Tax Form Series: What is a K-1?
Running a business is hard enough without trying to decipher the various tax forms you receive. We're here to help with our Tax Form Series, where we’ll answer questions like who receives them and what they are used for.
What is a K-1 Tax Form?
The K-1 is an IRS-issued form that is your official statement of information detailing your share, interest, or liability in your Partnership’s capital account (Partnerships) or Shareholder’s current account (S-Corps). This information is broken into the following parts:
- Part 1: Basic Information regarding your Partnership (name, address, and EIN)
- Part 2: Information regarding the Partner (you). This section describes what type of partner you are, your share of profits/loss, and liabilities. This is also where your capital account information is reported.
- Part 3: This section tells you how much ordinary income, deductions, loss, gain, or the total of distributions that have been allocated to your capital account.
Who receives a K-1?
K-1's are typically distributed in two instances: to report a Partner's information from a Partnership or to report a Shareholder's information from a S Corporation. These entities are required to file an annual information return, 1065 or 1120S, respectively. When either of these returns are filed a K-1 is included with it. This details each partner/shareholder’s share of profit, loss, and liabilities to the IRS. The K-1 is also sent to each partner/shareholder for the information to be included on their tax return.
What do I do with a K-1?
If you receive a K-1, you are required to report that information on your 1040 tax return under either Schedule B or Schedule E, depending on your tax circumstance. You do not need to include the K-1 form with your individual tax return unless you are specifically required to do so.
Is there a penalty for not including K-1 info on my tax return?
Failure to report K-1 information on your tax return can lead to several different accuracy-related penalties which can equal up to 20% of the amount you did not report, plus interest.
If you receive a K-1, you are required to report the information from each of your K-1 statements to your tax return. Accurate and timely filing is key in avoiding costly penalties and interest. If you find yourself still questioning what to do with a K-1 or have tax questions in general, reach out to an advisor who can help you navigate the choppy waters of tax compliance.