Issuing IRS Schedule K-1 to Shareholders

When do K-1s have to be issued?

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Schedule K-1 is used and filed with Forms 1120S and Forms 1065 to report each shareholder's or partner's pro-rated share of net income or loss from a pass-through business. It also reports various income and deduction items that are stated separately. Schedule K-1 can also be used to summarize a shareholder's beginning and ending stock basis for the year.

You can prepare Schedule K-1 for each shareholder or partner after your S-corporation's Form 1120S or your partnership's Form 1065 is completed.

Each shareholder or partner is required to file Schedule K-1 along with their personal tax return to report their shares of pass-through business's deductions, credits, profits, and losses.

What Is Schedule K-1 and Who Has to File It?

The K-1 reports taxable income, just like a W-2 or Form 1099, but not all business entities are required to file them. The business must be a pass-through entity: a partnership, an S-corp, or an LLC that's elected to be taxed as a partnership or an S-corp. The business itself doesn't pay taxes, but passes its liability and losses on to its shareholders and owners.

The Schedule K-1 for use by partnerships and the one for S-corporations are slightly different. Foreign partnerships should file the schedule with the Form 8865 return.

Trusts and estates must also file Schedules K-1 when they pass income on to beneficiaries, but beneficiaries are exempt from including the form with their tax returns.

The K-1 reports only that shareholder's or beneficiary's portion of earnings. Each partner would receive a K-1 for half the partnership's losses and earnings in a 50/50 partnership involving two partners.

What You'll Need

At a minimum, you'll need a completed 1120S tax return for the S-Corporation or a completed Form 1065 for a partnership to prepare the Schedule K-1.

You'll also need a complete transaction history and summary statement of each shareholder's capital accounts, as well as each shareholder's full legal name, address, and Social Security number. Ideally, you'll have tax software that prepares 1120S or 1065 tax returns.

Schedule K-1: Parts I and Parts II

Part I of the K-1 simply provides identifying information about the business entity. Part II identifies the partner or shareholder receiving the K-1. Part II is more extensive in the partnership K-1, requiring additional information.

Information regarding profits, losses, credits, and deductions is included in Part III.

Separately Stated Items Reported on Schedule K-1

You won't have to deal with all the K-1's lines and boxes. This form covers multiple situations, and not all are applicable to every business.

These corresponding lines and boxes apply to the 2018 Form K-1 for Form 1120S for S-corporations, the most commonly used. Not all versions of Form K-1 will include all these items.

  • Section 1231 gains and losses (line 9)
  • Net short-term capital gains and losses (line 7)
  • Net long-term capital gains and losses (line 8a)
  • Dividends eligible for the dividends received deduction if a shareholder is a C-corporation
  • Charitable contributions
  • Taxes paid to a foreign country (line 14)
  • Tax-exempt interest and related expenses (box 16)
  • Investment income and expenses (line 4)
  • Amounts previously deducted, such as bad debts
  • Rental real estate income and expenses (line 3b)
  • Section 179 deductions (line 11)
  • Tax credits (line 13)
  • Non-deductible expenses, such as 50% of meals and entertainment expenses (box 8a)

The IRS offers detailed and comprehensive instructions for accurately completing the S-corp Form K-1, as well as the partnership K-1 for use with Form 1065.

The Deadline for Sending Schedule K-1

S-corporations and other pass-through entities are required to issue their Schedules K-1 by March 15, the deadline for Forms 1120S and 1065, or by the extended deadline, which is September 15.

The deadline for these business returns is one month earlier than that for individual taxpayers, allowing shareholders and partners ample time to receive their K-1s and incorporate the information with their own tax returns.

Some states have their own K-1 or similar requirements for reporting. Check with a local tax professional to find out if yours is one of them.

Note: Tax laws change periodically and you should always consult with a tax professional for the most up-to-date advice. The information contained in this article is not intended as tax advice and it is not a substitute for tax advice.