K-1 (Schedule K-1)
Schedule K-1 is an IRS tax form used by partnerships, S corporations, trusts, and estates to report each owner's or beneficiary's proportional share of the entity's income, deductions, credits, and other tax items for the year. Recipients use the information on their K-1 to complete their individual Form 1040, carrying each income and deduction category to the appropriate line or schedule.
Unlike a corporation that pays tax at the entity level, pass-through entities — including general and limited partnerships, limited liability companies (LLCs) taxed as partnerships, S corporations, trusts, and estates — do not pay federal income tax themselves. Instead, each owner's share of the entity's income, losses, deductions, and credits passes through to their individual tax return. The K-1 is the reporting instrument that communicates each partner's or shareholder's allocable share of these items.
For partnerships and multi-member LLCs taxed as partnerships, Schedule K-1 (Form 1065) is issued to each partner. For S corporations, it is Schedule K-1 (Form 1120-S) issued to each shareholder. Trusts and estates use Schedule K-1 (Form 1041) issued to each beneficiary. The entity files the applicable return (Form 1065, 1120-S, or 1041) with the IRS and provides K-1s to each recipient, typically by March 15 for partnerships and S corps and by April 15 for trusts and estates — though extensions are common, which is why K-1 recipients often must file extensions for their own returns.
K-1s report income in categories that mirror the IRS income classification structure: ordinary business income or loss, rental real estate income or loss, interest income, qualified dividends, royalties, net short-term capital gains, net long-term capital gains, Section 1231 gains and losses, and various other items including self-employment earnings and credits. Each category flows to a different schedule on the recipient's Form 1040.
For investors, K-1s are most commonly encountered through limited partnerships, master limited partnerships (MLPs), real estate limited partnerships, hedge funds organized as partnerships, and exchange-traded partnerships (ETPs) structured as limited partnerships rather than trusts. MLP distributions are not the same as dividends — MLPs return capital and generate various income items that are reported on K-1s and often include depletion deductions and unrecaptured Section 1250 gain.
Holding MLP interests in an IRA is generally inadvisable because the ordinary income from an MLP inside an IRA may generate Unrelated Business Taxable Income (UBTI), which is taxable even inside tax-exempt accounts if it exceeds $1,000 per year.
The basis adjustments required by K-1 items are critical for accurately calculating gain or loss when a partnership or S corporation interest is ultimately sold. Tracking outside basis over multiple years of K-1 income, loss, and distribution activity is one of the more complex record-keeping tasks for investors in pass-through entities.