Schedule K-1 - Explained
What is a K-1?
If you still have questions or prefer to get help directly from an agent, please submit a request.
We’ll get back to you as soon as possible.
- Marketing, Advertising, Sales & PR
- Accounting, Taxation, and Reporting
- Professionalism & Career Development
Law, Transactions, & Risk Management
Government, Legal System, Administrative Law, & Constitutional Law Legal Disputes - Civil & Criminal Law Agency Law HR, Employment, Labor, & Discrimination Business Entities, Corporate Governance & Ownership Business Transactions, Antitrust, & Securities Law Real Estate, Personal, & Intellectual Property Commercial Law: Contract, Payments, Security Interests, & Bankruptcy Consumer Protection Insurance & Risk Management Immigration Law Environmental Protection Law Inheritance, Estates, and Trusts
- Business Management & Operations
- Economics, Finance, & Analytics
Table of ContentsWhat is a Schedule K-1?How is a Schedule K-1 Used? Factoring in Partnership AgreementsBasis CalculationIncome ReportingAcademic Research on Schedule K-1
What is a Schedule K-1?
A Schedule K-1 refers to a tax form that businesses partners use to report their partnership earnings or income, losses, dividends and credits. A schedule K-1 is a tax document that the Internal Revenue Service (IRS) requires business partners to file for tax purposes. The tax document is prepared to report each partners share of the earnings and losses associated with the partnership. This means that the report is made to capture each individual partner.
Back To: BUSINESS LAW
How is a Schedule K-1 Used?
There are diverse tax forms or documents that taxpayers use in filing tax reports with the Internal Revenue Service. These tax forms vary and have different uses. The Schedule K-1 is a tax form used by the IRS, individual partners in a business entity or partnership are required to report their share of the partnerships earnings, losses and dividends.
The Schedule K-1 tax documents moves the tax liability of a business entity or corporation to individuals who make up the partnership. All the financial report for each individual partner contained in Schedule K-1 is submitted with Form 1065 when filing with the IRS. Form 1065 is the report of the partnerships transactions. The income realized by each partner is added to their personal income and recorded in Form 1040.
Factoring in Partnership Agreements
In every partnership agreement, there are two or more people who come together and agree to do business as partners. The partnership agreements are contained in the contract. This contract also contains the rules of the partnership, the obligations of each of the partners and how losses, income and dividends will be distributed to the partners.
In limited partnership, the amount of capital that each partner contributes to determine the level of debts and obligations they undertake. Also, in a partnership, there is a general partner (GP) who is the partner in charge of operations. The GP gives accounts for the outcomes of the actions and activities of other individuals in the partnership.
When calculating the losses, earnings and dividends of each partner in a business partnership, it is vital to keep track of the investment of the partner in the partnership. The investment of partners in the partnership is referred to as the basis in the partnership. A partners investment in a partnership is affected by losses or debt obligations and also increased by income (earnings) or capital contributions. Also, if partners make withdrawals from an investment, the partners basis in the partnership reduces. It is important to know that the calculation of each partners basis is crucial when reporting on Schedule K-1.
One of the major reporting on schedule K-1 is the income reporting which can be categorized into different sections. The different types of income reported on Schedule K-1 are;
- The guaranteed payments partners earn through their investment in the partnership.
- Rental income for the real estate holdings of the partnership.
- Interest payment of securities such as stocks and bonds.
- Royalty income and others.
These categories of income are reported on the Schedule K-1 for each partner.
Back to: Business Transactions