While you might know what a Schedule K-1 tax form is, you might not know if you can issue multiple K-1 forms if you have an LLC. Here’s how a K-1 tax form comes into play when you have multiple owners. We’ll also go over when you should be issuing more than one K-1 form for your small business.
What Is a Schedule K-1 Form?
If your small business is a pass-through entity such as a partnership or S Corp, the IRS requires that you prepare a Schedule K-1 tax form (Form 1065) when you file your annual tax returns. (Note: Besides businesses, estates and some trusts also issue K-1s.)
“Every owner of a pass-through entity — no matter how small of an ownership they have — gets a K-1 showing the owner's share of the pass-through entity's income, loss, deductions, credits and other tax attributes,” explains Riley Adams, a CPA and founder of Young and the Invested.
If you have an LLC with multiple owners, Schedule K-1s will show each owner's share of business income (loss), deductions and credits for the year, explains Logan Allec, a CPA and founder of Money Done Right.
A pass-through entity is a business structure that allows profit to pass through to each shareholder. In turn, the income is taxed on the shareholders’ individual tax returns at their individual tax rates. Because your taxes are only taxed once, you can avoid double taxation of dividends.
Can a K-1 Be Issued to Multiple Owners?
The short answer is yes. If there are multiple owners for a business that’s a pass-through entity, each owner will need to file a Schedule K-1. If you have an LLC with multiple owners, you’ll receive the same taxable treatment as partnerships, says Allec. In turn, you would file an income tax return with a K-1 form.
However, if you’re an S Corp, you’ll need to file an informational return on what’s called a Form 1120-S. “Both of these forms include a section that shows how their respective income [loss], deductions and credits pass through to the owners on their individual returns,” says Allec.
“Every owner of a pass-through entity, no matter how small of an ownership they have, gets a K-1 showing the owner's share of the pass-through entity's income, loss, deductions, credits and other tax attributes,” says Adams.
So if your business is set up as an S Corp, each shareholder would receive a K-1 form. If your business is a partnership, each partner would also receive a K-1. And if someone owns portions of several pass-through entities, they would need to file a K-1 for each of these pass-through entities.
Know How Your Business’s Tax Attributes Should Be Allocated
Another thing to note: When filing K-1 forms, you have to understand how the pass-through entity’s tax attributes should be allocated.
As Riley explains, in an S Corporation, this is relatively straightforward as the S Corporation's income, loss, deductions, credits and other tax attributes are generally allocated to shareholders on a pro rata, per share, per day basis.
However, in a partnership, there is more flexibility as to how items can be allocated. “A partnership's allocations can be straightforward pro rata allocations, or they can be very complicated,” says Adams. “You have to read the partnership agreement to understand how things should be allocated.”
What Are Some Common Mistakes Made with K-1 Tax Forms?
As there’s a lot to get your head around, it can be easy to make mistakes when filing Schedule K-1 tax forms for your small business.
A common one? In a partnership return, preparers typically assume that all items should be allocated pro rata to partners based on their ownership percentages. “This could be the case, or it may not be,” says Adams. “You have to look at the partnership agreement.”
Another mistake Riley oftentimes encounters is not checking for new partner or shareholder information that may have changed throughout the year. For example, a partner's or shareholder's address could have changed, which should be reflected on the K-1.
And last, business owners might not realize that simply admitting a partner who is a resident of a particular state may cause the partnership to have to file a return — and in turn K-1s — in that state.
If you have multiple owners, you certainly need to issue a Schedule K-1 whether you’re an LLC or a partnership. And if you’re one of several owners, you’ll need to file a K-1 for the business.
If you have questions or would like assistance filing your taxes, Incfile can help. Our team of tax experts can guide you through the process of filing your business tax return and provide information and resources.