It's wise to either go to a tax professional or at least use reputable tax-filing software if you're receiving Schedule K-1 forms. It's already been reported to the IRS by the entity that paid you, so the IRS will know if you omit it when you file taxes.
Just like any other income or tax document you get during tax season, you need to report your schedule K-1 when you file your taxes - for two reasons: If you're getting a Schedule K-1 form from an entity you partly own, you may also be able to claim a share of the losses, deductions, and credits, as well as your share of the income. After all, while you don't want to pay the higher regular income rate if you can pay the lower capital gains rate, you also don't want to get on the IRS' bad side by under-reporting income.Ī Schedule K-1 is not entirely like a 1099 or W2, though. This is where the tax complexity comes in, because some categories of income may be taxed as capital gains, while others are taxed as regular income, and you want to be sure you pay the appropriate tax rate. These Schedule K-1 forms are a lot like a 1099 or W2: You'll receive one from the trust, estate, LLC, S corp., or partnership, and it breaks down the income you received into various categories. It really boils down to your tax rate, and how much more income the LLC, MLP, or trust is able to pay. In summary, a Schedule K-1 issuing entity may be able to pass more income along to you, the investor, but you may end up giving more of it back in taxes than if you'd received regular dividends from a corporation.
That means it's taxed at your effective income-tax rate, which is often much higher than the 15% or 20% long-term capital gains rate for regular dividends. A typical corporation's regular dividend is taxed as long-term capital gains, while much of the income paid and shown on a Schedule K-1 can be classified as regular income. In other words, because these entities don't pay corporate taxes, the distributions paid to investors may be treated differently than dividends paid by corporations. MLPs and LLCs can be a great income investments, since these organizational structures don't pay income tax but pass that burden along to investors. The pros and cons of trusts, partnerships, and S corps
This article was updated on April 13, 2017. Let's take a closer look at the Schedule K-1 form, the implications for you, and what you must do with it. MLPs and LLCs are often able to pass more income on to investors because they don't pay corporate income taxes, but that comes at the cost of more complexity and potential tax implications. Trying to invest better? Like learning about companies with great (or really bad) stories? Jason can usually be found there, cutting through the noise and trying to get to the heart of the story.įollow you've ever invested in a business that uses one of several different types of legal structures, such as partnership, "C" corporation, or LLC, or if you're the beneficiary of a trust or an estate, then you've probably received a Schedule K-1 in the mail during tax season. A Fool since 2006, he began contributing to in 2012. Form IT-2658 is used by partnerships and S corporations to report and pay estimated tax on behalf of partners or shareholders who are nonresident individuals.Born and raised in the Deep South of Georgia, Jason now calls Southern California home.