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FILING SEASON TIP: READING YOUR K-1

March 27, 2008

One fun part of doing the Tax Update is seeing what web searches get people here. Sometimes it's not clear why a search ends up here (if you got here by searching the word "girls" or "adult bookstore," I think you are on the wrong track). Sometimes its very clear. "How do I read K-1" gets internet seekers here pretty often - probably because the K-1 can be confusing:

One of the most common misconceptions about K-1s is the belief that issuers are under the same January 31 deadline that applies to 1099 forms. They are not. A Form 1120-S K-1 for a calendar-year S corporation is technically due March 15, but that deadline can be extended until September 15. Partnership and Estate and Trust K-1s are due April 15, but that deadline can also be extended for six months.

WHY A K-1?

It helps to understand what the K-1 does. Pass-through entities -- partnerships and S corporations -- don't pay taxes on their own income; the owners pay the tax. If you have an operating business, this can get complicated and require some time to sort out before the K-1 can be issued.

Trusts and Estates also have K-1s; these entities can pay their own tax, but if they make distributions for the beneficiaries, the distributions carry the taxable income with them; the K-1s report how much income is carried out to the beneficiaries.

The K-1 reports to the owners their share of the taxable income of the pass-through entity. The owners report the items on the K-1 on the appropriate lines of their own returns. For example, an owner's share of partnership interest income, reported on line 5 of the K-1, goes to Schedule B on the partner's 1040.

It gets more confusing when there are items lines with letters next to them - for example on the 1065 K-1 lines 11, 12, 15, 17, 19 and 20 . You then have to look to a cheat sheet on the second page of the K-1, like this one for partnerships:

(Click to enlarge)