Schedule K-1 Federal Tax Form: What It Is and Who It’s For

What is Schedule K-1?

Schedule K-1 is an IRS tax document that reports a stakeholder’s share of a pass‑through entity’s income, losses, deductions, credits, and other distributions. It notifies partners, S‑corporation shareholders, and beneficiaries of trusts or estates what portion of the entity’s tax items must be reported on their individual tax returns.

Pass‑through entities do not pay federal income tax at the entity level; instead, tax liability “passes through” to the owners or beneficiaries, who report the items on Form 1040.

Key takeaways

• Issued by pass‑through entities (partnerships, S corporations, trusts/estates) to report each participant’s share of tax items.
• Partnerships attach K‑1 information to Form 1065; S corporations use Form 1120‑S; trusts/estates use Form 1041.
• Recipients use K‑1 amounts to prepare their individual returns; the entity files a copy with the IRS.
• K‑1s are generally due by March 15 (the 15th day of the third month after the entity’s tax year ends).
• K‑1s can include many income types and may affect basis, self‑employment tax, and alternative minimum tax (AMT).

How it works

The entity prepares a K‑1 for each partner, shareholder, or beneficiary showing that person’s allocated share of the entity’s tax items for the year. The amounts on the K‑1 are entered on the recipient’s individual return and combined with other income. The entity files its return (Form 1065, 1120‑S, or 1041) with the IRS, which includes the K‑1 information.

Who issues and who receives K‑1s

Entities that commonly issue K‑1s:
* Partnerships and limited partnerships (including MLPs and many real estate partnerships) — reported on Form 1065.
S corporations — reported on Form 1120‑S.
Trusts and estates — reported on Form 1041.

Typical recipients:
* General and limited partners, members of multi‑member LLCs taxed as partnerships.
Shareholders of S corporations.
Beneficiaries of trusts and estates.
* Investors in certain ETFs or pooled investments that operate as pass‑throughs.

Types of items reported

K‑1s can include:
* Ordinary business income or loss
Rental income and expenses
Interest and dividend income
Capital gains and losses
Royalties
Guaranteed payments to partners
Credits and deductions that pass through to owners

Important concepts

Basis
* A partner’s basis reflects their investment in the partnership.
Basis increases with capital contributions and allocated income; it decreases with allocated losses and withdrawals.
Distributions in excess of basis are generally taxed as ordinary income or capital gain depending on the situation. Basis information often appears in the K‑1’s capital account analysis.

Earned vs. unearned treatment
* Income reported on a K‑1 may be treated as earned income (subject to self‑employment tax) for active owners or general partners.
* Passive partners, beneficiaries, and limited investors typically treat K‑1 amounts as unearned for income tax purposes.

Other tax effects
* Some K‑1 items can affect AMT or trigger other tax obligations; consult a tax professional if you have complex allocations.

Filing, timing, and corrections

• Entities generally must issue K‑1s by March 15 (or the 15th day of the third month after their tax year ends). K‑1s are often received later than other tax forms.
• Recipients usually do not attach the K‑1 to their Form 1040, but should retain it in their records unless instructions require otherwise.
• If you receive an incorrect K‑1, request a corrected version from the issuer and file the corrected K‑1 with the IRS if necessary.

Practical tips

• Keep records of capital contributions, withdrawals, and prior year basis calculations to verify K‑1 basis entries.
• If you receive multiple K‑1s (from several entities), combine the items correctly on your return.
• Consider professional tax help if your K‑1 includes complex items (foreign transactions, credits, AMT adjustments, or partnership allocations).

Bottom line

Schedule K‑1 is the vehicle by which pass‑through entities allocate taxable income, losses, and other tax items to their owners or beneficiaries. Recipients use the K‑1 figures to prepare their individual returns and to track basis and tax obligations. Because K‑1s can be complex and sometimes late or amended, review them carefully and consult a tax professional when needed.