what is schedule k 1 
schedule k 1 is a federal tax document used to report the income losses and dividends for a business or financial entity s partners or an s corporation s shareholders the k 1 form is also used to report income distributions from trusts and estates to beneficiaries a schedule k 1 document is prepared for each relevant individual partner shareholder or beneficiary a partnership then files form 1065 the partnership tax return that contains the activity on each partner s k 1 an s corporation reports activity on form 1120 s trusts and estates report the k 1 form activity on form 1041 investopedia zoe hansenunderstanding schedule k 1the u s federal tax code allows the use of a pass through strategy in certain instances which shifts tax liability from the entity such as a trust or a partnership to the individuals who have an interest in it the entity itself pays no taxes on earnings or income rather any payouts along with any tax due on them pass through directly to the stakeholders this is where schedule k 1 comes in the purpose of the k 1 form is to report each participant s share of the business entity s gains losses deductions credits and other distributions whether or not they re actually distributed in the case of a partnership while not filed with an individual partner s tax return the financial information posted to each partner s k 1 form is sent to the irs with form 1065 income generated from partnerships is added to the partner s other sources of income and entered on form 1040 12schedule k 1 is similar to form 1099 in that it reports dividends interest and other annual returns from an investment whether you receive a k 1 or a form 1099 depends on the investment master limited partnerships mlps real estate limited partnerships relps and certain exchange traded funds etfs are all types of investments that routinely issue k 1s 32aspects of schedule k 1a partnership is defined as a contract between two or more people who decide to work together as partners the rules of this business arrangement are stated in a partnership agreement the partnership has at least one general partner gp who operates the partnership gps are liable for their actions as partners and for the activities of other gps in the partnership limited partners on the other hand are liable for the debts and obligations of the partnership based only on the amount of capital they contribute the partnership agreement dictates how the partners share profits which impacts the information on schedule k 1 2schedule k 1 requires the partnership to track each partner s basis in the partnership in this context basis refers to a partner s investment or ownership stake in the enterprise a partner s basis is increased by capital contributions and their share of income it s reduced by a partner s share of losses and any withdrawals assume for example that a partner contributes 50 000 in cash and 30 000 in equipment to a partnership and the partner s share of income is 10 000 for the year that partner s total basis is 90 000 less any withdrawals they ve made the basis calculation is important because when the basis balance is zero any additional payments to the partner are taxed as ordinary income the basis calculation is reported on schedule k 1 in the partner s capital account analysis section 2a partner can earn several types of income on schedule k 1 including rental income from a partnership s real estate holdings and income from bond interest and stock dividends many partnership agreements provide guaranteed payments to general partners who invest the time to operate the business venture and those guaranteed payments are reported on schedule k 1 the guaranteed payments are put in place to compensate the partner for the large time investment a partnership may generate royalty income and capital gains or losses and those items are allocated to each partner s schedule k 1 based on the partnership agreement those receiving k 1 reported income should consult with a tax professional to determine if their proceeds trigger the alternative minimum tax 4types of schedule k 1sthe k 1 forms used by the three entities partnerships s corporations and trusts vary slightly in the way they look but they all have the same purpose they report to the irs and individual partners shareholders and beneficiaries the amounts of income losses deductions credits and other distributions they may have received k 1s are sent to the irs with the partnership s tax return form 1065 and also to each partner so that they can add the information to their own tax returns 5s corporations file an annual tax return using form 1120 s they include schedule k 1 information about each shareholder s share of income losses deductions and credits 6trusts and estates use form 1041 to file their tax returns beneficiaries receive a k 1 that shows the income that they need to report on their own tax returns 7if you spot an error on the schedule k 1 you receive ask the issuer to correct it and send the revised version to the irs 8who files a schedule k 1 there are four main types of entities required to file a k 1 individual taxpayers typically don t file k 1 forms instead they transfer the information provided in the k 1 to their personal individual tax return for example if you re a partner use the information on schedule k 1 to prepare your income tax return s you typically aren t required to attach the k 1 form unless specifically required per the form instructions but be sure to keep it in your records the partnership files a copy of schedule k 1 form 1065 the u s return of partnership income with the irs 2if you re a shareholder use the information on schedule k 1 form 1120 s to prepare your income tax return s again you usually aren t meant to include the k 1 form with them but file it with your records the corporation files form 1120 s the u s income tax return for an s corporation with the irs 9if you re a beneficiary of a trust or estate use the information on schedule k 1 form 1041 to prepare your income tax return s the k 1 isn t filed with your tax return unless backup withholding was reported in box 13 code b 10 keep it with your records the trust or estate files a copy of schedule k 1 form 1041 with the irs 