Everything You Need to Know About IRS Schedule K-1

Partnerships, S corporations, estates, and trusts must attach IRS Schedule K-1s to their business tax returns. K-1 forms report each owner’s share of passthrough business activity. 

Schedule K-1 represents a critical component of passthrough entity tax compliance. However, IRS rules and instructions can confuse business owners. 

This article will explain everything you need to know about IRS Schedule K-1.

What Is IRS Schedule K-1?

IRS Schedule K-1 is a tax form that passthrough entities use to report business owners’ income allocations, tax deductions, and credits.

Passthrough entities must file tax returns to report business income or loss, ownership information, and other items. Passthroughs also allocate income and expenses to business owners. Passthrough entities use Schedule K-1 to report each owner’s share of business activity and ownership percentages.

Passthrough entity owners must include Schedule K-1 information on their income tax returns.

Who Should File Schedule K-1?

The Internal Revenue Service (IRS) requires passthrough entities to attach Schedule K-1s to their business tax returns and provide copies to business owners. Passthrough entities include partnerships, S corporations, trusts, and estates.

Partnerships and Multi-Member LLCs

Partnerships and multi-member LLCs file IRS Form 1065, U.S. Return of Partnership Income. Form 1065 attachments include Schedule K-1s for each partner. 

Partnerships and multi-member LLCs do not pay federal income tax. Instead, the partnership passes income and losses to its partners. 

Partnerships have two or more partners. Most legal entity types can own partnership interests, including corporations, individuals, and other partnerships. Each partner must report its share of partnership activity on its income tax return. For example, individual partners report their share of partnership income and deductions on their personal tax returns.

General partners and LLC managing members often take responsibility for filing information returns or outsourcing business tax compliance to professional CPAs.

S Corporations

S corporations file IRS Form 1120-S, U.S. Income Tax Return for an S Corporation. Form 1120-S attachments include Schedule K-1s for each shareholder.

S corporations do not pay federal income tax. Instead, S corps distribute business income and deductions to their shareholders. 

S corporations can have one or more shareholders. Only individuals and certain disregarded entities can own S corporations. Shareholders report Schedule K-1 information on their individual tax returns.

Trusts and Estates

Trusts and estates file IRS Form 1041, U.S. Income Tax Return for Estates and Trusts. Form 1041 attachments include Schedule K-1s for each beneficiary.

A trust or estate can generate an income tax liability, depending on several factors. We recommend partnering with tax professionals for your trust or estate tax compliance.

Types of K-1 Forms and How to File

Each type of passthrough entity files a different type of K-1. Schedule K-1s for partnerships, S corporations, estates, and trusts contain similar sections. However, certain items vary for each type of entity.

Review the following instructions to learn how to file Schedule K-1 for your small business.

Partnerships: How to File IRS Schedule K-1 (Form 1065)

Partnerships file Form 1065 and attach Schedule K-1, Partner’s Share of Income, Deductions, Credits, etc. Partnership K-1s report each partner’s share of business activity. The business must file a separate K-1 for every partner.

Part I: Information About the Partnership

Report your company’s information, including business name, employer identification number (EIN), and address. Indicate whether the business is a publicly traded partnership.

The partnership should report the same information on Part I for all K-1 forms.

Part II: Information About the Partner

Part II reports information specific to each partner. In addition to the partner’s name and address, indicate whether the partner is any of the following:

• General or limited partner

• Domestic or foreign partner

• Disregarded entity

• Retirement plan

Provide the partner’s ownership percentages, share of liabilities, and capital account activity. For example, report any contributions to or withdrawals from the partnership during the tax year.

Part III: Partner’s Share of Current Year Income, Deductions, Credits, and Other Items

Partnerships must allocate business income and losses to the partners. Schedule K-1, Part III, reports allocations of the following items.

• Ordinary business income

• Net rental real estate income

• Guaranteed payments

• Interest income

• Ordinary and qualified dividends

• Net short-term capital gain or loss

• Net long-term capital gain or loss

• Gain on the sale of collectibles

• Unrecaptured section 1250 and net section 1231 gains or losses

• Other deductions, including charitable contributions

• Alternative minimum tax (AMT) adjustments, such as depreciation expense

• Tax-exempt income and nondeductible expenses

• Foreign taxes paid

Partnership allocations can present complex challenges for business owners. We recommend consulting small business tax experts for help with Schedule K-1 calculations.

Schedule K-1 Attachments

Many partnerships report additional information on K-1 statements. For example, passthrough entities meeting certain reporting thresholds must file Schedule K-3 to report international activity and foreign tax credits. 

Consider using statements to provide information about the following items if relevant to your partnership.

