How Does an S Corporation K-1 Form Work?

I want to explain here how a K-1 works. (A K-1 is the document an S corporation gives its shareholder or shareholders to report on their "shares" of the corporation's income and any special deductions.)

But first, a slight digression...

K-1s Sort of Work Like W-2s

If you have ever had a job before--and you probably have--you know that at the end of the year your employer provides you with a W-2 wage statement.

The W-2 reports on the income you earned in your job and the taxes that were withheld from your paycheck. And the W-2 may even report other items of tax accounting interest: United Way charitable contributions withheld from your payroll check, dependent care benefits, 401(k) savings, and so on. As you hopefully know, you need all this information to prepare your individual income tax return.

I bring this up because, in effect, an S corporation's K-1 provides the same kind of information to an S corporation's shareholders that a W-2 provides to employees.

K-1 Reports Shareholder's Share of Income or Loss

Specifically, the K-1 form reports on the income earned, or assigned to, the shareholder. For example, if an S corporation with two equal shareholders earns $200,000 in profit, both shareholders receive a K-1 at the year end that shows $100,000 of S corporation profit allocated, or assigned, to their individual income tax returns.

While many S corporation K-1s are simple, you should know that an S corp K-1 can be more complicated for a couple of reasons. First, some of the income earned by the S corporation may not be taxable on your tax return or some of the income may be taxed at lower rates. Accordingly, to deal with this situation, the K-1 often breaks out the S corporation's income into the various income categories, including ordinary income, rental income, regular interest, tax-exempt interest, qualified dividends, capital gains and so on.

K-1 May Report Deductions Shareholder Can Take

There's a second reason, too, why an S corporation K-1 is often more complicated. In many cases, an S corporation's expenditures don't count as deductions on the S corporation tax return but do count as deductions on the individual's tax return. For this reason, the S corporation K-1 often includes tax deductions that that S corporation can't take on its return but that the S corporation shareholder can and should take on his or her tax return.

K-1s Part of the Actual Corporate Return

Two final quick notes:

  1. The S corporation K-1 is part of the S corporation tax return. When the corporation files its 1120S tax return, the last pages of the return include all the individual K-1s for the shareholders.

  2. You should get your S corporation K-1 well before the due date of your individual 1040 tax return. An S corporation that files its tax return on time--which means before the March 15 due date--should mean that shareholders get their K-1s well before the individual shareholder's April 15 due date. And if an S corporation tax return gets extended six months to the September 15 extension due date, shareholders can easily extend their individual tax return due dates to October 15--which again means they should have time to file their individual tax returns.

Note: Typically, the CPA who prepares the S corporation tax return will happily answer questions from shareholders about the K-1s they receive.

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