Sole proprietors and single-member LLCs do not need to file a Schedule K-1. Most small businesses are pass-through entities, meaning income passes or flows through the business to an owner’s individual tax return as it does for partnerships, S corporations, sole proprietors and limited liability company (LLC) owners. There are multiple versions of the Schedule K-1 form, and each one applies to a particular kind of pass-through entity.

“States, for example, might have different depreciation rules than the IRS uses.” Pass-through entities “Your K-1 helps you track basis, and it helps track differences in basis for federal and state tax purposes,” said financial planner Sean W. This stake determines the owner’s “tax basis” in the business - that is, the amount that a partner has invested in it. The profits, losses, deductions and credits on a given owner’s form are allocated based on their ownership stake in the business. The IRS requires each partnership, S corporation and estate or trust to file a Schedule K-1 tax form annually.

Follow the Schedule K-1 instructions if your business is a:.

Tax authorities will check to see that the numbers reported on the K-1 are reflected in the owners’ returns.

The Schedule K-1 is then used by the owners to prepare their individual tax returns. There are two types of business taxpayers that need to complete the Schedule K-1 tax form: partnerships and S corporations, plus trusts or estates.

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