• At-risk or passive activity limitations

• Rental activities

• Qualified Business Income (QBI)

• Tax credits, such as the investment credit and low-income housing credit

• Ownership changes

• Special allocations

The IRS Form 1065 instructions provide detailed directions for K-1s and attached statements. We recommend partnering with tax advisory professionals to support your partnership reporting requirements.

S Corporations: How to File IRS Schedule K-1 (Form 1120-S)

S corporations file Form 1065 and attach Schedule K-1, Shareholder’s Share of Income, Deductions, Credits, etc. S Corp K-1s report each shareholder’s share of business activity. The business must file a separate K-1 for every shareholder.

Part I: Information About the Corporation

Part I reports the S corporation’s information, including business name, EIN, and address. The S Corp should report the same information on Part I for all K-1 forms.

Part II: Information About the Shareholder

Report the shareholder’s tax identification number, name, and address. Include ownership information, such as the allocation percentage, shares owned, and loans to the S corp.

Part III: Shareholder’s Share of Current Year Income, Deductions, Credits, and Other Items

Schedule K-1, Part III, reports allocations of S corporation income and deductions to each shareholder. S corps should include the following items.

• Ordinary business income

• Net rental real estate income

• Interest and dividend income

• Capital gains or losses

• Tax credits

• AMT adjustments

• Shareholder contributions and distributions

Similar to partnerships, S corporations may need to attach statements to report additional information. We recommend reviewing the Form 1120-S instructions for more guidance. 

Small business tax professionals can help your S Corp determine items to include.

Trusts and Estates: How to File IRS Schedule K-1 (Form 1041)

Trusts and estates file Form 1041 and attach Schedule K-1, Beneficiary’s Share of Income, Deductions, Credits, etc. Trust and estate K-1s report each beneficiary’s share of business activity. The entity must file a separate K-1 for every beneficiary.

Part I: Information About the Estate or Trust

Report the entity’s business information, including the name and EIN of the estate or trust. Include the fiduciary’s name and address. The estate or trust must report the same information on Part I for all K-1 forms.

Part II: Information About the Beneficiary

Report the beneficiary’s name, address, and tax identification number. Indicate whether the beneficiary is domestic or foreign.

Part III: Beneficiary’s Share of Current Year Income, Deductions, Credits, and Other Items

Estates and trusts must report each beneficiary’s allocation of income and losses. Complete Schedule K-1, Part III, including the following items.

• Interest income

• Ordinary and qualified dividends

• Capital gains and losses

• Portfolio and nonbusiness income

• Net rental real estate income

• AMT adjustments

• Credits and credit recapture

The business must attach statements to report each beneficiary’s share of income and deductions from each underlying activity. The Form 1041 instructions explain additional information requirements.

The Schedule K-1 reporting process can be tedious and confusing. We recommend partnering with professionals for tax preparation and filing services.

When to File Schedule K-1

Passthrough entities must attach Schedule K-1s to their federal tax returns and submit copies of K-1s to each business owner.

Your tax form due date depends on your entity type. Calendar year taxpayers must file federal income tax returns by the following dates: 

• Partnerships and S corporations: March 15th

• Trusts and estates: April 15th

Taxpayers can request a six-month extension of time to file federal income tax forms.

Who Receives Schedule K-1 Forms?

Each passthrough entity owner receives a Schedule K-1 from the business. Partners, shareholders, and beneficiaries must include passthrough activity in their federal taxable income.

Individual taxpayers include passthrough income and deductions on IRS Form 1040, U.S. Individual Income Tax Return. Reporting rules and taxability vary depending on the type of income. Consider the following examples.

• Form 1040, Schedule B, reports ordinary dividends and interest income, including amounts from Schedule K-1.

• Individuals use Form 1040, Schedule A, to report itemized deductions, such as charitable contributions from K-1s.

• Form 1040, Schedule E, includes guaranteed payments from partnerships. Limited partners generally pay self-employment tax on guaranteed payments.

• General partners and S Corp shareholders report their share of ordinary business income on Form 1040, Schedule E.

Business owners should reference the partner’s instructions for Schedule K-1 (Form 1065) or the shareholder’s instructions for Schedule K-1 (Form 1120-S) for detailed guidance. Business owners and beneficiaries can find numerous resources on the IRS website at www.irs.gov. 

Let 1-800Accountant Handle Your Schedule K-1s for You

Schedule K-1 reporting can feel cumbersome and complicated. Lengthy instructions leave room for error, increasing the risk of fines and penalties. 

Business owners can gain confidence in their passthrough entity reporting by outsourcing tax compliance to 1-800Accountant. Business tax professionals offer industry-specific expertise, budget-friendly pricing, and timely, accurate compliance.

Additionally, individual income tax experts can assist with your personal tax return. We’ll help you maximize tax deductions and lower your tax bill.

We recommend partnering with tax advisory professionals for hands-on, specialized support. Schedule a free consultation to learn how you can benefit from year-round tax advice.