will reflect 30% of the company’s profit or loss.
The pass-through entities have a deduction of 20% on the payment of their income. In other words, with the K-1 form, you can reduce your tax burden. Let’s suppose you have to pay $80,000 to the tax agency; with this benefit, you can receive 20% of the total.
In the following lines, we will explain with more emphasis how the tax is levied for this type of taxpayer:
- The deductions, gains, and losses reported on the K-1 are calculated with the percentage of ownership they have with the company
- Partners receiving guaranteed payments must report them on the K-1
- The report includes an analysis of each owner’s equity or percentage owned by each inverter
Form K -1 for Trusts and Estates
Recipients of a trust or estate must also file Form K-1. This document allows individuals to report their income on their return correctly.
The process is the same as pass-through entities, but the only difference is that they do NOT have to include it on their tax return. They should only keep it as a record and use it only to notify the IRS of their income, losses, credits, and deductions concerning the trust or estate.
For years I have studied American finance regulations. All the information in this blog is sourced from official or contrasted sources from reliable sites.
Salesforce Certified SALES & SERVICE Cloud Consultant in February 2020, Salesforce Certified Administrator (ADM-201), and Master degree in “Business Analytics & Big Data Strategy” with more than 13 years of experience in IT consulting.