What Is the Definition of K-1 Income?


Quick Answer

K-1 income shifts tax liability from the business to the individuals who benefit from the income, according to TurboTax. It is income reported on Schedule K-1 and differs slightly depending on the type of business allowing the income to pass through to the party. The business is responsible for completing the schedule to report the income.

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Full Answer

In business partnerships, the business files Form 1065 with the Internal Revenue Service for informational purposes, advises TurboTax. The Schedule K-1 for each partner reports his portion of the profits, losses, credits and deductions. With an equal partnership, the Schedule K-1 reports the same information for each partner. Each partner is then responsible for filing his individual tax return to report the income.

S corporations have shareholders and file annual tax returns using Form 1120S, reports TurboTax. With these corporations, each shareholder receives a Schedule K-1 reporting his share of the income. The shareholder reports this information on his individual tax return.

Beneficiaries of trusts and estates may also receive K-1 income, explains TurboTax. While some trusts or estates choose to pay taxes on any income when they file Form 1041, others pass this income to the beneficiaries. When trusts pass K-1 income, they report it as a deduction; however, the beneficiaries receive a Schedule K-1 and are responsible for the taxes on the income.

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